<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<CAPTION>
Registrant; State of
Incorporation or I.R.S. Employer
Commission Organization; Address; Identification
File Number and Telephone Number Number
- ------------ ---------------------- ---------------
<S> <C> <C>
1-3446 NEW ENGLAND ELECTRIC SYSTEM 04-1663060
(A Massachusetts voluntary
association)
25 Research Drive
Westborough, Massachusetts 01582
Telephone: 508-389-2000
1-6564 NEW ENGLAND POWER COMPANY 04-1663070
(A Massachusetts corporation)
25 Research Drive
Westborough, Massachusetts 01582
Telephone: 508-389-2000
0-5464 MASSACHUSETTS ELECTRIC COMPANY 04-1988940
(A Massachusetts corporation)
25 Research Drive
Westborough, Massachusetts 01582
Telephone: 508-389-2000
1-7471 THE NARRAGANSETT ELECTRIC COMPANY 05-0187805
(A Rhode Island corporation)
280 Melrose Street
Providence, Rhode Island 02907
Telephone: 401-784-7000
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrants were required to file such
reports), and (2) have been subject to such filing requirements
for the past 90 days.
(X) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
</TABLE>
<PAGE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Outstanding at Name of each exchange
Registrant Title of each class March 18, 1998 on which registered
- ---------- ------------------- -------------- ---------------------
<S> <C> <C> <C>
New England Common Shares 64,161,560 New York Stock Exchange
Electric Boston Stock Exchange
System
Securities registered pursuant to Section 12(g) of the Act:
Registrant Title of each class
- ---------- -------------------
New England Dividend Series Preferred Stock
Power Company
Massachusetts Cumulative Preferred Stock
Electric Company Preferred Stock - Cumulative
The Narragansett Cumulative Preferred Stock
Electric Company
Aggregate market value
of the voting stock Number of shares of
held by nonaffiliates common stock outstanding
of the registrants at of the registrants at
March 18, 1998 March 18, 1998
---------------------- ------------------------
New England $2,823,108,640 64,161,560 ($1 par value)
Electric System
New England $1,693,285 6,449,896 ($20 par value)
Power Company
Massachusetts None 2,398,111 ($25 par value)
Electric Company
The Narragansett None 1,132,487 ($50 par value)
Electric Company
</TABLE>
<PAGE>
<TABLE>
Documents Incorporated by Reference
<CAPTION>
Part of Form 10-K into which
Description document is incorporated
- ---------------------------------- ----------------------------
<S> <C>
Portions of Annual Reports to Parts I and II
Shareholders for the year ended
December 31, 1997 of the following
companies, as set forth in Parts I
and II
New England Electric System
New England Power Company
Massachusetts Electric Company
The Narragansett Electric Company
Portions of Proxy Statement of Part III
New England Electric System
filed in connection with its
annual meeting of shareholders to
be held on April 28, 1998, as set
forth in Part III
This combined Form 10-K is separately filed by New England Electric
System, New England Power Company, Massachusetts Electric Company, and The
Narragansett Electric Company. Information contained herein relating to
any individual company is filed by such company on its own behalf. Each
company makes no representation as to information relating to the other
companies.
</TABLE>
<PAGE>
TABLE OF CONTENTS PAGE
GLOSSARY OF TERMS.......................................... iii
FORWARD LOOKING INFORMATION................................ v
PART I
ITEM 1. BUSINESS.......................................... 1
THE SYSTEM................................................. 1
System Organization................................... 1
Employees............................................. 3
ELECTRIC UTILITY OPERATIONS................................ 3
Industry Restructuring................................ 3
Outlook............................................. 4
Massachusetts Legislation and Settlement Agreement.. 4
Rhode Island Legislation and Settlement Agreement... 6
New Hampshire Legislation and Settlement Agreement.. 6
Unaffiliated Customers.............................. 7
Divestiture of Generating Business.................. 7
Risk Factors........................................ 9
Other............................................... 9
Electricity Delivery Companies........................ 9
Mass. Electric
Description of Business........................... 9
Rates............................................. 10
Narragansett
Description of Business........................... 11
Rates............................................. 12
Granite State
Description of Business........................... 13
Rates............................................. 13
Nantucket
Description of Business........................... 13
Recovery of Demand-Side Management Expenditures..... 14
Transmission and Generation Business.................. 14
NEP
Description of Business........................... 14
Rates............................................. 15
Unregulated Business.................................. 16
Operating Revenues.................................... 17
Electric Utility Properties........................... 19
Transmission, Distribution, and Generation
Properties........................................ 19
Map - Electric Utility Properties................... 25
Nuclear Units....................................... 26
Divestiture of Nonnuclear Generating Business....... 31
Energy Mix.......................................... 31
Fuel for Generation................................. 31
Oil and Gas Operations.............................. 33
Nonutility Power Producer Information............... 33
Hydroelectric Project Licensing..................... 34
Ocean State Power................................... 35
<PAGE>
PAGE
Regulatory and Environmental Matters.................. 35
Regulation.......................................... 35
Environmental Requirements.......................... 36
Construction and Financing............................ 38
Research and Development.............................. 42
EXECUTIVE OFFICERS......................................... 43
ITEM 2. PROPERTIES....................................... 47
ITEM 3. LEGAL PROCEEDINGS................................ 47
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.......................................... 48
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SECURITY HOLDER MATTERS.................. 50
ITEM 6. SELECTED FINANCIAL DATA.......................... 50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................... 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...... 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............. 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT....................................... 53
ITEM 11. EXECUTIVE COMPENSATION........................... 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................... 69
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS... 72
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K................. 72
INDEX TO FINANCIAL STATEMENTS.............................. 102
<PAGE>
GLOSSARY OF TERMS
Term Meaning
---- -------
AFDC allowance for funds used during
construction
AllEnergy AllEnergy Marketing Company, LLC
Connecticut Yankee Connecticut Yankee Atomic Power Company
DOE U.S. Department of Energy
DOER Massachusetts Division of Energy
Resources
DSM demand-side management
EPA U.S. Environmental Protection Agency
Electricity Delivery Mass. Electric, Narragansett, Granite
Companies State, and Nantucket
FERC Federal Energy Regulatory Commission
FAS 121 Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets
to Be Disposed Of
FAS 80 Financial Accounting Standards No. 80,
Accounting for Futures Contracts
Firm Energy agreement between NEPOOL members and
Contract Hydro-Quebec
Granite State Granite State Electric Company
Granite State Granite State Energy, Inc.
Energy
Interconnection transmission interconnection between
participating New England utilities
and Hydro-Quebec
ISO Independent System Operator
kWh kilowatt hour
Maine Yankee Maine Yankee Atomic Power Company
Mass. Electric Massachusetts Electric Company
Mass. Hydro New England Hydro-Transmission Electric
Company, Inc.
Massachusetts settlement agreement previously reached
Settlement among the NEES companies' Massachusetts
subsidiaries
MDPU Massachusetts Department of Public
Utilities
MDTE Massachusetts Department of
Telecommunications and Energy
MW megawatts
Nantucket Nantucket Electric Company
Narragansett The Narragansett Electric Company
N.E. Hydro Finance New England Hydro Finance Company, Inc.
NEEI New England Energy Incorporated
NEES New England Electric System
NEESCom NEES Communications, Inc.
NEES companies the subsidiaries of NEES
NEES Global NEES Global Transmission, Inc.
NEET New England Electric Transmission
Corporation
NEP New England Power Company
NEES Energy NEES Energy, Inc.
NEPOOL New England Power Pool
NEUs New England Utilities
N.H. Hydro New England Hydro-Transmission
Corporation
<PAGE>
GLOSSARY OF TERMS
Term Meaning
---- -------
NOx nitrogen oxide
NRC Nuclear Regulatory Commission
OSP Ocean State Power
OSP II Ocean State Power II
PCRBs pollution control revenue bonds
PG&E PG&E Corporation
PBOPs postretirement benefits other than
pensions
PPCA purchased power cost adjustment
Resources Narragansett Energy Resources
Company
retail choice retail customers are allowed to
choose their electricity supplier
Rhode Island Settlement settlement agreement among NEP,
Narragansett, the RIPUC and the
Rhode Island Division of Public
Utilities and Carriers to
implement the stranded cost
recovery provisions of the Rhode
Island statute
RIPUC Rhode Island Public Utilities
Commission
Samedan Samedan Oil Corporation
Seabrook 1 Seabrook Nuclear Generating Station
Unit 1
SEC Securities and Exchange Commission
Sellers NEP and Narragansett
Service Company New England Power Service Company
Service Extension rate discounts given to large
Discounts commercial and industrial
customers who agree to give a
five-year notice before they
choose to purchase power from
another supplier
SO2 sulphur dioxide
spent nuclear fuel high level radioactive waste
stranded costs the amounts by which prudently
incurred costs incurred to supply
customers electricity under a
regulated industry structure
exceed market prices under an
unregulated industry structure
System the subsidiaries of NEES
collectively
USGen USGen New England, Inc.
unbilled revenues electricity delivered but not yet
billed
Vermont Yankee Vermont Yankee Nuclear Power
Corporation
Yankee Atomic Yankee Atomic Electric Company
Yankee Companies Yankee Atomic, Vermont Yankee,
Maine Yankee, and Connecticut
Yankee
1935 Act Public Utility Holding Company Act
of 1935, as amended
<PAGE>
FORWARD LOOKING INFORMATION
This report and other presentations made by NEES and its
subsidiaries contain forward looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended.
Throughout this report, forward looking statements can be
identified by the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimated",
"project", "believe", or similar expressions. Although NEES and each
of its subsidiaries believe that, in making any such statements,
its expectations are based on reasonable assumptions, any such
statements may be influenced by factors that could cause actual
outcomes and results to be materially different from those
projected. Important factors that could cause actual results to
differ materially from those in the forward looking statements
include, but are not limited to: the impact of general economic
changes in New England; changing fuel prices; the impact of
industry restructuring, customer choice of power suppliers,
increased competition in the electric utility industry, and sale of
the nonnuclear generating business, as more fully set out below
under INDUSTRY RESTRUCTURING, page 3; federal and state regulatory
developments and changes in law which may have a substantial
adverse impact on the value of NEES and the NEES companies' assets;
changes in accounting rules and interpretations which may have an
adverse impact on the NEES companies' statements of financial
position and reported earnings; timing and adequacy of rate relief;
adverse changes in electric load and customer growth; climatic
changes or unexpected changes in weather patterns; generating plant
and distribution facility performance and possible power shortages,
as more fully set out below under Transmission, Distribution, and
Generation Properties, page 19; and operation and decommissioning
costs associated with nuclear generating facilities, as set out
under Nuclear Units below, page 26 (see Risk Factors, page 9, for
more information).
<PAGE>
PART I
ITEM 1. BUSINESS
THE SYSTEM
SYSTEM ORGANIZATION
New England Electric System (NEES) is a voluntary association created under
Massachusetts law on January 2, 1926, and is a registered holding company under
the Public Utility Holding Company Act of 1935, as amended (the 1935 Act). NEES
owns voting stock in the amounts indicated of the following companies, which
together constitute the System.
% Voting
Securities
State of Type of Owned by
Name of Company Organization Business NEES
--------------- ------------ -------- ---------
AllEnergy Marketing Company, Mass. Marketing *
L.L.C. (AllEnergy)
Granite State Electric Company N.H. Retail 100
(Granite State) Electric
Granite State Energy, Inc. N.H. Marketing 100
(Granite State Energy)
Massachusetts Electric Company Mass. Retail 100
(Mass. Electric) Electric
Nantucket Electric Company Mass. Retail 100
(Nantucket) Electric
The Narragansett Electric Company R.I. Retail 100
(Narragansett) Electric
Narragansett Energy Resources R.I. Wholesale 100
Company (Resources) Electric
Generation
NEES Communications, Inc. Mass. Telecommunications 100
(NEESCom)
NEES Energy, Inc. (NEES Energy) Mass. Marketing 100
NEES Global Transmission, Inc. Mass. Development 100
(NEES Global) (formerly New Services
England Electric Resources, Inc.)
New England Electric Transmission N.H. Electric 100
Corporation (NEET) Transmission
New England Energy Incorporated Mass. Oil and Gas 100
(NEEI)
New England Hydro Finance Company, Mass. Debt Financing **
Inc. (N.E. Hydro Finance)
New England Hydro-Transmission N.H. Electric 53.97(a)
Corporation (N.H. Hydro) Transmission
New England Hydro-Transmission Mass. Electric 53.97(a)
Electric Company, Inc. Transmission
(Mass. Hydro)
* NEES Energy owns 99 percent and NEES Global owns 1 percent of the voting
securities.
** Mass. Hydro and N.H. Hydro each own 50 percent of the voting securities.
<PAGE>
% Voting
Securities
State of Type of Owned by
Name of Company Organization Business NEES
--------------- ------------ -------- ---------
New England Power Company (NEP) Mass. Wholesale 99.71(b)
Electric
Generation &
Transmission (c)
New England Power Service Company Mass. Service 100
(Service Company) Company
(a) The common stock of these subsidiaries is owned by NEES and
certain participants (or their parent companies) in the second
phase of the Hydro-Quebec project. See Interconnection with
Quebec, page 23.
(b) Holders of common stock and 6% Cumulative Preferred Stock of
NEP have general voting rights. The 6% Cumulative Preferred
Stock held by nonaffiliates represents 0.29 percent of the
total voting power.
(c) For information on NEP's ownership interest in nuclear
generating units, see Nuclear Units, page 26.
The facilities of NEES' four electricity delivery companies,
Mass. Electric, Narragansett, Granite State, and Nantucket
(collectively referred to as the Electricity Delivery Companies),
and of its principal generation and transmission subsidiary, NEP,
constitute a single integrated electric utility system that is
directly interconnected with other utilities in New England and New
York State, and indirectly interconnected with utilities in Canada.
See ELECTRIC UTILITY OPERATIONS, page 3. See INDUSTRY
RESTRUCTURING, page 3, for information on the agreement to sell the
NEES companies' generating business.
Granite State Energy is a wholly-owned, nonutility subsidiary
of NEES which provides a range of energy and related services,
including but not limited to sales of electric energy, audits,
power quality, fuel supply, repair, maintenance, construction,
design, engineering, and consulting.
NEES Energy is a wholly-owned, nonutility marketing subsidiary
of NEES. NEES Energy owns a 99 percent interest in AllEnergy, an
energy marketing joint venture between NEES Energy and NEES Global.
NEESCom is a wholly-owned, nonutility subsidiary of NEES which
provides telecommunications and information-related products and
services.
NEET owns and operates a portion of an international
transmission interconnection between the electric systems of
Hydro-Quebec and New England. Mass. Hydro and N.H. Hydro own and
operate facilities in connection with an expanded second phase of
this interconnection. N.E. Hydro Finance provides the debt
financing to Mass. Hydro and N.H. Hydro for the capital costs of
the interconnection. For more information, see Interconnection
with Quebec, page 23.
<PAGE>
NEEI primarily participated (principally through a partnership
with a nonaffiliated oil company) in domestic oil and gas
exploration, development, and production and the sale to NEP of
fuel purchased in the open market. As part of the NEES companies'
plan to divest their generating business, NEEI sold its oil and gas
properties in February 1998. For more information, see INDUSTRY
RESTRUCTURING, page 3, and Oil and Gas Operations, page 33.
Resources is a general partner, with a 20 percent interest, in
each of two partnerships formed in connection with the Ocean State
Power project. NEES' ownership interest in Resources is subject to
a sale agreement as part of the NEES companies' divestiture of
their generating business. For more information, see INDUSTRY
RESTRUCTURING, page 3, and Ocean State Power, page 35.
The Service Company has contracted with NEES and its
subsidiaries to provide, at cost, such administrative, engineering,
construction, legal and financial services as the companies
request.
NEES Global is a wholly-owned, nonutility subsidiary of NEES
which provides consulting and independent project development
services domestically and internationally to nonaffiliates.
EMPLOYEES
At December 31, 1997, NEES subsidiaries had approximately 4,665
employees. At that date, the total number of employees was
approximately 842 at NEP, 1,691 at Mass. Electric, 734 at
Narragansett, 70 at Granite State, 23 at Nantucket and 1,305 at the
Service Company. Of the 4,665 employees, approximately 2,800 are
members of labor organizations. Collective bargaining agreements
with the Brotherhood of Utility Workers of New England, Inc., the
International Brotherhood of Electrical Workers, and the Utility
Workers Union of America, AFL-CIO expire in May, 1999. The NEES
companies have reached an agreement with all three of their unions
regarding employee benefits related to industry restructuring and
divestiture, including a voluntary early retirement package and
benefits for displaced employees.
ELECTRIC UTILITY OPERATIONS
INDUSTRY RESTRUCTURING
Historically, electric utilities have provided their customers
bundled electric service within exclusive franchise service
territories. As the result of a number of trends, including a
disparity in electric rates among regions of the country and new
regulations and legislation intended to foster competition,
distribution customers are being allowed to choose their power
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution systems.
Because of legislation enacted in the states served by the NEES
companies, most customers served by the NEES companies will have
<PAGE>
the ability to choose their power supplier by the first quarter of
1998.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient to
recover the costs of the commitments incurred to supply customers
under a regulated structure. The amounts by which such costs
exceed market prices are commonly referred to as "stranded costs."
As described below, the NEES companies have reached settlement
agreements with parties representing all of their distribution
customers. In each case, these settlements provide for recovery of
stranded costs.
Outlook
Starting in 1998, NEES earnings will be reduced by the
restructuring of the electric utility business in the states served
by the NEES companies. During the first quarter of 1998, customers
in Massachusetts and Rhode Island, representing approximately 95
percent of the NEES companies' revenues from the sale of
electricity, will have the ability to choose their power supplier.
Upon the introduction of consumer choice, settlement agreements
related to recovery of stranded costs will limit the return on
equity earned on the NEES companies' generating business to
approximately 9.4 percent, before mitigation incentives, which is
significantly lower than earned by the generating business in
recent years. (The settlement agreements also will cap earnings
for the majority of NEES' distribution business at 11.75 percent.)
Following completion of the sale of the NEES companies' nonnuclear
generating business, which is discussed in more detail below, NEES
earnings will be affected by the return on the reinvestment of the
sale proceeds, whether through retirement of debt, the repurchase
of NEES shares, investments in new ventures, or otherwise. This
reinvestment return is expected, at least in the near term, to be
considerably less than the return historically earned in the
generating business.
Massachusetts Legislation and Settlement Agreement
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1, 1998.
The legislation requires electric companies to provide customers
who do not choose a power supplier with a transition rate (or
"standard offer service") which results in a 10 percent rate
reduction, with the discount increasing to 15 percent on or before
September 1, 1999. The legislation also provides a mechanism for
the recovery of stranded costs resulting from the introduction of
customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) (formerly the Massachusetts
Department of Public Utilities (MDPU)) found that a settlement
agreement (the Massachusetts Settlement) previously reached among
the NEES companies' Massachusetts subsidiaries (NEP, Mass.
Electric, and Nantucket) and various governmental agencies and
other interested parties substantially complies with or is
<PAGE>
consistent with the Massachusetts statute. The Massachusetts
Settlement was also conditionally approved by the FERC in November
1997, subject to a compliance filing to clarify the impact of the
settlement on nonsettling parties.
In accordance with the Massachusetts Settlement, NEP's
wholesale contracts with Mass. Electric and Nantucket have been
amended effective March 1, 1998. The Massachusetts Settlement
provides that Mass. Electric's and Nantucket's share of NEP's
stranded costs will be recovered from distribution customers
through a transition access charge, which will be collected by
these electricity delivery companies. Under the Massachusetts
Settlement, the recovery of NEP's stranded costs is divided into
several categories. Unrecovered costs associated with generating
plants and regulatory assets would be recovered over 12 years and
would earn a return on equity of 9.4 percent. The above-market
component of purchased power contracts and nuclear decommissioning
costs would be recovered as incurred over the life of those
obligations, a period expected to extend beyond 12 years.
Initially, the transition access charge was set at 2.8 cents per
kWh. The MDTE has approved a reduction of the initial transition
access charge to 2.7 cents per kWh for Mass. Electric and Nantucket
effective March 1, 1998. NEP's filing with the FERC to approve
this reduction is pending. Mass. Electric and Nantucket have
already reflected the lower transition access charge amount in
their rates. The transition access charge would be reduced further
upon completion of the sale of NEP's nonnuclear generating
business, as described below. As the transition access charge
declines, NEP would earn incentives based on successful mitigation
of its stranded costs. These incentives would supplement NEP's
return on equity.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the NEES
companies to divest their nonnuclear generating business. In
August 1997, NEP and NEES' Rhode Island subsidiary, Narragansett,
entered into an agreement to sell substantially all of their
nonnuclear generating business to USGen New England, Inc. (USGen),
an indirect wholly owned subsidiary of PG&E Corporation (PG&E).
See "Divestiture of Generating Business" below. The net proceeds
from the sale of the nonnuclear generating business to USGen will
be used to reduce the transition access charge to approximately 1.5
cents per kWh. In addition, the FERC accepted the NEES companies'
proposal in conjunction with their divestiture filing that the
recovery of the remaining above-market nuclear generating plant
investment and regulatory assets be completed by the end of the
year 2000.
A referendum question which asks voters to repeal the
Massachusetts statute is expected to be on the ballot in November
1998. The NEES companies are unable to predict the outcome. While
by itself, repeal of the statute is not expected to materially
impair the effectiveness of the previously approved Massachusetts
Settlement, the potential exists that following repeal, there could
be legislative or regulatory actions which could be materially
adverse to the NEES companies.
<PAGE>
Rhode Island Legislation and Settlement Agreement
In August 1996, the state of Rhode Island enacted legislation
that allows customers in that state the opportunity to choose their
power supplier. Under the Rhode Island statute, state accounts,
certain new customers, and the largest manufacturing customers were
able to choose their power supplier beginning on July 1, 1997. The
balance of Rhode Island customers gained the ability to choose
their power supplier on January 1, 1998. The Rhode Island statute
also provided utilities with the ability to recover stranded costs.
In November 1997, the FERC conditionally approved a settlement
agreement (the Rhode Island Settlement) among NEP, Narragansett,
the Rhode Island Public Utilities Commission (RIPUC) and the Rhode
Island Division of Public Utilities and Carriers to implement the
stranded cost recovery provisions of the Rhode Island statute,
subject to a compliance filing to clarify the impact of the
settlement on nonsettling parties. The terms of the Rhode Island
Settlement are substantially the same as the Massachusetts
Settlement.
The Rhode Island Settlement requires NEP to sell power to
Narragansett at specified prices for resale to distribution
customers who do not choose a power supplier (or "standard offer
service"). The total rates for customers purchasing this interim
power service from Narragansett are approximately 7 percent below
the total rates that were in effect during 1997. Pursuant to the
Rhode Island statute, the total rate for customers who do not
choose a power supplier is capped through 2009 at a level equal to
the 1996 rate adjusted upward for 80 percent of inflation and for
other factors beyond the control of Narragansett.
New Hampshire Legislation and Settlement Agreement
On February 3, 1998, NEES' New Hampshire subsidiary, Granite
State, and NEP reached a comprehensive settlement agreement with
the Governor's office of the State of New Hampshire and a number of
other interested parties on a plan to provide choice of power
supplier to its customers by no later than July 1, 1998. This
settlement agreement was reached in response to a previously
enacted New Hampshire statute which requires customer choice of
power supplier. The principle terms of the New Hampshire
settlement agreement, which require approval by state and federal
regulators, are substantially similar to the Massachusetts
Settlement and Rhode Island Settlement, including rate reductions
for customers and the ability to recover stranded costs.
On March 20, 1998, the New Hampshire Public Utilities
Commission issued an Order on Rehearing of their previously issued
Final Plan on industry restructuring. The Order on Rehearing
reaffirmed the interim recovery of stranded costs from customers
previously established in February 1997 for Granite State (1.9
cents per kWh), which reflects an assumed level of stranded cost
mitigation. The Order on Rehearing also addressed a number of
other issues, including standards of conduct of affiliates, energy
efficiency programs, and billing and metering services. The Order
<PAGE>
on Rehearing encouraged utilities to file settlements but appears
to be inconsistent with one key aspect of the settlement filed by
Granite State concerning a separate transition service for existing
customers with back-stop pricing provided by USGen, similar to that
in place for Mass. Electric and Narragansett, after the divestiture
of NEP's and Narragansett's nonnuclear generating business to
USGen, as discussed below.
Unaffiliated Customers
Agreements have not yet been reached with certain wholesale
customers that represent less than 2 percent of the NEES companies'
stranded cost exposure. The largest of these customers, the Town
of Norwood, Massachusetts, gave notice in March 1998 of its intent
to terminate its contract with NEP, without accepting
responsibility for its share of NEP's stranded costs, and to begin
taking power from another supplier. NEP has filed with the Federal
Energy Regulatory Commission (FERC) for permission to charge
Norwood a contract termination charge for its share of NEP's
stranded costs.
Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
(collectively, the Sellers) reached an agreement to sell their
nonnuclear generating business to USGen. The nonnuclear generating
business includes three fossil-fueled and 15 hydroelectric
generating stations, totaling approximately 4,000 megawatts (MW) of
capacity, as well as NEES' 100 percent interest in Resources, a 20
percent general partner in the Ocean State Power project, all of
which has a book value of $1.1 billion. USGen will pay the Sellers
$1.59 billion in cash, of which $225 million will be contingent
upon the introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for payment
of the full purchase price have been met. USGen will also
reimburse the NEES companies for $85 million of costs associated
with early retirement and special severance programs for employees
affected by industry restructuring. USGen will assume
responsibility for environmental conditions at the Sellers'
nonnuclear generating stations. USGen will also assume the
Sellers' obligations under long-term fuel and fuel transportation
contracts and certain collective bargaining agreements for
nonnuclear facilities.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost of
the purchased power of between $12.5 million and $14.2 million per
month from closing through January 2008. USGen will be responsible
for the balance of the costs under the purchased power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale on
various grounds, including allegations that following the sale,
USGen would be able to exercise unlawful levels of market power.
<PAGE>
On February 25, 1998, the FERC issued an order that rejected the
market power allegations, approved the sale, and conditionally
approved most supporting filings. On February 27, 1998, the FERC
approved the transfer of the hydroelectric generating licenses to
USGen. While the timing of receipt of final regulatory approvals
is uncertain, receipt of all approvals is unlikely before mid-1998.
Closing is contingent upon all regulatory approvals being obtained
by February 1999.
In order to meet the terms of NEP's mortgage indenture, NEP
will be required, prior to the consummation of the sale, to either
defease or call approximately $278 million of its mortgage bonds.
Any defeasance of bonds would be by deposit of cash representing
principal and interest to the maturity date, or interest,
principal, and general redemption premium to an earlier redemption
date. In addition, NEP will retire approximately $372 million of
mortgage bonds securing the issuance of a like amount of pollution
control revenue bonds (PCRBs) by various public agencies. However,
NEP expects that substantially all of the underlying PCRBs will
remain outstanding as unsecured obligations of NEP. In addition,
the long-term debt of Resources will be retired prior to the
closing.
NEP's stranded costs will be recovered from distribution
customers through a transition access charge, which will be
collected by NEP's distribution affiliates. Upon completion of the
divestiture of NEP's nonnuclear generating business, stranded costs
will be reduced from $4.5 billion to $2.1 billion.
As part of the divestiture plan, in February 1998, NEEI (a
wholly-owned subsidiary of NEES) sold its oil and gas properties
for approximately $50 million. NEEI's loss on the sale of
approximately $120 million, before tax, has been reimbursed by NEP.
NEEI retired $121 million of bank debt at the same time.
At the divestiture date, any gain or loss from the divestiture
of nonnuclear generating assets and oil and gas assets will be
recorded as a regulatory asset or liability to be recovered as part
of NEP's stranded costs, through the ongoing transition access
charge, consistent with the settlement agreements. NEP may be
required to record a liability for the monthly fixed contribution
towards the above-market cost of purchased power. In such an
event, NEP would also record a regulatory asset consistent with the
settlement agreements.
In addition, NEP will endeavor to sell, or otherwise transfer,
its minority interest in three nuclear power plants and a 60 MW
interest in a fossil-fueled generating station in Maine to
nonaffiliates. Until such time as the nuclear interests are
divested, NEP will share with customers 80 percent of the revenues
and operating costs related to the units, with shareholders
retaining the balance. In the event that NEP determines that it
has an impairment of its nuclear plant balances under Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (FAS 121), it will record any such impairment as a
regulatory asset.
<PAGE>
Risk Factors
While the NEES companies believe that the previously described
settlements and legislation and the sale agreement with USGen and
other developments constitute substantial progress in reducing the
impacts associated with industry restructuring, significant risks
remain. These include, but are not limited to: (i) the potential
that ultimately the settlements will not be implemented in the
manner anticipated by NEES, (ii) the possibility that a voter
referendum in November 1998 could overturn the Massachusetts
legislation, followed by materially adverse legislative or
regulatory actions, (iii) the possibility of federal legislation
that would increase the risks above those contained in the
settlements and the Massachusetts and Rhode Island statutes, (iv)
the potential for adverse stranded cost recovery decisions
involving wholesale customers with whom settlements have not yet
been reached, and (v) the failure to complete the sale of the
nonnuclear generating business to USGen. The major risk factors
affecting the Electricity Delivery Companies relate to the
possibility of adverse regulatory or judicial decisions or
legislation which limit the level of revenues the Electricity
Delivery Companies are allowed to charge for their services or
affect the costs the Electricity Delivery Companies incur.
Other
For more information on workforce reductions, accounting
implications, year 2000 computer issues, and new accounting
standards, see pages 14 through 20 of the 1997 NEES Annual Report.
ELECTRICITY DELIVERY COMPANIES
The combined service area of the Electricity Delivery Companies
constitutes the electric delivery service area of the System and
covers more than 4,500 square miles with a population of about
3,000,000 (1990 census). See Map - Electric Utility Properties,
page 25. The largest cities served are Worcester, Mass.
(population 170,000) and Providence, Rhode Island (population
161,000). In addition, NEP's business going forward will be
primarily that of transmitting electricity. For a further
description of NEP's business, see TRANSMISSION AND GENERATION
BUSINESS, page 14.
Mass. Electric
Description of Business
Mass. Electric provides approximately 970,000 customers with
electric delivery service in an area comprising approximately 43
percent of The Commonwealth of Massachusetts. The population of
the service area is about 2,160,000 or 36 percent of the total
population of the Commonwealth (1990 Census). Mass. Electric's
service area consists of 146 cities and towns including the highly
diversified commercial and industrial cities of Worcester, Lowell,
and Quincy, the Interstate 495 high technology belt, and many
<PAGE>
suburban communities and rural towns. The economy of the area is
diversified. Principal industries served by Mass. Electric include
computer manufacturing and related businesses, electrical and
industrial machinery, plastic goods, fabricated metals and paper,
and chemical products. In addition, a broad range of professional,
banking, medical, and educational institutions is served. During
1997, 40 percent of Mass. Electric's revenue from the sale of
electricity was derived from residential customers, 38 percent from
commercial customers, 21 percent from industrial customers, and 1
percent from others. In 1997, the 20 largest customers of Mass.
Electric accounted for approximately 7 percent of its electric
revenue. In November 1997, legislation was enacted in The
Commonwealth of Massachusetts which provides Mass. Electric's
customers with choice of power supplier beginning on March 1, 1998
(see INDUSTRY RESTRUCTURING, page 3).
Rates
Rate schedules applicable to electric services rendered by
Mass. Electric are on file with the MDTE.
The Massachusetts Settlement establishes distribution rates for
Mass. Electric. On March 1, 1998, Mass. Electric's distribution
rates were set at a level approximately $45 million above the level
embedded in its previously bundled rates, with such rates then
frozen through the year 2000. This increase reflects changes to the
distribution cost of service that include an $11 million increase
in annual depreciation expense, a $3 million annual contribution to
a storm fund, and increased amortization of unfunded deferred
income taxes of approximately $1 million over six years. The
Massachusetts restructuring legislation also expanded the
eligibility for certain rate discount programs, the cost of which
is uncertain at this time. From 1998 through 2000, Mass. Electric's
return on equity will be subject to a floor of 6 percent and a
ceiling of 11 percent. Earnings over the ceiling will be shared
equally between customers and shareholders up to a maximum of 12.5
percent. This sharing results in an effective cap on Mass.
Electric's return on equity of 11.75 percent, excluding certain
limited incentive opportunities. To the extent that earnings fall
below the floor, Mass. Electric will be authorized to surcharge
customers for the shortfall. The statute also imposes an inflation
cap through March 1, 2005 on the total rates for customers who have
not chosen a power supplier. If this inflation cap is triggered,
under the Massachusetts Settlement the recovery of stranded
investment costs would be deferred. This inflation cap does not
apply to any surcharge triggered by the rate of return floor.
The Massachusetts Settlement also eliminated Mass. Electric's
purchased power cost adjustment (PPCA) mechanism as of July 31,
1996. This mechanism allowed Mass. Electric to recover purchased
power rate changes from NEP and the effects of NEP's seasonal
rates. The Massachusetts Settlement required that Mass. Electric's
net $18 million PPCA refund liability balance at July 31, 1996 be
transferred on its books to establish a storm contingency fund
account of $3 million initially, with the remainder applied to
reduce regulatory assets for hazardous waste costs.
<PAGE>
Historically, Mass. Electric's rates were periodically adjusted
by rate cases, including:
1995 - The MDPU approved a $31 million increase to base
rates, effective October 1, 1995.
1993 - The MDPU approved the following:
- an 11-month, $26 million general rate decrease
effective December 1, 1993;
- recognition of $35 million of unbilled revenues
as of September 30, 1993, amortized into income
over a 13-month period, ended December 1994; and
- rate discounts for large commercial and
industrial customers who agreed to give a five-
year notice to Mass. Electric before they chose
to purchase power from another supplier (Service
Extension Discounts). These Service Extension
Discounts ended effective March 1, 1998.
The rates of Mass. Electric in 1997 contained fuel adjustment
clauses that allowed the rates to be adjusted to reflect changes in
the cost of fuel. Mass. Electric's fuel clause will terminate
during the first quarter of 1998, subject to a final reconciliation
and refund or surcharge of any excess or deficiency in fuel cost
recovery.
Narragansett
Description of Business
Narragansett provides approximately 330,000 customers with
electric delivery service. Its service territory, which includes
urban, suburban, and rural areas, covers about 839 square miles or
80 percent of the area of Rhode Island, and encompasses 27 cities
and towns including the cities of Providence, East Providence,
Cranston, and Warwick. The population of the area is about 725,000
(1990 Census) which represents about 72 percent of the total
population of the state. The economy of the territory is
diversified. Principal industries served by Narragansett produce
fabricated metal products, electrical and industrial machinery,
transportation equipment, textiles, silverware, and chemical
products. In addition, a broad range of professional, banking,
medical, and educational institutions is served. During 1997, 43
percent of Narragansett's revenue from the sale of electricity was
derived from residential customers, 41 percent from commercial
customers, 14 percent from industrial customers, and 2 percent from
others. In 1997, the 20 largest customers of Narragansett
accounted for approximately 9 percent of its electric revenue. In
1996, legislation was enacted in the state of Rhode Island which
provided certain customers with choice of supplier on July 1, 1997,
with the balance of customers gaining such choice on January 1,
1998 (see INDUSTRY RESTRUCTURING, page 3).
<PAGE>
Rates
Rate schedules applicable to electric services rendered by
Narragansett are on file with the RIPUC and the Rhode Island
Division of Public Utilities and Carriers.
Under the Rhode Island statute, Narragansett increased
distribution rates by approximately $11 million in January 1997 and
another $7 million in January 1998. The statute also provides that
Narragansett may request increased distribution rates which would
take effect no earlier than 1999.
Effective January 1998, the RIPUC approved a $3.1 million
decrease in rates for Narragansett, reflecting a corresponding
decrease in expense associated with postretirement benefits other
than pensions (PBOPs). The RIPUC also approved a refund of
approximately $800,000 resulting from a past overcollection of PBOP
costs. This refund obligation was reflected on Narragansett's
books at December 31, 1997.
Historically, Narragansett's rates were periodically adjusted
by rate cases, including:
1995 - The RIPUC approved a $15 million base rate increase,
effective December 1, 1995, and $3 million in new
discounts for manufacturing customers, which ended in
1997.
- The FERC approved a rate agreement increasing credits
received from NEP to approximately $50 million for
ownership and operating costs related to Narragansett's
10 percent investment in the Manchester Street plant,
which went back into service in 1995, as well as
Narragansett's costs associated with its integrated
transmission facilities.
1994 - The RIPUC approved a rate agreement that provided for
the recognition of $14 million of unbilled revenues
over a 21-month period, which ended December 1995, and
provided for rate discounts for large commercial and
industrial customers who agreed to give a five-year
notice to Narragansett before they chose to purchase
power from another supplier (Service Extension
Discounts). These Service Extension Discounts ended
effective January 1, 1998.
1993 - The RIPUC approved a $1.5 million rate increase as part
of the three-year phase-in of Narragansett's PBOP cost
recovery. Similar increases took effect in January 1994
and 1995.
The rates of Narragansett in 1997 contained fuel adjustment
clauses that allowed the rates to be adjusted to reflect changes in
the cost of fuel. Narragansett's fuel clause terminated at the end
of 1997, subject to a final reconciliation.
<PAGE>
A 1986 Rhode Island Supreme Court decision held that the
RIPUC's rate-making power includes the authority to order refunds
of amounts earned in excess of an allowed return. As a result of
the decision, the RIPUC monitors Narragansett's earnings on a
regular basis.
Granite State
Description of Business
Granite State provides approximately 36,000 customers in 21 New
Hampshire communities with electric delivery service in the State
of New Hampshire in an area having a population of about 73,000
(1990 Census), including the Salem area of Southern New Hampshire
as well as several communities located along the Connecticut River,
primarily in the Lebanon and Walpole areas. During 1997, 48
percent of Granite State's revenue from the sale of electricity was
derived from commercial customers, 38 percent from residential
customers, 13 percent from industrial customers, and 1 percent from
others. In 1997, the 10 largest customers of Granite State
accounted for about 19 percent of its electric revenue. Granite
State is not subject to the reporting requirements of the
Securities Exchange Act of 1934, and its financial impact on the
System is small. Information on Granite State is provided herein
solely for the purpose of furnishing a more complete description of
System operations. In February 1998, Granite State and its
generation and transmission affiliate, NEP, reached a settlement
agreement with the Governor's office of the State of New Hampshire
and a number of other interested parties. This settlement
agreement provides for a distribution rate surcharge for storm
costs and pilot program costs. This settlement is subject to
federal and state regulatory approval. If approved, the settlement
provides for choice of power supplier by New Hampshire customers no
later than July 1, 1998 (see INDUSTRY RESTRUCTURING, page 3).
Rates
The rates of Granite State in 1997 contained fuel adjustment
clauses that allowed the rates to be adjusted to reflect changes in
the cost of fuel. Fuel costs billed by Granite State are estimated
on a semi-annual basis. Billings are adjusted in the subsequent
period for any excess or deficiency in fuel cost recovery.
Nantucket
Description of Business
In March 1996, NEES acquired Nantucket for $3.5 million.
Nantucket provides electric delivery service to approximately
10,000 customers on Nantucket Island which has a year-round
population of approximately 6,000 (1990 Census) and a seasonal
tourist population which peaks at approximately 40,000 during the
summer. Nantucket's service area covers the entire island. In
November 1997, legislation was enacted in The Commonwealth of
Massachusetts which provided Nantucket's customers with choice of
power supplier beginning on March 1, 1998 (see INDUSTRY
RESTRUCTURING, page 3). During 1997, 61 percent of Nantucket's
<PAGE>
revenue from the sale of electricity was derived from residential
customers, 37 percent from commercial customers, and 2 percent from
others. During 1996, a 26-mile-long submarine cable connecting
Nantucket Island with the transmission system on the mainland was
constructed. Nantucket is not subject to the reporting
requirements of the Securities Exchange Act of 1934, and its
financial impact on the System is small. Information on Nantucket
is provided herein solely for the purpose of furnishing a more
complete description of System operations.
Recovery of Demand-Side Management Expenditures
The Electricity Delivery Companies offer conservation and load
management programs, usually referred to in the industry as Demand-
Side Management (DSM) programs, which are designed to help
customers use electricity efficiently, as a part of meeting the
NEES companies' regulatory requirements and customers' needs for
energy services.
The Electricity Delivery Companies regularly file their DSM
programs with their respective regulatory agencies and have
received approval to recover DSM program expenditures in rates on
a current basis through 1997. Mass. Electric's expenditures were
$53 million, $48 million, and $51 million in 1995, 1996, and 1997,
respectively. Narragansett's expenditures were $9 million, $10
million, and $10 million, in 1995, 1996, and 1997, respectively.
Narragansett and Granite State have received approvals from their
respective state regulatory agencies to recover substantially all
of their 1998 DSM program expenditures. The Massachusetts
Settlement and statute provide for recovery of DSM-related costs.
Mass. Electric and Nantucket have filed DSM program expenditure
recovery plans with the MDTE for the period 1998 through 2002 and
have received interim MDTE approval, subject to further MDTE review
and modification based on comments by the Massachusetts Division of
Energy Resources (DOER) and other parties. Mass. Electric and
Nantucket subsequently filed a comprehensive Offer of Settlement
with the MDTE resolving all issues raised by the DOER and other
settling parties relating to Mass. Electric and Nantucket's DSM
program for the period 1998 to 2002. Since 1990, the Electricity
Delivery Companies have been allowed to earn incentives based on
the results of their DSM programs. The Electricity Delivery
Companies must be able to demonstrate the electricity savings
produced by their DSM programs to their respective state regulatory
agencies before incentives are recorded. Mass. Electric recorded
$5.1 million, $5.7 million, and $7.0 million of before-tax
incentives in 1995, 1996, and 1997, respectively. Narragansett
recorded $0.5 million, $0.2 million, and $0.3 million of before-tax
incentives in 1995, 1996, and 1997, respectively.
TRANSMISSION AND GENERATION BUSINESS
NEP
Description of Business
NEP's business has been principally generating, purchasing,
transmitting, and selling electric energy in wholesale quantities.
<PAGE>
In 1997, 91 percent of NEP's all-requirement revenue from the sale
of electricity was derived from sales for resale to affiliated
companies and 9 percent from sales for resale to municipal and
other utilities. NEP was the wholesale supplier of the electric
energy requirements of the Electricity Delivery Companies under
contracts that required seven years' notice of termination. NEP's
contracts with Mass. Electric, Nantucket, and Narragansett have
been amended. Mass. Electric and Nantucket conducted a competitive
solicitation among power suppliers in February 1998. No other
supplier bid to supply power to these companies. Narragansett will
conduct a similar competitive solicitation in April 1998. If bids
are received in response to this solicitation, Narragansett may
begin to purchase its electric energy requirements from other
suppliers. NEP retains the backstop obligation to supply the
electric energy requirements of Mass. Electric, Nantucket, and
Narragansett for retail customers eligible to continue to buy
electricity from their electricity delivery company at regulated
prices, so-called "standard offer service." Upon the completion of
the sale of NEP's nonnuclear generating business to USGen, USGen
will have the backstop obligation. Narragansett receives credits
against its purchases of power from NEP for the cost of generation
from its Providence units, which are functionally integrated with
NEP's facilities to achieve maximum economy and reliability.
Discussions of NEP's generating properties, load growth, energy
mix, and fuel supplies include the related properties of
Narragansett. (For a discussion of electric utility operations in
a more competitive environment, see INDUSTRY RESTRUCTURING, page 3,
and for a discussion of the sale of NEP's nonnuclear generating
business, see Divestiture of Generating Business, page 7.) In
addition to NEP's nonnuclear and nuclear generation, it is involved
in the transmission of electricity and owns a system of
transmission lines and substations (see Map - Electric Utility
Properties, page 25). As discussed above, NEP has agreed to sell
its nonnuclear generating business and to attempt to sell the
nuclear assets. NEP will retain its transmission business.
Rates
Since January 1995, NEP has collected the majority of its
generation and transmission revenues pursuant to the rates under
Tariff No. 1 established in the FERC approved W-95 settlement
agreement, including the revenues from the Electricity Delivery
Companies. Under Tariff No. 1, NEP is obligated to sell to its
customers, and its customers are obligated to purchase from NEP,
the requirements of its retail service territory, and they may only
terminate those mutual obligations upon seven years' notice. In
addition, NEP established an open access transmission Tariff No. 9
applicable to non-Tariff No. 1 customers in July 1996.
As customers of NEP and the Electricity Delivery Companies
become eligible to chose their own power supplier in accordance
with industry restructuring, it is necessary to amend Tariff No. 1.
The settlement agreements between NEP and the Electricity Delivery
Companies include an amendment to the Tariff No. 1 service
agreement which reforms the contractual relationship to allow for
the early termination of the Electricity Delivery Companies'
obligation to purchase wholesale all-requirements service from NEP,
in consideration for the payment of the contract termination
<PAGE>
charge. The Electricity Delivery Companies will recover the
contract termination charge through a transition access charge.
(see INDUSTRY RESTRUCTURING, page 3) NEP has also reached a
similar agreement with an unaffiliated wholesale customer. These
agreements amend the provisions of Tariff No. 1 and allow for the
provision of unbundled service by NEP.
NEP's unbundled rates going forward will consist of the
contract termination charge, transmission charges, standard offer
charges where applicable, and market revenues where applicable.
The contract termination charge initially equals 2.8 cents per
kilowatthour. The MDTE has approved a reduction of the initial
contract termination charge to 2.7 cents per kWh for Mass. Electric
and Nantucket, effective March 1, 1998. NEP's filing with the FERC
to approve this reduction is pending. Upon divestiture, the
contract termination charge declines to approximately 1.5 cents per
kWh (see INDUSTRY RESTRUCTURING, page 3). The transmission rate
pursuant to the open access Tariff No. 9 is a formula rate which
recovers NEP's actual costs plus a return on actual capital
investment and will equal approximately 0.4 cents per kWh. The
standard offer revenues will equal 3.2 cents per kWh in 1998 and
escalate in the years thereafter and are recovered by NEP until the
completion of the divestiture. Revenues from sale in the
marketplace will vary. The settlement agreements also provide for
recovery of lost revenue due to differences between what NEP would
have collected under Tariff No. 1 and what it actually collects
under the unbundled tariffs for the time period between the time
customers can choose their electricity supplier and divestiture of
NEP's nonnuclear generating business.
The electric utility business of NEP and the Electricity
Delivery Companies (except Nantucket) is not highly seasonal. For
NEP and the Electricity Delivery Companies, industrial customers
are broadly distributed among standardized industrial
classifications. No single industrial classification exceeds 3
percent of operating revenue, and no single customer of the System
contributes more than 1 percent of operating revenue.
UNREGULATED BUSINESS
AllEnergy's principal purpose is to sell energy and provide a
range of energy-related services, including but not limited to,
marketing, brokering and sales of energy, audits, fuel supply,
repair, maintenance, construction, operation, design, engineering,
and consulting, to customers in the competitive market in New
England and New York. In December 1997, AllEnergy became a wholly-
owned indirect subsidiary of NEES when Eastern Enterprises' 50
percent interest in the joint venture was purchased by NEES.
NEESCom was established in August 1996 to allow the NEES
companies to participate in the growing telecommunications
industry. This subsidiary (an exempt telecommunications company)
is not regulated under the Public Utility Holding Company Act of
1935 and has a license from the Federal Communications Commission.
It will focus on the fiber optics, cable, and infrastructure
sectors of the telecommunications industry.
<PAGE>
NEES Global is a wholly-owned nonutility subsidiary of NEES.
Its principal purpose is to provide consulting and independent
project development services for transmission projects.
Secondarily, NEES Global also provides consulting services to
unaffiliated utilities in the areas of electric industry
restructuring and customer choice.
NEES and the NEES companies have from time to time considered,
and expect to consider in the future, various strategies designed
to enhance NEES' competitive position and to increase its ability
to anticipate and adapt to changes in the electric utility
industry. These strategies may include business combinations with
other companies, internal restructurings, acquisitions or
dispositions of assets or lines of business, and changes to
franchised service territories. NEES and the NEES companies may
from time to time engage in discussions, either internally or with
third parties, regarding one or more of these potential strategies.
Those discussions may be subject to confidentiality agreements, and
NEES' policy is generally not to comment on such activities. No
assurances can be given that any potential transaction of the type
described above may actually occur, or, if one does occur, the
ultimate effect thereof on NEES' or any NEES company's results of
operations, financial condition or competitive position. See
Divestiture of Generating Business, page 7.
OPERATING REVENUES
The following is the detail of consolidated kWh sales and
deliveries, revenue from sales of electricity by the System, and
System operating income for the last three years.
<PAGE>
<TABLE>
<CAPTION>
Sales and Deliveries of Electricity
(in thousands of kWh)
------------------------------------
Classification 1997 1996 1995
- -------------- ---- ---- ----
<S> <C> <C> <C>
Residential 7,992,677 7,993,375 7,837,527
Commercial 8,731,976 8,559,082 8,378,580
Industrial 4,928,622 4,892,524 4,952,217
Other 134,499 137,378 142,848
---------- ---------- ----------
Total Sales
to Ultimate
Customers 21,787,774 21,582,359 21,311,172
Sales for
Resale 4,034,345 3,611,643 1,592,577
---------- ---------- ----------
Total Sales 25,822,119 25,194,002 22,903,749
Deliveries 334,780 101,402
---------- ---------- ----------
Total Sales
and Deliveries 26,156,899 25,295,404 22,903,749
========== ========== ==========
Revenues from Sales of Electricity
(in thousands of dollars)
----------------------------------
Classification 1997 1996 1995
- -------------- ---- ---- ----
Residential $877,447 $ 849,070 $ 841,433
Commercial 840,671 792,380 773,138
Industrial 403,868 383,659 393,174
Other 28,040 26,902 25,836
---------- ---------- ----------
Total Sales to
Ultimate
Customers 2,150,026 2,052,011 2,033,581
Amortization
of Unbilled
Revenues 8,209
Sales for Resale 149,339 140,110 79,452
---------- ---------- ----------
Total 2,299,365 2,192,121 2,121,242
Other Operating
Revenue 203,226 158,577 150,470
---------- ---------- ----------
Total Operating
Revenue $2,502,591 $2,350,698 $2,271,712
========== ========== ==========
Operating Income $ 366,861 $ 348,118 $ 323,428
========== ========== ==========
</TABLE>
<PAGE>
Operating revenue increased in 1997 and reflects higher kWh
deliveries, rate increases, increased revenues related to rate
adjustment mechanisms, and increased fuel revenues.
In 1997, kWh deliveries to ultimate customers increased 2.0
percent, reflecting the effects of an improving regional economy.
In 1997, 73 percent of the System's electric utility revenues
was attributable to NEP, whose rates are subject to regulation by
the FERC. The rates of Mass. Electric and Nantucket, Narragansett,
and Granite State are subject to the respective jurisdictions of
the state regulatory commissions in Massachusetts, Rhode Island,
and New Hampshire. For a discussion of 1998 rates, see ELECTRICITY
DELIVERY COMPANIES, page 9 and TRANSMISSION AND GENERATION
BUSINESS, page 14.
ELECTRIC UTILITY PROPERTIES
Transmission, Distribution, and Generation Properties
The electric utility properties of the System companies consist
of NEP's and Narragansett's fossil-fuel base load and intermediate
load steam and combined cycle generating units, conventional and
pumped storage hydroelectric stations, internal combustion peaking
units, and portions of fossil fuel and nuclear generating units.
On August 5, 1997, NEP and Narragansett entered into an agreement
to sell their nonnuclear generating assets. See Divestiture of
Generating Business, page 7. NEP also plans to seek offers to sell
its nuclear generating business. The properties of the System also
include the ownership interests of NEET, Mass. Hydro, and
N.H. Hydro in the Hydro-Quebec Interconnection, and an integrated
system of transmission lines, substations, and distribution
facilities. See Map - Electric Utility Properties, page 25.
NEP's integrated system consists of 2,266 circuit miles of
transmission lines, 118 substations with an aggregate capacity of
15,697,624 kVA, and 7 pole or conduit miles of distribution lines.
The properties of Mass. Electric and Narragansett include
substations and distribution and transmission lines, which are
interconnected with transmission and other facilities of NEP. At
December 31, 1997, Mass. Electric owned 253 substations, which had
an aggregate capacity of 2,984,429 kVA, 148,718 line transformers
with the capacity of 8,398,146 kVA, and 16,919 pole or conduit
miles of distribution lines. Mass. Electric also owns 83 circuit
miles of transmission lines. At December 31, 1997, Narragansett
owned 243 substations, which had an aggregate capacity of 3,055,065
kVA, 48,653 line transformers with the capacity of 2,102,894 kVA,
and 4,553 pole or conduit miles of distribution lines.
Narragansett, in addition, owns 326 circuit miles of transmission
lines.
Substantially all of the properties and franchises of Mass.
Electric, Narragansett, and NEP are subject to the liens of
indentures under which mortgage bonds have been issued. NEP's
bond indenture restricts the sale of the trust property in its
entirety or substantially in its entirety. In order to meet the
<PAGE>
terms of NEP's mortgage indenture, NEP will be required, prior to
the consummation of the sale of its nonnuclear generating business,
to either defease or call approximately $278 million of its
mortgage bonds (see Divestiture of Generating Business, page 7).
For details of the mortgage liens on these properties, see the
long-term debt note in Notes to Financial Statements in each of
these companies' respective 1997 annual reports. The properties of
NEET are subject to a mortgage under its financing arrangements.
<PAGE>
<TABLE>
The net capability at December 31, 1997, and the net generation for the
twelve months ended December 31, 1997, from all sources were as follows:
<CAPTION>
Year(s)
Placed Energy Net Net
Source Location In-Service Source Capability Generation
------ -------- ---------- ------ ---------- -------------
Fossil Fuel Units (MW) (000's of MWh)
<S> <C> <C> <C> <C> <C>
Brayton Point
Station
Units 1,2 & 3 Somerset, 1963-1969 Coal-Oil-Gas(a) 1,135 8,383
Unit 4 Mass. 1974 Oil-Gas 446 543
Salem Harbor
Station
Units 1,2 & 3 Salem, 1952-1958 Coal-Oil(a) 314 2,188
Unit 4 Mass. 1972 Oil 400 1,718
Manchester St. Prov., 1995 Gas-Oil 495 3,553
Station(b) R.I.
Other System Me., Mass. 1963-1978 Oil 93 90
Units(c)
Hydroelectric Units(d)
Conventional Mass.,N.H. 1909-1987 Water 576 1,487
& Vt.
Pumped Storage
Bear Swamp Rowe, Mass. 1974 Water 585 (154)
Other(e) - - - 927 4,523
----- ------
Subtotal 4,971 22,331
Nuclear Units(f)
Vermont Yankee Vt. 1972 Nuclear 95 767
Millstone 3 Waterford, 1986 Nuclear 0 0
Conn.
Seabrook 1 Seabrook, 1990 Nuclear 116 791
N.H.
----- ------
Subtotal 211 1,558
----- -----
Total 5,182 23,889
===== ======
</TABLE>
(a) These units currently burn coal, but are also capable of
burning oil. In addition Brayton Point Units 1, 2, and 3 are
capable of limited co-firing of natural gas.
(b) In 1995, NEES subsidiaries completed the approximately 500 MW
repowering of Manchester Street Station in Providence, Rhode
Island. Total costs for the generating station were
approximately $440 million, including allowance for funds used
during construction (AFDC).
<PAGE>
(c) Includes (i) an interest in a jointly owned oil-fired unit in
Yarmouth, Maine, and (ii) diesel units at various locations.
(d) See Hydroelectric Project Licensing, page 34.
(e) Capability includes contracted purchases (1,095 MW) less
contract sales (168 MW). Net generation includes the effects
of the above contracted purchases and economy interchanges
through the New England Power Exchange (including a 115 MW
capacity credit associated with purchases from Hydro-Quebec and
purchases from nonutility generation). For further information
see Nonutility Power Producer Information, page 33.
(f) See Nuclear Units, page 26.
NEP, Narragansett, and AllEnergy are members of the New England
Power Pool (NEPOOL). Mass. Electric, Nantucket, and Granite State
participate in NEPOOL through NEP. The NEPOOL Agreement provides
for coordination of the planning and operation of the generation
and transmission facilities of its members. The NEPOOL Agreement
incorporates generating capacity reserve obligations, provisions
regarding the use of major transmission lines, and provisions for
payment for facilities usage. The NEPOOL Agreement further
provides for New England-wide central dispatch of generation by the
Independent System Operator (ISO). Through NEPOOL, operating and
capital economies are achieved and reserves are established on a
region-wide rather than an individual company basis.
At the end of 1996, NEPOOL filed with the FERC a comprehensive
proposal to restructure NEPOOL. The main elements of the proposal
include: (1) the establishment of a regional transmission tariff
that will ensure open, nondiscriminatory access to the regional
transmission network; (2) the development of wholesale competitive
markets and a power exchange for capacity, energy and several
ancillary services with market-based pricing for these products and
services; (3) a new governance structure for NEPOOL that will allow
for more flexible and representative governance; and (4) the
creation of a new institution, the ISO, that will operate the bulk
power system and administer the regional tariff and power exchange.
Since the initial filing, the FERC has conditionally accepted a
number of NEPOOL's proposals including the Regional Open Access
Tariff, the ISO, and the NEPOOL governance restructuring. NEPOOL
is awaiting a final order on its market proposal. The NEES
companies support the NEPOOL restructuring proposal because they
believe it will facilitate the development of robust competition in
the wholesale electricity markets in New England and facilitate
retail access. A number of parties intervened in the proceeding.
The 1997 NEPOOL peak demand of 20,569 MW occurred on July 14,
1997. This was a new all-time NEPOOL peak demand which surpassed
the previous all time NEPOOL peak demand of 20,519 MW set on July
21, 1994.
The 1997 summer peak for the System of 4,326 MW occurred on
July 17, 1997. The previous all-time peak load of 4,385 MW
occurred on July 21, 1994. The 1997-1998 winter peak of 3,901 MW
occurred on December 15, 1997.
<PAGE>
NEPOOL currently projects a capacity shortfall of approximately
500 MW from long-range planning criteria for the summer of 1998,
assuming normal summer weather. This projection further assumes
that the three Millstone nuclear units will be unavailable during
the summer. Extensive or extended hot weather or losses of other
major generating units or transmission ties could further strain
the System. NEPOOL participants are working to mitigate any
capacity shortages and prevent disruptions in electric service this
summer. A new spot market for capacity, which is expected to
become effective on April 1, 1998, may create sufficient economic
incentives for the NEPOOL participants to meet the increased
capacity requirements in the aggregate. NEPOOL participants will
coordinate with adjacent control areas to arrange for import power
and will make use of voluntary interruptible load options to meet
the projected capacity shortfall.
Interconnection with Quebec
NEET, Mass. Hydro, and N.H. Hydro own and operate, on behalf
of NEPOOL participants in the project, a 450 kV direct current
transmission line and related terminals to interconnect the New
England and Quebec transmission systems (the Interconnection). The
transfer capability of the Interconnection is currently rated at
1,800 MW. Operating limits implemented by adjacent Power Pools
covering New York, New Jersey, Pennsylvania, and Maryland often
restrict the effective transfer capability to levels of 1,200 MW to
1,400 MW. Participants in the Interconnection purchase from and
sell energy to Hydro-Quebec pursuant to several agreements. The
principal agreement calls for New England Utilities (NEUs) to
purchase 7 billion kWh of energy each year for ten years (the Firm
Energy Contract). Purchases under the Firm Energy Contract totaled
over 5.5 billion kWh in 1997. Net energy deliveries from Hydro-
Quebec over the Interconnection totaled more than 7.3 billion kWh
in 1997. These additional deliveries reflect the use of the
Interconnection by participants to conduct independent transactions
with Hydro-Quebec on a regular basis.
The Interconnection has two phases. NEP's participation in
both is approximately 18 percent. NEP and the other participants
have entered into support agreements that end in 2020, to pay
monthly their proportionate share of the total cost of
constructing, owning, and operating the transmission facilities.
NEP accounts for these support agreements as capital leases and
accordingly recorded approximately $65 million in utility plant at
December 31, 1997. Under the support agreements, NEP has agreed
to guarantee its share of debt financing for the second phase. At
December 31, 1997, NEP had guaranteed approximately $25 million of
project debt. In the event any Interconnection facilities are
abandoned for any reason, each participant is contractually
committed to pay its pro-rata share of the net investment in the
abandoned facilities. NEP's rights and obligations under its
support agreements will be transferred to USGen upon completion of
the sale of NEP's nonnuclear generating business (see Divestiture
of Generating Business, page 7).
<PAGE>
For information regarding a dispute between the NEUs and Hydro-
Quebec regarding their Firm Energy Contract, see Item 3 herein.
<PAGE>
Map - Electric Utility Properties
(Displays electric utility properties of NEES subsidiaries)
<PAGE>
Nuclear Units
General
NEP is a stockholder of Yankee Atomic Electric Company (Yankee
Atomic), Vermont Yankee Nuclear Power Corporation (Vermont Yankee),
Maine Yankee Atomic Power Company (Maine Yankee), and Connecticut
Yankee Atomic Power Company (Connecticut Yankee). Each of these
companies (collectively referred to as the Yankee Companies) owns
a single nuclear generating unit. NEP purchases the output of the
Vermont Yankee nuclear electric generating plant in the same
percentage as its stock ownership, less small entitlements taken by
municipal utilities. Yankee Atomic, Connecticut Yankee, and Maine
Yankee have permanently ceased operations. NEP has power contracts
with each Yankee Company that require NEP to pay an amount equal to
its share of total fixed and operating costs (including
decommissioning costs) of the plant plus a return on equity.
The stockholders of three Yankee Companies (Vermont Yankee,
Maine Yankee, and Connecticut Yankee) have agreed, subject to
regulatory approval, to provide capital requirements in the same
proportion as their ownership percentages of the particular Yankee
Company.
In addition, NEP is a joint owner of the Millstone 3 nuclear
generating unit in Connecticut and the Seabrook 1 nuclear
generating unit in New Hampshire. Millstone 3 and Seabrook 1 are
operated by subsidiaries of Northeast Utilities. The Millstone 3
unit is currently shut down. NEP pays its proportionate share of
costs and receives its proportionate share of output from Vermont
Yankee, Millstone 3, and Seabrook 1. Listed below is information
on each operating nuclear plant in which NEP has an ownership
interest.
Operating Nuclear Units
<TABLE>
<CAPTION>
NEP's Share of
NEP's Net Plant
Ownership Assets
Unit Interest (%) ($ in millions)
---- ------------ ---------------
<S> <C> <C>
Vermont Yankee 20 35
Millstone 3 12 366
Seabrook 1 10 54
</TABLE>
Nuclear Units Permanently Shut Down
Three of the four regional nuclear generating companies in
which NEP has a minority interest own nuclear generating units
which have been permanently shut down. These three units are as
follows:
<PAGE>
<TABLE>
<CAPTION>
NEP's Investment Future Estimated
------------------- Date Billings to NEP
Unit % $(millions) Retired $(millions)
---- --- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 7 February 1992 44
Connecticut Yankee 15 17 December 1996 92
Maine Yankee 20 16 August 1997 164
</TABLE>
Operating Nuclear Plants - Decommissioning Estimates
<TABLE>
<CAPTION>
NEP's share of
($ in millions)
--------------------------------
Estimated Decommissioning
Decommissioning Fund
Costs Balances (1) License
Unit (in 1997 $) (12/31/97) Expiration
---- --------------- --------------- ----------
<S> <C> <C> <C>
Vermont Yankee $77 $34 2012
Millstone 3 $66 $18 2025
Seabrook 1 (2) $47 $ 9 2026
(1) Certain additional amounts are anticipated to be
available through tax deductions.
(2) Proposed legislation in New Hampshire would make owners of
Seabrook 1 proportional guarantors for decommissioning costs in
the event that an owner without a franchise service territory
fails to fund its share of decommissioning costs.
</TABLE>
For a discussion of NEP's investment in both operating and
retired nuclear units, the Millstone 3 unit, nuclear
decommissioning costs and nuclear insurance issues, see pages 35 to
38 of the 1997 NEES Annual Report.
High-Level Waste Disposal
The Nuclear Waste Policy Act of 1982 provides a framework and
timetable for selection of sites for repositories of high-level
radioactive waste (spent nuclear fuel) from United States nuclear
plants. The U.S. Department of Energy (DOE) has entered into
contracts with the Yankee Companies, the Millstone 3 joint owners,
and the Seabrook 1 joint owners for acceptance of title to, and
transportation and storage of, this waste. Under these contracts,
each operating unit will pay fees to the DOE to cover the
development and creation of waste repositories. Fees for fuel
burned since April 1983 have been collected by the DOE on an
<PAGE>
ongoing basis at the rate of one tenth of a cent per kWh of net
generation. Fees for generation up through April 1983 were
determined by the DOE as follows: $13.2 million for Yankee Atomic,
$48.7 million for Connecticut Yankee, $50.4 million for Maine
Yankee, and $39.3 million for Vermont Yankee. Neither Millstone 3
nor Seabrook 1 has been assessed any fees for fuel burned through
April 1983 because they did not enter commercial operation until
1986 and 1990, respectively.
The Yankee Companies had several options to pay these fees.
Yankee Atomic paid its fee to the DOE for the period through April
1983. The other three Yankee Companies elected to defer payment
until a future date, thereby incurring interest expense. However,
payment to the DOE must occur prior to the first delivery of spent
fuel. Connecticut, Maine, and Vermont Yankee have segregated a
portion of their respective DOE obligations in external accounts.
The remainder of the funds have been used to support general
capital requirements. All expect to separately fund in full in
external accounts their DOE obligation (including accrued interest)
prior to payment to the DOE. To the extent that any of the three
Yankee Companies is unable to fully meet its DOE obligation at the
prescribed time, NEP might be required to provide additional funds.
Prior to such time that the DOE takes delivery of a plant's
spent nuclear fuel, it is stored on site in spent fuel pools.
Millstone 3, Seabrook 1, and Vermont Yankee are in the process of
reconfiguring their spent fuel pools to allow for additional
storage capability. Upon successful completion of the
reconfiguring, Millstone 3 will have sufficient spent fuel pool
capacity to support plant operation through the expiration of their
respective current Nuclear Regulatory Commission (NRC) license.
Seabrook 1's licensed storage capacity will allow a full core
discharge until 2011. Vermont Yankee will be able to maintain a
full core discharge capability until 2004. Yankee Atomic,
Connecticut Yankee and Maine Yankee all have adequate on-site
storage capacity for all their spent fuel.
Federal legislation enacted in 1987 directed the DOE to proceed
with the studies necessary to develop and operate a permanent
high-level waste disposal site at Yucca Mountain, Nevada. There is
local opposition to development of this site. Although originally
scheduled to open in 1998, the DOE currently estimates that the
permanent disposal site is not expected to open before 2015.
Currently there is legislation before Congress that would create an
interim spent fuel storage site to be used until the Yucca Mountain
permanent storage site becomes available. Separate bills passed
the Senate and House in 1997 and are awaiting action by a joint
House-Senate conference committee. Although the measures had
strong bipartisan support in both chambers, their future is
uncertain due to the threat of a Presidential veto.
On July 23, 1996, the U.S. Court of Appeals for the District
of Columbia Circuit issued its decision in a lawsuit petitioning
the Court to declare the 1998 contract date a binding legal
obligation. The Court stated that the DOE is obligated "to start
disposing Spent Nuclear Fuel no later than January 31, 1998." The
Court's decision did not specify a plan for ensuring that the DOE
<PAGE>
meets its obligations, but rather noted that it was premature to
determine the appropriate remedy since the DOE had not yet
defaulted upon either its statutory or contractual obligation.
In January 1997, 36 utilities and 33 states filed lawsuits
against the DOE in the U.S. Court of Appeals for the District of
Columbia Circuit. The plaintiffs sought to suspend payments to the
Nuclear Waste Fund until DOE begins taking spent fuel. The payment
would instead be made to special escrow accounts.
The petitioners in the lawsuits requested that the court review
the above decision in which the same court ruled that the January
31, 1998 contract date was binding and order DOE to prepare a plan
to begin taking spent fuel by that date.
In November 1997, the U.S. District Court of Appeals for the
District of Columbia Circuit ruled that the lack of an interim
storage facility does not excuse the DOE from meeting its
contractual obligation to begin accepting spent nuclear fuel no
later than January 31, 1998. The Court did not require the DOE to
develop a plan for meeting the January 1998 deadline.
The DOE did not begin accepting spent nuclear fuel by January
31, 1998.
In February and March 1998, Yankee Atomic and Connecticut
Yankee, respectively, filed separate suits in the United States
Court of Federal Claims against the DOE for monetary damages for
breach of contract arising from the DOE's refusal to accept nuclear
fuel from the plants. Vermont Yankee, Maine Yankee, Millstone 3
and Seabrook 1 have joined with others in separate legal actions
against the DOE.
Federal authorities have deferred indefinitely the commercial
reprocessing of spent nuclear fuel.
Low-Level Waste Disposal
Federal law allows the states in which the three existing low-
level waste disposal sites were located to deny access to
nonregional waste generators after 1992. Under the statute,
individual states are responsible for finding local sites for
disposal or forming regional disposal compacts by defined milestone
dates.
None of the states in which NEP holds an interest in a nuclear
facility has met the statutory milestones toward developing
disposal sites. Currently, two low-level waste disposal sites in
the U.S. are accepting nonregional waste, Chem-Nuclear Systems,
Inc.'s site in Barnwell, South Carolina and Envirocare of Utah,
Inc's site in Clive, Utah. The Barnwell facility reopened its
services to most nonregional generators on July 1, 1995 and is
authorized to remain open until July 1, 2005. In 1996, the South
Carolina Supreme Court upheld the constitutionality of the
legislative action that reopened Barnwell to nonregional
generators. Envirocare began accepting Class A low-level waste in
1995. Class A waste is the least contaminated of the three
<PAGE>
categories defining low-level waste. The Barnwell facility accepts
all three categories of waste. Connecticut Yankee, Maine Yankee,
Millstone 3, Seabrook 1, and Yankee Atomic are currently shipping
low-level waste to these sites. Chem-Nuclear Systems, as operator
of the Barnwell facility, is obligated to make certain payments to
the State of South Carolina. Chem-Nuclear has indicated that
projected revenues from its disposal activities at Barnwell are not
likely to be sufficient to reimburse it for these payments, and is
exploring alternatives to increase revenues from utilities
disposing waste at Barnwell. NEP cannot predict what impact, if
any, this situation will have on the continued availability of the
Barnwell site.
The States of Maine and Vermont have established a compact with
Texas for the disposal of low-level waste in Hudspeth County,
Texas. The compact agreement has been approved in all three states
and is now before the U.S. Congress. In 1997, the House approved
the compact agreement and it is under review by the Senate. If
Congress approves, the site is expected to begin accepting waste
during 1999. While Maine Yankee has been shipping its low-level
waste off-site, Vermont Yankee has elected to store low-level waste
on-site until that time, although a shipment was made to Barnwell
in 1997. The compact relieves Maine and Vermont from having to
site an in-state disposal facility. Connecticut, Massachusetts,
and New Hampshire are still required to pursue local or regional
low-level waste disposal facilities. However, Massachusetts
suspended its search for a local disposal facility in 1996.
Nuclear Fuel Supply
The utilities responsible for the fuel supply for these
operating nuclear units are not experiencing any difficulty in
obtaining commitments for the supply of each element of the nuclear
fuel cycle.
Other Items
Federal legislation requires emergency response plans, approved
by federal authorities, for nuclear generating units. The Yankee
Companies, Seabrook 1, and Millstone 3 are not currently
experiencing difficulty in maintaining approval of their emergency
response plans.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for the
plant decommissioning, the owners of Maine Yankee are jointly and
severally liable for the shortfall. The definition of owner under
the statute covers NEP and may cover companies affiliated with it.
NEP and the Electricity Delivery Companies cannot determine, at
this time, the constitutionality, applicability, or effect of this
statute. If NEP or the Electricity Delivery Companies were
required to make payments under this statute, they would assess
their legal remedies at that time. In any event, NEP and the
Electricity Delivery Companies would attempt to recover through
rates any payments required. If any claim in excess of NEP's
ownership share were enforced against a NEES company, that company
would seek reimbursement from any other Maine Yankee stockholder
which failed to pay its share of such costs.
<PAGE>
Divestiture of Nonnuclear Generating Business
On August 5, 1997, the NEES companies reached an agreement to
sell their nonnuclear generating business to USGen. For more
information, see INDUSTRY RESTRUCTURING, page 3.
Energy Mix
The following table displays the contributions of various fuel
sources and other generation to total net generation of electricity
by NEP during the past three years, as well as an estimate for
1998:
<TABLE>
<CAPTION>
% of Net Generation
------------------------------
Estimated Actual
--------- -------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Coal 39 44 42 38
Nuclear 7 5 14 14
Gas (1) 28 29 24 22
Oil 7 4 1 10
Hydroelectric 7 6 7 5
Hydro-Quebec 6 6 6 5
Renewable Nonutility
Generation (2) 6 6 6 6
--- --- --- ---
100 100 100 100
(1) Gas includes both utility and nonutility generation.
(2) Waste to energy and hydro.
</TABLE>
Fuel for Generation
NEP burned the following amounts of coal, residual oil, and
gas during the past three years:
1997 1996 1995
---- ---- ----
Coal (in millions of tons) 4.1 3.8 3.4
Oil (in millions of barrels) 3.3 2.2 1.7
Natural Gas (in billions of cubic feet) 31.1 28.6 16.2
Coal Procurement Program
Depending on coal-fired generating unit availability and the
degree to which the units are dispatched, NEP's 1998 coal
requirements should range between 3.8 and 4.2 million tons. NEP
<PAGE>
obtains its domestic coal under contracts of varying lengths and on
a spot basis from domestic coal producers in Kentucky, West
Virginia, and Virginia, and from mines in Colombia and Venezuela.
Two different rail systems (CSX and Norfolk Southern) transport
coal from domestic sources to loading ports on the east coast.
NEP's coal is transported from east coast ports by ocean-going
collier to Brayton Point and Salem Harbor. NEP has a term charter
with International Shipholding Corporation for the S.S. Energy
Enterprise, a self-unloading collier, which carries most of NEP's
U.S. coal and a portion of foreign coal. NEP also charters other
coal-carrying vessels for the balance of foreign coal, and
presently has contracts of affreightment with Canada Steamship
Lines, International and Marbulk Shipping Inc. As protection
against interruptions in coal deliveries, NEP maintains average
coal inventories at its generating stations of 25 to 50 days.
To meet environmental requirements, NEP uses coal with a
relatively low sulphur content. NEP's average price for coal
burned, including transportation costs, was $42.25 per ton in 1995,
$42.03 in 1996, and $42.39 in 1997. Based on a 42 gallon barrel of
oil producing 6.3 million Btu's, these coal prices were equivalent
to approximately $10.25 per barrel of oil in 1995, $10.20 in 1996,
and $10.28 in 1997.
Oil Procurement Program
Depending on unit availability, dispatch, and the relationship
of oil and gas prices, the System's 1998 oil requirements are
expected to be approximately 3.0 to 4.5 million barrels. The
System obtains its oil requirements through short-term contracts
with oil suppliers and purchases on the spot market. The System
currently has a total storage capacity for approximately
1.3 million barrels of residual and diesel fuel oil. The System's
average cost of oil burned, calculated on a 6.3 million Btu per
barrel basis, was $14.46 in 1995, $17.19 in 1996, and $16.60 in
1997.
Natural Gas
NEP has contracts with two Canadian natural gas suppliers for
a total of 35 million cubic feet per day as well as a 7.5 million
cubic feet per day liquified natural gas supply contract with a
Massachusetts corporation. NEP has service agreements for firm
transportation of natural gas with a number of pipeline companies.
The agreements are sufficient to cover a total delivery to New
England of an aggregate amount of approximately 127.5 million cubic
feet per day. Service under the pipeline agreements and one of the
supply contracts require minimum fixed payments. NEP's minimum
fixed payments under all pipeline and supply agreements are
currently estimated to be approximately $59 million to $62 million
per year from 1998 to 2002. Remaining fixed payments from 2003
through 2014 total approximately $501 million. The amount of the
fixed payments is subject to FERC regulation and will depend on
FERC actions affecting the rates on each of the pipelines. In
connection with managing its fuel supply, NEP uses a portion of
this pipeline capacity to sell natural gas. Proceeds from sales of
natural gas and pipeline capacity of $71 million, $50.2 million,
<PAGE>
and $41 million in 1995, 1996, and 1997, respectively, have been
passed on to customers through NEP's fuel clause. These contracts
will be assumed by USGen upon completion of the sale of the NEES
companies' nonnuclear generating business to USGen (see Divestiture
of Generating Business, page 7).
Oil and Gas Operations
NEEI participated in a rate-regulated domestic oil and gas
exploration, development, and production program through a
partnership with a nonaffiliated oil company. Losses from this
program, calculated under the full cost method of accounting, have
been charged to NEP, and ultimately to distribution customers, in
accordance with Securities and Exchange Commission (SEC) and FERC
approvals. Such losses were $11 million, $22 million, and $44
million in 1997, 1996, and 1995, respectively. In February 1998,
after a competitive bidding process, NEEI sold all of its remaining
oil and gas properties held as of December 31, 1997 to Samedan Oil
Corporation for $50 million. The loss on such disposition,
approximately $120 million, before tax, has been charged to NEP.
The settlements provide for the recovery of the NEEI loss as part
of NEP's stranded costs. See INDUSTRY RESTRUCTURING, page 3, and
Divestiture of Generating Business, page 7.
Nonutility Power Producer Information
The System companies purchase a portion of the electricity
generated by, or provide backup or standard service to, 140 small
power producers, cogenerators, or independent power producers (a
total of 5,286,228 MWh of purchases in 1997). As of December 31,
1997, these nonutility generation sources include 24 low-head
hydroelectric plants, 49 wind or solar generators, 13 waste to
energy facilities, 51 cogenerators, and 3 independent power
producers. The total capacity of these sources is as follows:
Source MW at 12/31/97
------ --------------
Hydro 37
Waste to Energy 182
Cogeneration 306
Independent Power Producers 393
----
Total 918
These amounts include 758 MW of long-term capacity, 16 MW of
short-term capacity, and 144 MW treated as load reductions and
includes the Ocean State Power contracts discussed below. NEP's
entitlements under these contracts are subject to a sale agreement
with USGen. For information on the sale of the NEES companies'
nonnuclear generating business including entitlements to power
procured under long-term contracts, see Divestiture of Generating
Business, page 7.
<PAGE>
Hydroelectric Project Licensing
NEP is the largest operator of conventional hydroelectric
facilities in New England. NEP has entered into an agreement to
sell its hydroelectric facilities to USGen (see Divestiture of
Generating Business, page 7). All of NEP's hydroelectric projects
are licensed by the FERC. These licenses expire periodically and
the projects must be relicensed at that time. NEP's present
licenses expire over a period from 2001 to 2020, excluding the
Deerfield River Project discussed below. Upon expiration of a FERC
license for a hydro project, the project may be taken over by the
United States or licensed to the existing, or a new licensee. If
the project were taken over, the existing licensee would receive an
amount equal to the lesser of (i) fair value of the project or
(ii) original cost less depreciation and amounts held in
amortization reserves, plus in either case severance damages. The
net book value of NEP's hydroelectric plants in service was $237
million as of December 31, 1997.
In the event that a new license is not issued when the existing
license expires, FERC must issue annual licenses to the existing
licensee which will allow the project to continue operation until
a new license is issued. A new license for a project may
incorporate operational restrictions and requirements for
additional nonpower facilities (e.g., fish passage or recreational
facilities) that could affect operation of the project, and may
also require additional capital investment. For example, NEP has
previously received new licenses for projects on the Connecticut
River that involved construction of an extensive system of fish
ladders.
The license for the 84 MW Deerfield River Project expired at
the end of 1993. NEP filed an application for a new license in
1991. NEP has signed, with 15 governmental agencies and
nongovernmental organizations, a Settlement Agreement which
embodies operational, environmental and recreational conditions
acceptable to the parties. In 1996, FERC issued a final
environmental impact statement which supports the Settlement
Agreement. NEP has received water quality certifications from The
Commonwealth of Massachusetts and the State of Vermont needed to
complete the FERC relicensing processing. The Vermont certificate
was appealed by an advocacy group; however, the appeal has
subsequently been settled. On March 25, 1997, the FERC voted to
issue NEP a new 40-year license for the project. NEP filed a
Petition for Rehearing in May 1997. The FERC ruled on that
Petition, in terms generally favorable to NEP.
The next NEP project to require a new license will be the 369
MW Fifteen Mile Falls Project on the Connecticut River in New
Hampshire and Vermont. This license expires in 2001. The formal
process of preparing an application for a new license began in 1996
with the filing of a Letter of Intent to Relicense with the FERC.
NEP has conducted relicensing studies and engaged in a cooperative
settlement process with 17 stakeholder parties. That process
culminated in a Settlement Agreement signed in August 1997,
enabling NEP to participate in what will likely result in an
<PAGE>
alternative relicensing process which results in an Applicant
Prepared Environmental Assessment filed with the relicense
application. This alternative process will, NEP believes, result
in a cost-effective and streamlined regulatory option before the
FERC. NEP applied for this alternative process in March 1998. NEP
must file its relicense application before July 31, 1999.
In 1994, the FERC adopted a policy statement in which it
asserted that it has authority over the decommissioning of licensed
hydroelectric projects being abandoned or denied a new license.
However, the FERC has recognized in the process leading to the
policy statement that mandated project removal would occur in only
rare circumstances. The FERC also declined to require any generic
funding mechanism to cover decommissioning costs. If a project is
decommissioned, the licensee may incur substantial costs.
Ocean State Power
Ocean State Power (OSP) and Ocean State Power II (OSP II) are
general partnerships that own and operate a two unit gas-fired
combined cycle electric power plant in Burrillville, Rhode Island.
The two units have a combined winter net electrical capability of
approximately 562 MW. Each unit's capacity and energy output is
sold under 20-year unit power agreements to a group of New England
utilities, including NEP, which has contracts for 48.5 percent of
the output of each unit. NEP is required to make certain minimum
fixed payments to cover capital and fixed operating costs of these
units in amounts estimated to be $75 million per year.
Resources is a general partner with a 20 percent interest in
both OSP and OSP II and had an equity investment of approximately
$35 million at December 31, 1997. Upon completion of the sale of
the nonnuclear generating business, which includes Resources, to
USGen in 1998, $29 million of Resources' debt will be retired (see
Divestiture of Generating Business, page 7).
REGULATORY AND ENVIRONMENTAL MATTERS
Regulation
Numerous activities of NEES and its subsidiaries are subject
to regulation by various federal agencies. Under the 1935 Act,
many transactions of NEES and its subsidiaries are subject to the
jurisdiction of the SEC. With the intensifying competitive
pressures within the electric utility industry, there has been
increasing debate about modifying or repealing the 1935 Act.
Under the Federal Power Act, certain electric subsidiaries of NEES
are subject to the jurisdiction of the FERC with respect to rates,
accounting, and hydroelectric facilities. In addition, the NRC has
broad jurisdiction over nuclear units and federal environmental
agencies have broad jurisdiction over environmental matters. The
electric utility subsidiaries of NEES are also subject to the
jurisdiction of regulatory bodies of the states and municipalities
in which they operate.
<PAGE>
For more information, see INDUSTRY RESTRUCTURING, page 3;
Mass. Electric, Narragansett, Granite State, and NEP Rates, pages
10 through 15; Nuclear Units, page 26; Fuel for Generation, page
31; Oil and Gas Operations, page 33; and Environmental
Requirements, page 36.
Environmental Requirements
Existing Operations
The NEES subsidiaries are subject to federal, state, and local
environmental regulation of, among other things, wetlands and flood
plains; air and water quality; storage, transportation, and
disposal of hazardous wastes and substances; underground storage
tanks; and land-use. It is likely that the stringency of
environmental regulation affecting the System and its operations
will increase in the future.
Siting and Construction Activities for New Facilities
All New England states require, in certain circumstances,
regulatory approval for site selection or construction of major
transmission facilities. Connecticut, Maine, Massachusetts, New
Hampshire, and Rhode Island also have programs of coastal zone
management that might restrict construction of electrical
facilities in, or potentially affecting, coastal areas. The New
England states have environmental laws which require project
proponents to prepare reports of the environmental impact of
certain proposed actions for review by various agencies.
Environmental Expenditures
Total System capital expenditures for environmental protection
facilities have been substantial. System capital expenditures for
such facilities amounted to approximately $39 million in 1995, $9
million in 1996, and $7 million in 1997, including expenditures by
NEP of $32 million, $3 million, and $5 million, respectively, for
those years. The System estimates that capital expenditures for
environmental protection facilities in 1998 and 1999 will not be
material to the System.
Hazardous Substances
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. For more information regarding sites for
which NEES and/or its subsidiaries have been named as potentially
responsible parties, other sites, a settlement agreement covering
rate recovery of certain remediation costs, and reserves, see pages
20 and 34 of the NEES 1997 Annual Report, Note D of the Notes to
the Financial Statements of the NEP 1997 Annual Report, and
Financial Review and Note D of the Notes to the Financial
Statements of both the Mass. Electric 1997 Annual Report and the
Narragansett 1997 Annual Report.
<PAGE>
Nuclear
The NRC, along with other federal and state agencies, has
extensive regulations pertaining to environmental aspects of
nuclear reactors. Safety aspects of nuclear reactors, including
design controls and inspection programs to mitigate any possibility
of nuclear accidents and to reduce any damages therefrom, are also
subject to NRC regulation. See Nuclear Units, page 26.
Air
Approximately 45 percent of NEP's electricity is produced at
eight older thermal generating units in Massachusetts. Six are
principally fueled by coal, one by oil, and one by oil and gas.
The federal Clean Air Act requires significant reduction in utility
sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions that
result from burning fossil fuels by the year 2000 to reduce acid
rain and ground-level ozone (smog).
All eight of NEP's thermal units will be subject to Phase 2 of
the federal and state acid rain regulations that become effective
in 2000. NEP believes that the SO2 controls already installed for
Massachusetts requirements (which took effect in 1995) will satisfy
the Phase 2 acid rain regulations.
In 1995, the NEES companies and the DOE executed an accord
pursuant to the Climate Challenge Program, a joint voluntary effort
of the DOE and the electric utility industry. Under the accord,
the NEES companies committed to reduce greenhouse gas emissions 20
percent below 1990 levels by 2000. Climate Challenge is a
component of President Clinton's Climate Change Action Plan.
In connection with the federal ozone emission requirements,
state environmental agencies in The Ozone Transport Region have
developed a second phase of NOx reduction regulations that were
scheduled to be fully implemented by NEP in the summer of 1999.
For more information on NEP's planned divestiture of its nonnuclear
generating business, see Divestiture of Generating Business, page
7.
Water
The federal Clean Water Act prohibits the discharge of any
pollutant (including heat), except in compliance with a discharge
permit issued by the states or the EPA for a term of no more than
five years. NEP and Narragansett have received required permits
for all their steam-generating plants. NEET has received its
required surface water discharge permits for all of its current
operations.
For information regarding NEP's water discharge permit for its
Brayton Point power plant, see pages 19 to 20 of the NEES 1997
Annual Report.
<PAGE>
CONSTRUCTION AND FINANCING
Estimated construction expenditures (including nuclear fuel)
for the System's electric utility companies are shown below for
1998 through 2000.
The System conducts a continuing review of its construction and
financing programs. These programs and the estimates shown below
are subject to revision based upon changes in assumptions as to
System load growth, rates of inflation, receipt of adequate and
timely rate relief, the availability and timing of regulatory
approvals, new environmental and legal or regulatory requirements,
total costs of major projects, and the availability and costs of
external sources of capital.
<PAGE>
<TABLE>
<CAPTION>
Estimated Construction Expenditures
-----------------------------------
1998 1999 2000 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
($ in Millions - excluding AFDC)
NEP
- ---
Generation (1)(2)
Nonnuclear 10 0 0 10
Nuclear 10 10 10 30
Transmission 45 45 45 135
---- ---- ---- ----
Total NEP 65 55 55 175
---- ---- ---- ----
Mass. Electric
- --------------
Distribution 90 90 90 270
Narragansett
- ------------
Transmission 5 5 5 15
Distribution 30 25 25 80
---- ---- ---- ----
Total Narragansett 35 30 30 95
---- ---- ---- ----
Granite State
- -------------
Distribution 3 4 4 11
---- ---- ---- ----
Nantucket
- ---------
Distribution 3 1 1 5
---- ---- ---- ----
Combined Total
- --------------
Generation (1)(2) 20 10 10 40
Transmission 50 50 50 150
Distribution 126 120 120 366
---- ---- ---- ----
Grand Total 196 180 180 556
---- ---- ---- ----
<FN>
(1) Includes nuclear fuel.
(2) For more information, see INDUSTRY RESTRUCTURING, page 3.
</FN>
</TABLE>
<PAGE>
Financing
All of NEP's construction expenditures during the period from
1998 to 2000 will be financed by internally generated funds. The
proportion of the Electricity Delivery Companies' construction
expenditures estimated to be financed by internally generated funds
during the period from 1998 to 2000 is:
Mass. Electric 75%
Narragansett 100%
Granite State 75%
Nantucket 100%
The general practice of the operating subsidiaries of NEES has
been to finance construction expenditures in excess of internally
generated funds initially by issuing unsecured short-term debt.
This short-term debt is subsequently reduced through sales by such
subsidiaries of long-term debt securities and preferred stock, and
through capital contributions from NEES to the subsidiaries. NEES,
in turn, generally has financed capital contributions to the
operating subsidiaries through retained earnings and the sale of
additional NEES shares. Since April 1991, NEES has been meeting
all of the requirements of its dividend reinvestment and common
share purchase plan and employee share plans through open market
purchases. Under these plans, NEES may revert to the issuance of
new common shares at any time.
The ability of NEP and the Electricity Delivery Companies to
issue short-term debt is limited by regulatory restrictions. The
following table summarizes the short-term debt limits at
December 31, 1997, and the amount of outstanding short-term debt
and lines of credit and standby bond facilities at such date.
<TABLE>
<CAPTION>
($ millions)
Lines of Credit/
Standby Bond
Limit Outstanding Facilities
----- ----------- ----------------
<S> <C> <C> <C>
NEP 375 111 580
Mass. Electric 150 35 65
Narragansett 100 16 31
Granite State 10 4 7
Nantucket 5 .025 3
</TABLE>
NEES and certain subsidiaries, with regulatory approval,
operate a money pool to more effectively utilize cash resources and
to reduce outside short-term borrowings. Short-term borrowing
needs are met first by available funds of the money pool
participants. Borrowing companies pay interest at a rate designed
to approximate the cost of outside short-term borrowings.
Companies which invest in the pool share the interest earned on a
basis proportionate to their average monthly investment in the
<PAGE>
money pool. Funds may be withdrawn from or repaid to the pool at
any time without prior notice. At December 31, 1997, NEP, Mass.
Electric, Narragansett, and Granite State each had money pool
borrowings of approximately $3 million, $5 million, $4 million, and
$4 million, respectively.
In order to issue additional long-term debt and preferred
stock, NEP and the Electricity Delivery Companies, excluding
Nantucket, must comply with earnings coverage requirements
contained in their respective mortgages, note agreements, and
preference provisions. The most restrictive of these provisions in
each instance generally requires (1) for the issuance of additional
mortgage bonds by NEP, Mass. Electric, and Narragansett, for
purposes other than the refunding of certain outstanding mortgage
bonds, a minimum earnings coverage (before income tax) of twice the
pro forma annual interest charges on mortgage bonds, and (2) for
the issuance of additional preferred stock by NEP, Mass. Electric,
and Narragansett, minimum gross income coverage (after income tax)
of one and one-half times pro forma annual interest charges and
preferred stock dividends, in each case for a period of twelve
consecutive calendar months within the fifteen calendar months
immediately preceding the proposed new issue.
The respective long-term debt and preferred stock coverages of
NEP and the Electricity Delivery Companies, excluding Nantucket,
under their respective mortgage indentures, note agreements, and
preference provisions, are stated in the following table for the
past three years:
<TABLE>
<CAPTION>
Coverage
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NEP
- ---
General and Refunding Mortgage Bonds 4.09 4.16 4.05
Preferred Stock 2.48 2.47 2.45
Mass. Electric
- --------------
First Mortgage Bonds 5.09 3.25 2.82
Preferred Stock 2.89 1.93 1.71
Narragansett
- ------------
First Mortgage Bonds 3.98 3.22 3.10
Preferred Stock 2.61 2.04 2.01
Granite State
- -------------
Notes (1) 3.39 2.82 2.38
(1) As defined under the most restrictive note agreement.
</TABLE>
<PAGE>
RESEARCH AND DEVELOPMENT
Expenditures for the System's research and development
activities totaled $7.5 million, $5.5 million, and $6.2 million in
1995, 1996, and 1997, respectively. Total expenditures are
expected to be about $2.6 million in 1998.
About 31 percent of these expenditures support the Electric
Power Research Institute, which conducts research and development
activities on behalf of its sponsors and provides the System with
access to a wide range of relevant research results at minimum
cost.
The System also directly funds research projects of a more
site-specific concern to the System and its customers. These
projects include:
- creating options to maintain electric service
quality and reliability for customers at the lowest
cost;
- developing conservation, load control, and rate
design measures that will help customers use
electric energy more efficiently; and
- developing, assessing, and demonstrating new
technologies and fuels that will ensure economic,
efficient and environmentally sound delivery of
electric energy in the future.
<PAGE>
EXECUTIVE OFFICERS
NEES
- ----
All executive officers are elected to continue in office
subject to Article 19 of the Agreement and Declaration of Trust
until the first meeting of the Board of Directors following the
next annual meeting of shareholders, or the special meeting of
shareholders held in lieu of such annual meeting, and until their
successors are chosen and qualified. The executive officers also
serve as officers and/or directors of various subsidiary companies.
Richard P. Sergel - Age: 48 - Elected President and Chief
Executive Officer in 1998 - Senior Vice President from 1996 to
1998 - Vice President from 1992 to 1995 -Chairman of Mass.
Electric and Narragansett from 1993 to 1997.
Alfred D. Houston - Age: 57 - Executive Vice President since
1994 - Senior Vice President from 1987 to 1994 - Chief
Financial Officer from 1984 to 1998 - Elected Chairman of NEP
in 1998 - Vice President of NEP from 1987 to 1994 - Vice
President of Narragansett from 1976 to 1998 - Treasurer of
Narragansett from 1977 to 1998.
Cheryl A. LaFleur - Age: 43 - Elected Senior Vice President in
1998 - Vice President from 1995 to 1998 - Secretary and General
Counsel since 1995 - Vice President of Mass. Electric from 1993
to 1995 - Vice President of the Service Company - 1992-1993
and since 1995 - Vice President of NEP since 1995.
Michael E. Jesanis - Age: 41 - Elected Senior Vice President
and Chief Financial Officer in 1998 - Vice President from 1997
to 1998 - Treasurer from 1992 to 1998 - Elected Vice President
of Mass. Electric and NEP in 1998 - Treasurer of Mass. Electric
and NEP from 1992 to 1998.
David C. Kennedy - Age: 49 - Elected Vice President in 1998 -
Vice President of the Service Company since 1985.
John G. Cochrane - Age: 40 - Elected Treasurer in 1998 - Vice
President of the Service Company since 1993.
NEP
- ---
The Treasurer is elected by the stockholders to hold office
until the next annual meeting of stockholders and until the
successor is duly chosen and qualified. The other executive
officers are elected by the Board of Directors to hold office
subject to the pleasure of the directors and until the first
meeting of directors after the next annual meeting of stockholders
and until their successors are duly chosen and qualified. Certain
officers of NEP are, or at various times in the past have been,
officers and/or directors of the System companies with which NEP
has entered into contracts and had other business relations.
<PAGE>
Alfred D. Houston* - Elected Chairman in 1998.
Lawrence E. Bailey - Age: 54 - Elected President in 1997 - Vice
President from 1989 to 1997.
Andrew H. Aitken - Age: 53 - Vice President since 1995 -
Director of Environmental and Safety for the Service Company
since 1993 - Director, Environmental Affairs for the Service
Company from 1981 to 1993.
Michael E. Hachey - Age: 44 - Elected Vice President in 1997 -
Manager of Generation Marketing since 1994 - Manager of
Independent Power Projects from 1989 to 1993.
Michael E. Jesanis* - Elected Vice President in 1998 -
Treasurer from 1992 to 1998.
Cheryl A. LaFleur* - Vice President since 1995.
John F. Malley - Age: 49 - Vice President since 1992.
Masheed H. Rosenqvist - Age: 43 - Elected Vice President
effective April 1, 1998 - Manager, Transmission Tariffs and
Contracts for NEP or Service Company since 1997 - Consulting
Engineer for the Service Company from 1995 to 1997. Principal
Engineer for the Service Company from 1993 to 1995.
Arnold H. Turner - Age: 57 - Vice President since 1989 -
Director of Transmission Marketing since 1993. Mr. Turner
plans to retire effective April 1, 1998.
Jeffrey W. VanSant - Age: 44 - Vice President since 1993 -
Manager of Oil and Gas Exploration and Development for the
Service Company from 1985 to 1993 - Manager of Oil and Gas
Procurement from 1992 to 1993 - Manager of Natural Gas Supply
from 1989 to 1992.
John G. Cochrane* - Elected Treasurer in 1998.
Howard W. McDowell - Age: 54 - Elected Assistant Treasurer in
1998 - Controller since 1987 - Controller of Mass. Electric and
Narragansett since 1987 - Treasurer of Granite State since
1984.
*Please refer to the material supplied under the caption
EXECUTIVE OFFICERS - NEES for other information regarding this
officer.
Mass. Electric
- --------------
The Treasurer is elected by the stockholders to hold office
until the next annual meeting of stockholders and until the
successor is duly chosen and qualified. The other executive
officers are elected by the board of directors to hold office
subject to the pleasure of the directors and until the first
meeting of the directors after the next annual meeting of
<PAGE>
stockholders. Certain officers of Mass. Electric are, or at
various times in the past have been, officers and directors of
System companies with which Mass. Electric has entered into
contracts and had other business relations.
Robert L. McCabe - Age: 56 - Elected Chairman in 1997 -
President of Narragansett from 1986 to 1997.
Lawrence J. Reilly - Age: 42 - President since 1996 - Vice
President for the Service Company from 1993 to 1996 - Director
of Rates for the Service Company from 1990 to 1996.
Lydia M. Pastuszek - Age: 44 - Elected Senior Vice President
in 1997 - Vice President from 1993 to 1997 - Vice President of
NEP from 1990 to 1993 - President of Granite State from 1990
to 1996.
Christopher E. Root - Age: 39 - Elected Senior Vice President
in 1997 - Vice President from 1995 to 1997 - Director, Retail
Distribution Services for the Service Company from 1993 to 1995
- Chief of Division Engineering for the Service Company from
1992 to 1993.
Dennis E. Snay - Age: 56 - Elected Senior Vice President in
1997 - Vice President from 1990 to 1997.
John C. Amoroso - Age: 59 - Vice President since 1993 -
District Manager, Southeast District from 1992 to 1993.
William J. Flaherty - Age: 40 - Elected Vice President in 1997
- Account Manager from 1993 to 1997.
Andrea Foley-Stapleford - Age: 52 - Elected Vice President in
1997 - Director of Human Resources for the Service Company from
1996 to 1997 - Director of Labor Relations for the Service
Company from 1993 to 1996 - Division Personnel Manager from
1990 to 1993.
Richard W. Frost - Age: 58 - Elected Vice President in 1997 -
Vice President of Narragansett since 1993.
Michael E. Jesanis* - Elected Vice President in 1998 -
Treasurer from 1992 to 1998.
Charles H. Moser - Age: 57 - Vice President since 1993 - Chief
Protection and Planning Engineer for the Service Company from
1984 to 1993.
Joseph P. Newman - Age: 42 - Elected Vice President effective
April 1, 1998 - Director of Government Affairs for the Service
Company from 1996 to 1998.
Kwong O. Nuey, Jr. - Age: 49 - Elected Vice President in 1997 -
Director of Retail Information Services for the Service Company
from 1993 to 1997.
Nancy H. Sala - Age: 46 - Vice President since 1992.
<PAGE>
John G. Upham II - Age: 40 - Elected Vice President in 1997 -
Municipal Account Manager from 1993 to 1997.
John G. Cochrane* - Elected Treasurer in 1998.
Howard W. McDowell - Controller since 1987 and Assistant
Treasurer since 1977 - Reference is made to the material
supplied under the caption EXECUTIVE OFFICERS - NEP for other
information regarding Mr. McDowell.
*Please refer to the material supplied under the caption EXECUTIVE
OFFICERS - NEES for other information regarding this officer.
Narragansett
- ------------
Officers are elected by the board of directors or appointed,
as appropriate, to serve until the meeting of directors following
the annual meeting of stockholders, and until their successors are
chosen and qualified. Officers other than the President,
Treasurer, and Secretary, serve also at the pleasure of the
directors. Certain officers of Narragansett are, or at various
times in the past have been, officers and directors of System
companies with which Narragansett has entered into contracts and
had other business relations.
Robert L. McCabe* - Elected Chairman in 1997 - President from
1986 to 1997.
Lawrence J. Reilly* - Elected President in 1997.
Lydia M. Pastuszek* - Elected Senior Vice President in 1997.
Christopher E. Root* - Elected Senior Vice President in 1997.
Richard W. Frost* - Vice President since 1993 - District
Manager - Southern District from 1990 to 1993.
Shannon M. Larson** - Age: 40 - Vice President since 1996 -
Manager of Retail Marketing from 1995 to 1996 - Coordinator of
Emerging Markets from 1994 to 1995 - Manager of Conservation
and Load Management from 1990 to 1993 - Principal Analyst for
the Service Company from 1993 to 1994.
Richard Nadeau - Age: 62 - Vice President since 1994 - Director
of Customer Service since 1993 - Assistant to the President
from 1990 to 1993.
Michael F. Ryan - Age: 46 - Vice President since 1994 - Rhode
Island Director for U.S. Senator John H. Chafee from 1986 to
1994.
Peter T. Zschokke - Age: 40 - Elected Vice President effective
April 1, 1998 - Manager of Retail Rates for the Service Company
from 1992 to 1998.
<PAGE>
John G. Cochrane** - Elected Treasurer in 1998.
Howard W. McDowell - Controller since 1987 - Reference is made
to the material supplied under the caption EXECUTIVE OFFICERS
- NEP for other information regarding Mr. McDowell.
*Please refer to the material supplied under the caption EXECUTIVE
OFFICERS - Mass. Electric for other information regarding these
officers.
**Mr. Reilly and Ms. Larson are married to each other. Ms. Larson
intends to resign effective April 1, 1998.
ITEM 2. PROPERTIES
See ITEM 1. Business - Transmission, Distribution, and
Generation Properties, page 19.
ITEM 3. LEGAL PROCEEDINGS
See Item 1. BUSINESS - Divestiture of Generation Business,
page 7; Nuclear Units, page 26.
In April 1997, the Town of Norwood, Massachusetts filed a
lawsuit against NEP in the United States District Court for the
District of Massachusetts. NEP is the wholesale power supplier for
Norwood pursuant to rates approved by the FERC. Norwood alleges
that NEP's proposed divestiture of its power generation assets
would violate the terms of a 1983 power contract which settled an
antitrust lawsuit brought by Norwood against NEP. Norwood also
alleges that NEP's proposed divestiture plan and recovery of
stranded investment costs contravene federal antitrust laws.
Norwood seeks an injunction enjoining the divestiture and an
unspecified amount of treble damages (a specific claim for $450
million was withdrawn). Norwood's motion for a preliminary
injunction of the divestiture was denied on September 8, 1997. On
November 21, 1997, Norwood filed an amended complaint making new
allegations relating to the sale of NEP's generating assets and
naming as additional defendants, NEES, USGen, and USGen's
affiliate, PG & E. NEP continues to believe that its divestiture
plan will promote competition in the wholesale power generation
market and that it has met and will continue to meet its
contractual commitments to Norwood. On January 9, 1998, the
defendants, including NEES and NEP, filed motions to dismiss the
lawsuit. In March 1998, Norwood gave notice of its intent to
terminate its contract with NEP, without accepting responsibility
for its share of NEP's stranded costs, and to begin taking power
from another supplier. NEP has filed with the FERC for permission
to charge Norwood a contract termination charge for its share of
NEP's stranded costs.
In August 1997, NEP filed suit against Northeast Utilities in
Massachusetts Superior Court for damages resulting from the
tortious conduct of NU relating to the Millstone 3 nuclear unit.
NEP is seeking compensation for the losses it has suffered,
including the costs of lost power and costs necessary to assure
<PAGE>
that Millstone 3 can safely return to operation. NEP also seeks
punitive damages. NU has filed for dismissal of the suit and
sought to consolidate it with suits filed by other joint owners in
Massachusetts Superior Court.
NEP also sent a demand for arbitration to Connecticut Light &
Power Company and Western Massachusetts Electric Company, both
subsidiaries of NU, seeking damages resulting from the breach of
obligations under an agreement with NEP and others regarding the
operation and ownership of Millstone 3.
In the 1970s, NEP and several other shareholders (Sponsors) of
Maine Yankee Atomic Power Company entered into 27 contracts
(Secondary Purchase Agreements) under which they sold portions of
their entitlement to Maine Yankee power output through 2002 to
various entities, primarily municipal and cooperative systems in
New England (Secondary Purchasers). Virtually all of the Secondary
Purchasers have ceased making payments under the Secondary Purchase
Agreements and have demanded arbitration, claiming that such
agreements excuse further payments upon plant shutdown. NEP has
notified the Secondary Purchasers that the shutdown does not
relieve them of their obligation to make payments under the
Secondary Purchase Agreements and that they are in default of such
agreements. NEP has asked the FERC to enforce NEP's rights under
the agreements. In the event that no further payments are
forthcoming from Secondary Purchasers, NEP, as a primary obligor to
Maine Yankee, would be required to pay an additional $9 million of
shutdown costs.
In 1996, various New England utilities which are members of the
New England Power Pool, including NEP, submitted a dispute to
arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage
claim of approximately $37 million for past damages, of which NEP's
share would have been approximately $6 to $9 million. The claims
involved a dispute over the components of a pricing formula and
additional costs under the contract. With respect to ongoing
claims, NEP had been paying Hydro-Quebec the higher amount
(additional costs of approximately $3 million per year) since July
1996 under protest and subject to refund. In October 1997, an
arbitrator ruled in favor of the New England utilities in all
respects. NEP has made a demand for refund. Hydro-Quebec has not
yet refunded any monies and has appealed the decision. On November
9, 1997, NEP and the other utilities began a second arbitration to
enforce the first decision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NEES
----
No matters were submitted to a vote of NEES shareholders during
the last quarter of 1997.
<PAGE>
NEP
---
On December 12, 1997, a Special Meeting of Stockholders was
held.
It was voted to amend NEP's (i) Articles of Organization and
(ii) By-laws to delete restrictions on the issuance of unsecured
indebtedness, each by a vote of 292,542 shares of the Dividend
Series Preferred Stock "For", no votes "Against", and 1,633 shares
of the Dividend Series Preferred Stock "Abstaining", and by a
separate vote of 6,449,896 shares of the Common Stock "For".
Mass. Electric
--------------
Special Meetings of the Stockholders were held on December 12,
1997 and December 29, 1997.
It was voted to amend Mass. Electric's (i) Articles of
Organization and (ii) By-laws to delete restrictions on the
issuance of unsecured indebtedness, each by a vote of 465,970.75
shares of the Preferred Stock "For", 7,177 shares of the Preferred
Stock "Against", and 1,765 shares of the Preferred Stock
"Abstaining", and by a separate class vote of 2,398,111 shares of
the Common Stock "For".
The following actions were taken by the unanimous vote of the
2,398,111 shares having general voting rights represented at the
meeting:
The composition of the board of directors was changed as of
December 31, 1997 to consist of the following:
Cheryl A. LaFleur
Robert L. McCabe
Lydia M. Pastuszek
Lawrence J. Reilly
Christopher E. Root
Richard P. Sergel
Dennis E. Snay
The number of directors was fixed at seven.
Narragansett
------------
Special Meetings of the Stockholders were held on December 12,
1997 and December 29, 1997.
It was voted to amend Narragansett's Preferred Stock Preference
Provisions to delete restrictions on the issuance of unsecured
indebtedness, by a vote of 668,313 shares of the Preferred Stock
"For", 690 shares of the Preferred Stock "Against", and 400 shares
of the Preferred Stock "Abstaining", and by a separate class vote
of 1,132,487 shares of the Common Stock "For".
<PAGE>
The following actions were taken by the unanimous vote of the
1,132,487 shares having general voting rights represented at the
meeting:
The composition of the board of directors was changed as of
December 31, 1997 to consist of the following:
Richard W. Frost
Cheryl A. LaFleur
Robert L. McCabe
Lawrence J. Reilly
Michael F. Ryan
Richard P. Sergel
Ronald L. Thomas
The number of directors was fixed at seven.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
NEES information in response to the disclosure requirements
specified by this ITEM 5. appears under the captions in the 1997
NEES Annual Report indicated below:
Required Information Annual Report Caption
-------------------- ---------------------
(a) Market Information Shareholder Information
(b) Holders Shareholder Information
(c) Dividends Financial Results
The information referred to above is incorporated by reference
in this ITEM 5.
NEP, Mass. Electric, and Narragansett - The information
required by this item is not applicable as the common stock of all
these companies is held solely by NEES. Information pertaining to
payment of dividends and restrictions on payment of dividends is
incorporated herein by reference to each company's 1997 Annual
Report.
ITEM 6. SELECTED FINANCIAL DATA
NEES
----
The information required by this item is incorporated herein
by reference to page 22 of the NEES 1997 Annual Report.
<PAGE>
NEP
---
The information required by this item is incorporated herein
by reference to Selected Financial Information, Note K of the NEP
1997 Annual Report.
Mass. Electric
--------------
The information required by this item is incorporated herein
by reference to Selected Financial Information, Note K of the Mass.
Electric 1997 Annual Report.
Narragansett
------------
The information required by this item is incorporated herein
by reference to Selected Financial Information, Note L of the
Narragansett 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
NEES
----
The information required by this item is incorporated herein
by reference to pages 10 through 21 of the NEES 1997 Annual Report.
NEP
---
The information required by this item is incorporated herein
by reference to the Financial Review section of the NEP 1997 Annual
Report.
Mass. Electric
--------------
The information required by this item is incorporated herein
by reference to the Financial Review section of the Mass. Electric
1997 Annual Report.
Narragansett
------------
The information required by this item is incorporated herein
by reference to the Financial Review section of the Narragansett
1997 Annual Report.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
NEES
----
NEES, through its wholly-owned indirect subsidiary, AllEnergy,
uses derivative instruments to manage exposure in fluctuations in
commodity prices. At this time, AllEnergy has only held exchange-
traded futures contracts to manage risks associated with natural
gas, propane, and heating oil price risks. Hedge criteria used and
accounting for hedge transactions are in accordance with Statement
of Financial Accounting Standards No. 80, Accounting for Futures
Contracts (FAS 80). FAS 80 states that in order to qualify as a
hedge, price movements in commodity derivatives must be highly
correlated with the underlying hedged commodity and must reduce
exposure to market fluctuations throughout the hedged period. Any
gain or loss on a derivative which qualifies as a hedge under FAS
80 is deferred until recognized in the income statement in the same
period as the hedged item is recognized in the income statement.
As of December 31, 1997, all of AllEnergy's existing futures
contracts qualified as hedges.
NEP
---
None.
Mass. Electric
--------------
None.
Narragansett
------------
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEES
----
The information required by this item is incorporated herein
by reference to pages 22 through 46 of the NEES 1997 Annual Report.
NEP
---
The information required by this item is incorporated herein
by reference to the financial statements and Notes to Financial
Statements in the NEP 1997 Annual Report.
<PAGE>
Mass. Electric
--------------
The information required by this item is incorporated herein
by reference to the financial statements and Notes to Financial
Statements in the Mass. Electric 1997 Annual Report.
Narragansett
------------
The information required by this item is incorporated herein
by reference to the financial statements and Notes to Financial
Statements in the Narragansett 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NEES, NEP, Mass. Electric, and Narragansett - None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NEES
----
The information required by this item is incorporated herein
by reference to the material under the caption ELECTION OF
DIRECTORS in the definitive proxy statement of NEES, dated March
9, 1998, for the 1998 Annual Meeting of Shareholders, provided that
the information under the headings "Report of the Compensation
Committee on Executive Compensation" and "Corporate Performance"
are not so incorporated. Reference is also made to the information
under the caption EXECUTIVE OFFICERS - NEES in Part I of this
report.
NEP
---
The names of the directors of NEP, their ages, and a brief
account of their business experience during the past five years
appear below. Information required by this item for Executive
Officers is provided under the caption EXECUTIVE OFFICERS - NEP in
Part I of this report.
Directors are elected to hold office until the next annual
meeting of stockholders or special meeting held in lieu thereof and
until their respective successors are chosen and qualified.
Lawrence E. Bailey* - Elected Director in 1997.
Alfred D. Houston* - Director since 1984. Directorships of
NEES System companies: Granite State Energy, Inc.,
Narragansett Energy Resources Company, NEES Communications,
Inc., NEES Energy, Inc., NEES Global Transmission, Inc., New
<PAGE>
England Electric System, New England Electric Transmission
Corporation, New England Energy Incorporated, New England Hydro
Finance Company, Inc., New England Hydro-Transmission
Corporation, New England Hydro-Transmission Electric Company,
Inc., and New England Power Service Company. Mr. Houston also
serves as a member representative for NEES Global Transmission,
Inc. on the Member's Committee of AllEnergy Marketing Co., LLC.
Cheryl A. LaFleur* - Director since 1995. Directorships of
NEES System companies: Granite State Electric Company, Granite
State Energy, Inc., Massachusetts Electric Company, Nantucket
Electric Company, The Narragansett Electric Company,
Narragansett Energy Resources Company, NEES Communications,
Inc., NEES Energy, Inc., NEES Global Transmission, Inc., New
England Electric Transmission Corporation, New England Energy
Incorporated, New England Hydro Finance Company, Inc., New
England Hydro-Transmission Corporation, New England Hydro-
Transmission Electric Company, Inc., and New England Power
Service Company. Ms. LaFleur also serves as a member
representative for NEES Energy, Inc. on the Member's Committee
of AllEnergy Marketing Co., LLC.
Richard P. Sergel* - Elected a Director in 1998. Directorships
of NEES System companies: Granite State Electric Company,
Massachusetts Electric Company, Nantucket Electric Company, The
Narragansett Electric Company, NEES Communications, Inc., NEES
Global Transmission, Inc., New England Electric System, New
England Electric Transmission Corporation, New England Hydro
Finance Company, Inc., New England Hydro-Transmission
Corporation, New England Hydro-Transmission Electric Company,
Inc., and New England Power Service Company. Mr. Sergel also
serves as a member representative for NEES Energy, Inc. on the
Member's Committee of AllEnergy Marketing Co., Inc.
*Please refer to the material supplied under the caption
EXECUTIVE OFFICERS - NEES and/or EXECUTIVE OFFICERS - NEP in
Part I of this report for other information regarding these
directors.
Mass. Electric
--------------
The names of the directors of Mass. Electric, their ages, and
a brief account of their business experience during the past five
years appear below. Information required by this item for
Executive Officers is provided under the caption EXECUTIVE OFFICERS
- - Mass. Electric in Part I of this report.
Directors are elected to hold office until the next annual
meeting of stockholders or special meeting held in lieu thereof and
until their respective successors are chosen and qualified.
Cheryl A. LaFleur* - Elected Director in 1997.
Robert L. McCabe* - Elected Director in 1997. Directorships
of NEES System affiliates: Granite State Electric Company,
Nantucket Electric Company, and The Narragansett Electric
Company. Other directorship: Citizens Savings Bank.
<PAGE>
Lydia M. Pastuszek* - Elected Director in 1997. Directorships
of NEES System affiliates: Granite State Electric Company.
Lawrence J. Reilly* - Director since 1996 - Directorships of
NEES System affiliates: Granite State Electric Company,
Nantucket Electric Company, and The Narragansett Electric
Company.
Christopher E. Root* - Elected Director in 1997. Directorships
of NEES System affiliates: Granite State Electric Company and
Nantucket Electric Company.
Richard P. Sergel* - Director since 1993.
Dennis E. Snay* - Elected Director in 1997.
*Please refer to the material supplied under the caption
EXECUTIVE OFFICERS - NEES and/or Mass. Electric in Part I of
this report and/or the material supplied under the caption
DIRECTORS AND OFFICERS OF THE REGISTRANT - NEP in this Item for
other information regarding this director.
Narragansett
------------
The names of the directors of Narragansett, their ages, and a
brief account of their business experience during the past five
years appear below. Information required by this item for
Executive Officers is provided under the caption EXECUTIVE OFFICERS
- - Narragansett in Part I of this report.
Directors are elected to hold office until the next annual
meeting of stockholders or special meeting held in lieu thereof and
until their respective successors are chosen and qualified.
Richard W. Frost* - Director since 1997.
Cheryl A. LaFleur* - Director since 1997.
Robert L. McCabe* - Director since 1986.
Lawrence J. Reilly* - Director since 1997.
Michael F. Ryan* - Director since 1997.
Richard P. Sergel* - Director since 1993.
Ronald L. Thomas - Age: 61 - Director since 1997 - Manager of
Labor Relations since 1997 - Human Resources Manager from 1979
to 1997.
*Please refer to the material supplied under the caption
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - NEP and/or
Mass. Electric in this Item for other information regarding
this director.
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires
the System's officers and directors, and persons who own more than
10 percent of a registered class of the System's equity securities,
to file reports on Forms 3, 4, and 5 of share ownership and changes
in share ownership with the SEC and the New York Stock Exchange and
to furnish the System with copies of all Section 16(a) forms they
file.
Based solely on NEP's, Mass. Electric's, and Narragansett's
review of the copies of such forms received by them, or written
representations from certain reporting persons that such forms were
not required for those persons, NEP, Mass. Electric, and
Narragansett believe that, during 1997, all filing requirements
applicable to its officers, directors, and 10 percent beneficial
owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
NEES
----
The information required by this item is incorporated herein
by reference to the material under the captions BOARD STRUCTURE AND
COMPENSATION, EXECUTIVE COMPENSATION, PAYMENTS UPON A CHANGE IN
CONTROL OR TERMINATION OF EMPLOYMENT, PLAN SUMMARIES, LONG TERM
INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR, and RETIREMENT PLANS
in the definitive proxy statement of NEES, dated March 9, 1998, for
the 1998 Annual Meeting of Shareholders, provided that the
information under the headings "Report of the Compensation
Committee on Executive Compensation" and "Corporate Performance"
are not so incorporated.
NEP, Mass. Electric, and Narragansett
-------------------------------------
EXECUTIVE COMPENSATION
The following tables give information with respect to all
compensation (whether paid directly by NEP, Mass. Electric, or
Narragansett or billed to it as hourly charges) for services in all
capacities for NEP, Mass. Electric, or Narragansett for the years
1995 through 1997 to or for the benefit of the Chief Executive
Officer and the four other most highly compensated executive
officers for each company.
<PAGE>
NEP
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Compensa-
Annual Compensation (b) tion
-------------------------- ---------
Other Restricted
Name and Annual & Deferred All Other
Principal Compensa- Share Compensa-
Position Year Salary Bonus tion Awards tion
(a) ($) ($)(c) ($)(d) ($)(e) ($)(f)
- ---------- ---- ------- ------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lawrence E. 1997 156,516 188,214 3,316 0 600
Bailey 1996 151,956 101,667 116 0 3,776
President 1995 144,720 92,328 116 0 3,598
John W. 1997 217,987 104,212 4,596 55,520 928
Rowe(g) 1996 180,096 96,445 3,046 124,047 1,638
Former 1995 157,070 124,818 2,795 0 1,387
Chairman
Jeffrey D. 1997 154,433 133,560 8,274 0 1,077,143(h)
Tranen 1996 200,684 100,548 5,002 125,836 3,358
Former 1995 188,884 135,224 4,972 0 3,377
President
Andrew H. 1997 122,580 78,193 2,231 0 416
Aitken 1996 119,004 75,370 116 0 2,568
Vice 1995 107,081 66,683 108 0 2,243
President
John F. 1997 140,280 96,072 2,922 0 375
Malley 1996 133,394 104,885 116 0 3,141
Vice 1995 127,236 96,261 116 0 2,907
President
Arnold H. 1997 132,012 81,953 2,228 0 628
Turner 1996 128,172 89,185 116 0 2,849
Vice 1995 128,172 65,439 116 0 2,276
President
</TABLE>
(a) Certain officers of NEP are also officers of NEES and various
other System companies.
(b) Includes deferred compensation in category and year earned.
(c) The bonus figure represents: cash bonuses under an incentive
compensation plan, the all-employee goals program, the
variable match of the incentive thrift plan, including related
deferred compensation plan matches, special cash bonuses, and
unrestricted shares under the incentive share plan. See
descriptions under Plan Summaries.
<PAGE>
(d) Includes amounts reimbursed by NEP for the payment of taxes on
certain noncash benefits and contributions to the incentive
thrift plan by NEP that are not bonus contributions including
related deferred compensation plan match. See description
under Plan Summaries.
(e) The incentive share awards for the named executives who are
also NEES executives made for 1996 and 1997 were in the form
of restricted shares (with a five-year restriction) or
deferred share equivalents, deferred for receipt for at least
five years, at the executive's option. As cash dividends are
declared, the number of deferred share equivalents will be
increased as if the dividends were reinvested in shares. The
shares awarded for the other named executives and for all
executives for 1995 were not restricted and the value of the
awards is included in the bonus column.
As of December 31, 1997, the following executive officers held
the amount of restricted and deferred shares with the value
indicated: Mr. Bailey 3,892 shares, $166,383 value; Mr. Rowe
28,380 shares, $1,213,245 value; Mr. Aitken 3,044 shares,
$130,131 value; Mr. Malley 3,759 shares, $160,697 value; and
Mr. Turner 2,625 shares, $112,218 value. The value was
calculated by multiplying the closing market price on December
31, 1997 by the number of shares.
No awards vested during 1997 under the Long-Term Performance
Share Award Plan.
(f) Includes NEP contributions to life insurance. See description
under Plan Summaries. The life insurance contribution is
calculated based on the value of term life insurance for the
named individuals. The premium costs for most of these
policies have been or will be recovered by NEP. Prior to
1997, this column also included contributions by NEP to the
incentive thrift plan that are not bonus contributions. These
figures are now included in the Other Annual Compensation
column.
(g) Mr. Rowe resigned effective February 6, 1998.
(h) Mr. Tranen resigned effective September 12, 1997. All Other
Compensation includes: $830 for contributions to life
insurance as described in footnote (f) above, $28,452 as
accrued vacation pay, $621,081 as a severance payment, and
$426,780 in pension related benefits.
<PAGE>
MASS. ELECTRIC
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Compensa-
Annual Compensation (b) tion
-------------------------- ---------
Other Restricted
Name and Annual & Deferred All Other
Principal Compen- Share Compensa-
Position Year Salary Bonus sation Awards tion
(a) ($) ($)(c) ($)(d) ($)(e) ($)(f)
- ---------- ---- ------- ------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lawrence J. 1997 160,515 168,637 6,910 0 448
Reilly 1996 96,163 70,177 2,467 46,082 2,250
President 1995 38,561 34,985 37 0 986
Richard P. 1997 149,549 147,794 5,352 31,170 477
Sergel 1996 135,213 70,388 3,411 87,965 2,247
Former 1995 123,480 93,047 3,256 0 2,285
Chairman
Lydia M. 1997 125,481 81,944 2,544 0 241
Pastuszek 1996 86,068 52,017 69 22,115 1,893
Senior Vice 1995 86,597 53,204 72 0 2,403
President
Christopher E. 1997 98,421 103,890 2,067 0 147
Root 1996 92,055 67,050 99 0 2,032
Senior Vice 1995 84,173 37,158 89 0 1,537
President
Nancy H. 1997 124,344 60,661 2,603 0 283
Sala 1996 118,251 65,493 116 0 2,730
Vice 1995 115,524 59,932 116 0 2,498
President
</TABLE>
(a) Certain officers of Mass. Electric are also officers of NEES
and various other System companies.
(b) Includes deferred compensation in category and year earned.
(c) The bonus figure represents: cash bonuses under an incentive
compensation plan, the all-employee goals program, the
variable match of the incentive thrift plan, and unrestricted
shares under the incentive share plan or special share
bonuses. See descriptions under Plan Summaries.
(d) Includes amounts reimbursed by Mass. Electric for the payment
of taxes on certain noncash benefits and contributions to the
incentive thrift plan by Mass. Electric that are not bonus
contributions including related deferred compensation plan
match. See description under Plan Summaries.
<PAGE>
(e) The incentive share awards for the named executives who are
also NEES executives made for 1996 and 1997 were in the form
of restricted shares (with a five-year restriction) or
deferred share equivalents, deferred for receipt for at least
five years, at the executive's option. As cash dividends are
declared, the number of deferred share equivalents will be
increased as if the dividends were reinvested in shares. In
1996, certain named officers also received special share
awards in the form of deferred share equivalents. The shares
awarded for the other named officers and for all executives
for 1995 were not restricted and the value of the awards is
included in the bonus column.
As of December 31, 1997, the following executive officers held
the amount of restricted and deferred shares with the value
indicated: Mr. Reilly 6,320 shares, $270,180 value; Mr.
Sergel 8,698 shares, $371,840 value; Ms. Pastuszek 2,886
shares, $123,377 value; Mr. Root 2,632 shares, $112,518 value;
and Ms. Sala 1,989 shares, $85,030 value. The value was
calculated by multiplying the closing market price on December
31, 1997 by the number of shares.
No awards vested during 1997 under the Long-Term Performance
Share Award Plan.
(f) Includes Mass. Electric contributions to life insurance. See
description under Plan Summaries. The life insurance
contribution is calculated based on the value of term life
insurance for the named individuals. The premium costs for
most of these policies have been or will be recovered by Mass.
Electric. Prior to 1997, this column also included
contributions by Mass. Electric to the incentive thrift plan
that are not bonus contributions. These figures are now
included in the Other Annual Compensation column.
<PAGE>
NARRAGANSETT
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Compensa-
Annual Compensation (b) tion
-------------------------- ---------
Other Restricted
Name and Annual & Deferred All Other
Principal Compensa- Share Compensa-
Position Year Salary Bonus tion Awards tion
(a) ($) ($)(c) ($)(d) ($)(e) ($)(f)
- ---------- ---- ------- ------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert L. 1997 179,460 148,868 9,881 0 1,528
McCabe 1996 127,388 88,905 4,819 50,308 3,424
Chairman 1995 152,407 111,785 4,206 0 4,851
and Former
President
Lawrence J. 1997 679 452 29 0 1
Reilly 1996 16,329 11,916 419 7,825 382
President(g) 1995 30,322 26,625 29 0 622
William 1997 135,972 84,924 2,839 0 88,885(h)
Watkins, 1996 132,012 84,081 119 0 4,509
Jr. 1995 128,172 77,967 119 0 4,054
Executive
Vice
President
Richard W. 1997 113,856 52,347 2,396 0 596
Frost 1996 108,432 57,680 119 0 2,888
Vice 1995 103,272 48,972 119 0 2,787
President
Shannon M. 1997 105,012 51,259 2,220 0 330
Larson 1996 81,293 21,879 116 0 1,808
Vice 1995 68,432 2,908 132 0 1,809
President
Michael F. 1997 103,983 52,060 2,197 0 220
Ryan 1996 64,555 18,397 77 0 1,473
Vice 1995 74,917 14,499 94 0 231
President
</TABLE>
(a) Certain officers of Narragansett are also officers of NEES and
various other System companies.
(b) Includes deferred compensation in category and year earned.
<PAGE>
(c) The bonus figure represents: cash bonuses under an incentive
compensation plan, the all-employee goals program, the
variable match of the incentive thrift plan, and unrestricted
shares under the incentive share plan or special share
bonuses. See descriptions under Plan Summaries.
(d) Includes amounts reimbursed by Narragansett for the payment of
taxes on certain noncash benefits and contributions to the
incentive thrift plan by Narragansett that are not bonus
contributions including related deferred compensation plan
match. See description under Plan Summaries.
(e) The incentive share awards for the named executives made for
1996 and 1997 were in the form of restricted shares (with a
five-year restriction) or deferred share equivalents, deferred
for receipt for at least five years, at the executive's
option. As cash dividends are declared, the number of
deferred share equivalents will be increased as if the
dividends were reinvested in shares. The shares awarded for
1995 were not restricted and the value of the awards is
included in the bonus column.
As of December 31, 1997, the following executive officers held
the amount of restricted and deferred shares with the value
indicated: Mr. McCabe 6,725 shares, $287,493 value; Mr.
Reilly 6,320 shares, $270,180 value; Mr. Watkins 353 shares,
$15,091 value; Mr. Frost 798 shares, $34,115 value; Ms. Larson
6,320 shares, $270,180 value; and Mr. Ryan 10 shares, $428
value. The value was calculated by multiplying the closing
market price on December 31, 1997 by the number of shares.
Mr. Reilly and Ms. Larson are married and both of their
restricted shares are included in the others total.
No awards vested during 1997 under the Long-Term Performance
Share Award Plan.
(f) Includes Narragansett contributions to life insurance. See
description under Plan Summaries. The life insurance
contribution is calculated based on the value of term life
insurance for the named individuals. The premium costs for
most of these policies have been or will be recovered by
Narragansett. Prior to 1997, this column also included
contributions by Narragansett to the incentive thrift plan
that are not bonus contributions. These figures are now
included in the Other Annual Compensation column.
(g) Elected President effective October 1, 1997.
(h) Retired effective January 1, 1998. All Other Compensation
includes $1,528 contributions to life insurance as described
in footnote (f) and a payment of $87,357 as a special
retirement payment.
<PAGE>
Directors' Compensation
Members of the Mass. Electric and Narragansett Boards of
Directors, except employees of NEES System companies, received a
quarterly retainer of $1,500, a meeting fee of $600 plus expenses,
and 50 NEES common shares each year. Since all members of the NEP
Board are employees of NEES System companies, no fees are paid for
service on the Board except as noted below for Mrs. Bok. Effective
December 31, 1997, the composition of all three boards was changed
to include only employees of NEES System companies.
Mrs. Bok retired as an employee of the System on January 1,
1994 (remaining as Chairman of the Board of NEES and a director for
NEES subsidiaries). Mrs. Bok agreed to waive the normal fees
and annual retainers otherwise payable for services by
nonemployees on NEES subsidiary boards and received in lieu thereof
a single annual stipend of $60,000. During 1997, Mrs. Bok also
served as a consultant to NEES. Under the terms of her contract,
she received an annual retainer of $100,000.
Other
The NEES Compensation Committee administers certain of the
incentive compensation plans, and the Management Committee
administers the others (including the incentive share plan).
Retirement Plans
The following table shows estimated annual benefits payable to
executive officers under the qualified pension plan and the
supplemental retirement plan, assuming retirement at age 65 in
1998.
<TABLE>
PENSION TABLE
<CAPTION>
Five-Year
Average 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
Compensa- of of of of of of
tion Service Service Service Service Service Service
- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 18,926 29,276 39,626 49,976 60,326 70,676
$150,000 29,276 42,414 57,439 72,464 87,489 102,514
$200,000 39,626 57,439 75,251 94,951 114,651 134,351
$250,000 49,976 72,464 94,951 116,814 141,064 165,314
$300,000 60,326 87,489 114,651 141,064 167,477 184,123
$350,000 70,676 102,514 134,351 165,314 196,277 215,865
$400,000 81,026 117,539 154,051 189,564 225,077 241,590
$450,000 91,376 132,564 173,751 213,814 253,877 279,315
$500,000 101,726 147,589 193,451 238,064 282,677 311,040
</TABLE>
For purposes of the retirement plans, Messrs. Bailey, Rowe,
Tranen, Aitken, Malley, and Turner currently have 29, 20, 28, 25,
26, and 32 credited years of service, respectively. Mr. Reilly,
Mr. Sergel, Ms. Pastuszek, Mr. Root, and Ms. Sala currently have
16, 19, 17, 15, and 28 credited years of service, respectively.
Mr. McCabe, Mr. Reilly, Mr. Watkins, Mr. Frost, Ms. Larson, and Mr.
Ryan currently have 29, 16, 25, 35, 18, and 3 credited years of
service, respectively.
<PAGE>
Benefits under the pension plans are computed using formulae
based on percentages of highest average compensation computed over
five consecutive years. The compensation covered by the pension
plan includes salary, bonus, and incentive share awards. The
benefits listed in the pension table are not subject to deduction
for Social Security and are shown without any joint and survivor
benefits. If the participant elected at age 65 a 100 percent joint
and survivor benefit with a spouse of the same age, the benefit
shown would be reduced by approximately 16 percent.
The Pension Table above does not include annuity payments to
be received in lieu of life insurance for Messrs. Rowe and Houston.
The policies are described below under Plan Summaries.
In December 1997, the NEES companies announced a voluntary
early retirement program available to all nonunion employees over
age 55 with ten or more years of service. Messrs. Amoroso, Frost,
McCabe, Nadeau, Snay, and Turner were all eligible for the offer.
The program offered either an annuity or a lump sum equal to the
greater of either one week's base pay times the number of years of
service or an additional five years service and five years of age
toward their pension. The offer also included certain health care
and bridging of social security benefits. The program is
conditioned upon consummation of the divestiture of the nonnuclear
generating business to USGen. Mr. McCabe also has an employment
agreement which provides that if he remains in the employ of the
NEES companies until December 31, 1998, or the retirement effective
date under the offer, he will receive an annuity or a lump sum
equal to an additional five years of service and five years of age
toward his pension plus $225,000, subject to an offset for any
benefits under the general offer. The value of Messrs. Amoroso,
Frost, McCabe, Nadeau, Snay, and Turner's benefits under the offer
and the contract cannot be determined until their retirement
following the divestiture.
The System contributes the full cost of post-retirement health
benefits for senior executives.
NEP, MASS. ELECTRIC, AND NARRAGANSETT PAYMENTS UPON A CHANGE OF
CONTROL OR TERMINATION OF EMPLOYMENT
NEES has an agreement with Mr. Sergel which provides severance
benefits in the event of certain terminations of employment
following a Change in Control of NEES (as defined below). The term
of the agreement is for three years with automatic annual
extensions, unless terminated by NEES. If, following a Change in
Control, Mr. Sergel's employment is terminated other than for cause
(as defined) or if Mr. Sergel terminates employment for good reason
(as defined), NEES will pay to Mr. Sergel a lump sum cash payment
equal to three times the sum of Mr. Sergel's most recent annual
base compensation and the average of his bonus amounts for the
prior three years. If Mr. Sergel receives payments under his
severance agreement that would subject him to any federal excise
tax due under section 280G of the Internal Revenue Code, he will
receive a cash "gross-up" payment so he would be in the same net
after-tax position he would have been in had such excise tax not
<PAGE>
been applied. In addition, NEES will provide disability and health
benefits to Mr. Sergel for three years, provide such post-
retirement health and welfare benefits as Mr. Sergel would have
earned within such three years, and grant three additional years of
pension credit.
Change in Control, including potential change of control,
occurs (1) when any person becomes the beneficial owner of 20
percent of the voting securities of NEES, (2) when the prior
members of the Board of NEES no longer constitute a 2/3 majority of
the Board, or (3) NEES enters into an agreement that could result
in a Change in Control.
Upon a change in control a participant in the deferred
compensation plan has the option of receiving a full distribution
of the participant's cash and share accounts and the actuarial
value of future benefits from the insurance related benefits under
a prior plan, all less 10 percent.
The System's bonus plans, including the incentive compensation
plans, the Incentive Thrift Plan, and the Goals Program, provide
for payments equal to the average of the bonuses for the three
prior years in the event of a Change of Control. These payments
would be made in lieu of the regular bonuses for the year in which
the Change in Control occurs. The Long-Term Performance Share
Award Plan provides for a cash payment equal to the value of the
performance shares in the participants' account times the average
target achievement percentage for the Incentive Thrift Plan for the
three prior years. The System's Retirees Health and Life Insurance
Plan has provisions preventing changes in benefits adverse to the
participants for three years following a Change in Control. The
Incentive Share Plan and the related Incentive Share Deferral
Agreements provide that, upon the occurrence of a change in control
(defined more narrowly than in other plans), any restrictions on
shares and account balances would cease.
Under a retention agreement between Mr. Aitken and NEP, he has
agreed to remain in NEP's employ, at the sole option of NEP, until
the earlier of February 1999 or the closing date of the sale of the
generation assets to USGen in return for a lump sum payment of
$47,345. In August 1998, NEP will pay an additional amount equal
to 4-1/2 months' base salary if it has not released Mr. Aitken from
this obligation by July 6, 1998.
NEP, MASS. ELECTRIC, AND NARRAGANSETT PLAN SUMMARIES
A brief description of the various plans through which
compensation and benefits are provided to the named executive
officers is presented below to better enable shareholders to
understand the information presented in the tables shown earlier.
The amounts of compensation and benefits provided to the named
executive officers under the plans described below (and charged to
NEP, Mass. Electric, or Narragansett) are presented in the Summary
Compensation Tables.
<PAGE>
Goals Program
The Goals Program establishes goals annually. For 1997, these
goals related to earnings per share, customer costs, safety,
absenteeism, demand-side management results, generating station
availability, transmission reliability, environmental and OSHA
compliance, and customer satisfaction. Some goals apply to all
employees, while others apply to particular functional groups.
Depending upon the number of goals met, and provided the minimum
earnings goal is met, employees may earn a cash bonus of 1 percent
to 4-1/2 percent of their compensation.
Incentive Thrift Plan
The incentive thrift plan (a 401(k) program) provides for a
match of 40 percent of up to the first 5 percent of base
compensation contributed to the System's incentive thrift plan
(shown under Other Annual Compensation in the Summary Compensation
Tables) and, based on an incentive formula tied, in 1997, to
earnings per share, may fully match the first 5 percent of base
compensation contributed (the additional amount, if any, is shown
under Bonus in the Summary Compensation Tables). Under Federal
law, contributions to these plans are limited. In 1997, the salary
reduction amount was limited to $9,500.
Deferred Compensation Plan
The Deferred Compensation Plan offers executives the
opportunity to defer base pay and bonuses. The plan offers the
option of investing at the prime rate or in NEES shares; however,
share bonuses may only be deferred in a share account. Under
Federal law, the Incentive Thrift Plan, described above, is
required to limit participant base compensation to $160,000 in
calculating the NEES match. Under the Deferred Compensation Plan,
NEES will make a contribution to an executive's share account
equivalent to the resultant reduction in his or her match under the
Incentive Thrift Plan.
Life Insurance
NEES has established for certain senior executives life
insurance plans funded by individual policies. The combined death
benefit under these insurance plans is three times the
participant's annual salary. These plans are structured so that,
over time, NEES should recover the cost of the insurance premiums.
Messrs. McCabe, Reilly, and Sergel are participants in these plans.
After termination of employment, Mr. Rowe may elect, commencing
at age 55 or later, to receive an annuity income equal to 40
percent of final annual salary. In that event, the life insurance
is reduced over 15 years to an amount equal to the participant's
final annual salary.
<PAGE>
Incentive Compensation Plan
The System bonus plan for certain senior employees provides
that in order for cash bonuses to be awarded, NEES must achieve a
return on equity that places NEES in the top 50 percent of the
approximately 80 electric utilities in the national utility group
(the national grouping) or in the top 50 percent of the New
England/New York regional utilities (the regional grouping).
Bonuses are also dependent upon the achievement of individual
goals. In order to provide a long-term component to the incentive
compensation plan, participants may also be awarded NEES common
shares. An individual's award of shares under the incentive share
plan is a fixed percentage of her or his cash bonus for that year.
If no cash award is made, no shares are distributed.
In 1998, this plan will be replaced because the System is
shifting from a vertically integrated utility to being primarily a
transmission and distribution system and the System's strategic
plan calls for new business development in competitive new areas.
Comparative return on equity and cost per kWh measurements will
become increasingly less representative as the prime measures of
success as different utilities proceed through competitive
transitions at different times and at different rates. Under the
new plan, bonuses are tied to achievement of core business
operating income and strategic objectives. Annual income targets
will be established prior to or early in the plan year. In
addition, strategic objectives will be established for each year.
For 1998, those objectives are: achieving recovery of stranded
investments; maximizing the return on the sale of the generation
business; running the best wires business in the Northeast;
increasing the size of the energy delivery business; and profiting
from growth in unregulated ventures.
Financial Counseling
NEP, Mass. Electric, and Narragansett pay for personal
financial counseling for certain executives. As required by the
IRS, a portion of the amount paid is reported as taxable income for
the executive. Financial counseling is also offered to other
employees through seminars conducted at various locations each
year.
Other
The NEES companies do not have any share option plans.
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
-----------------------------------------------------
The Long-Term Performance Share Award Plan was established in
1996. There will be no payments under the plan until the Spring of
1999. Awards under the plan are based upon various measures of
NEES performance over a three-year period. Each award factor or
measurement functions independently. The performance targets for
each cycle are set by the Compensation Committee of the NEES Board.
<PAGE>
Performance is rated on rolling three-year periods, with a new
cycle beginning each year. An individual's potential award under
the plan is a fixed percentage (ranging from 15 percent to 50
percent) of base pay. At the end of the three-year cycle, the
participant receives NEES shares based upon the performance against
the various factors.
The measures of performance for the cycle commencing January
1, 1997 are as follows: total shareholder return compared to the
national group (60th-75th percentile); total shareholder return
compared to the regional group (50th-75th percentile); maintenance
or improvement of bond ratings; new business development; growth of
transmission and distribution business; and system service levels,
measured by system reliability and regulatory compliance. The
national grouping is composed of approximately 80 electric
utilities. The regional grouping is composed of New England/New
York regional utilities.
The following tables show the potential awards, for those
executive officers named in the Summary Compensation Tables, under
the Long-Term Performance Share Award Plan for the performance
cycle commencing January 1, 1997. The NEES System's performance
will be measured over the three-year period ending December 31,
1999.
NEP
---
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS
------------------------------------------------
<TABLE>
<CAPTION>
Number of
Common Share Performance
Name Equivalents(a) Period Threshold(b) Target(c)
---- -------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Lawrence E. Bailey 1,128 3 years 7 1,128
John W. Rowe(d) 8,617 3 years 0 0
Jeffrey D. Tranen(d) 3,333 3 years 0 0
Andrew H. Aitken 884 3 years 5 884
John F. Malley 1,011 3 years 6 1,011
Arnold H. Turner 952 3 years 6 952
Mass. Electric
--------------
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS
------------------------------------------------
Number of
Common Share Performance
Name Equivalents(a) Period Threshold(b) Target(c)
---- -------------- ----------- ------------ ---------
Lawrence J. Reilly 1,179 3 years 7 1,179
Richard P. Sergel 3,266 3 years 20 3,266
Lydia M. Pastuszek 1,019 3 years 6 1,019
Christopher E. Root 832 3 years 5 832
Nancy H. Sala 538 3 years 3 538
<PAGE>
Narragansett
------------
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS
------------------------------------------------
Number of
Common Share Performance
Name Equivalents(a) Period Threshold(b) Target(c)
---- -------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Robert L. McCabe 1,311 3 years 8 1,311
Lawrence J. Reilly 1,179 3 years 7 1,179
William Watkins, Jr. 980 3 years 6 980
Richard W. Frost 493 3 years 3 493
Shannon M. Larson 454 3 years 3 454
Michael F. Ryan 459 3 years 3 459
</TABLE>
(a) Amounts are denominated in common share units. No dividends
are attributable to share units. At the end of the cycle,
awards are paid either in shares or in cash (valued at the
five-day average price prior to the January 15 following the
close of the performance cycle).
(b) The awards in this column represent the threshold number of
shares that could be earned if the minimum attainment level is
reached for one factor. The minimum payout upon failure to
achieve any of the goals would be zero.
(c) The awards in this column represent the target (and maximum)
number of shares that could be earned if the maximum
performance is achieved for all factors.
(d) Upon Mr. Tranen's resignation in September 1997 and Mr. Rowe's
resignation in February 1998, they became ineligible to
receive any award under the Long-Term Performance Share Award
Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
NEES
----
The information required by this item is incorporated herein
by reference to the material under the caption TOTAL COMMON EQUITY
BASED HOLDINGS in the definitive proxy statement of NEES, dated
March 9, 1998, for the 1998 Annual Meeting of Shareholders,
provided that the information under the headings "Report of the
Compensation Committee on Executive Compensation" and "Corporate
Performance" are not so incorporated.
<PAGE>
NEP, Mass. Electric, and Narragansett
-------------------------------------
NEES owns 100 percent of the voting securities of Mass.
Electric and Narragansett. NEES owns 98.85 percent of the voting
securities of NEP.
SECURITY OWNERSHIP
The following tables list the holdings of NEES common shares
as of March 2, 1998 by NEP, Mass. Electric, and Narragansett
directors, the executive officers named in the Summary Compensation
Tables, and all directors and executive officers, as a group.
<TABLE>
NEP
---
<CAPTION>
Shares Deferred
Beneficially Share
Name Owned (a) Equivalents (b) Total
---- ------------ --------------- -----
<S> <C> <C> <C>
Andrew H. Aitken 6,606 2,572 9,178
Lawrence E. Bailey 5,153 3,330 8,483
Alfred D. Houston 13,688 11,558 25,246
Cheryl A. LaFleur 3,191 5,787 8,978
John F. Malley 2,506 3,364 5,870
John W. Rowe 14,823 25,355 40,178
Jeffrey D. Tranen 107 107
Arnold H. Turner 4,914 2,112 7,026
All directors and
executive officers,
as a group (11 persons) 64,846 (c) 61,994 126,840
Mass. Electric
--------------
Shares Deferred
Beneficially Share
Name Owned (a) Equivalents (b) Total
---- ------------ --------------- -----
Cheryl A. LaFleur 3,191 5,787 8,978
Robert L. McCabe 10,156 6,054 16,210
Lydia M. Pastuszek 7,185 2,446 9,631
Lawrence J. Reilly 3,656 5,959 9,615
Christopher E. Root 2,036 2,304 4,340
Nancy H. Sala 4,153 (d) 1,636 5,789
Richard P. Sergel 8,086 8,313 16,399
Dennis E. Snay 4,608 535 5,143
All directors and
executive officers,
as a group (17 persons) 84,854 (c) 42,610 127,464
<PAGE>
Narragansett
------------
Shares Deferred
Beneficially Share
Name Owned (a) Equivalents (b) Total
---- ------------ --------------- -----
Richard W. Frost 7,677 502 8,179
Cheryl A. LaFleur 3,191 5,787 8,978
Shannon M. Larson 3,656 5,959 9,615
Robert L. McCabe 10,156 6,054 16,210
Lawrence J. Reilly 3,656 5,959 9,615
Michael F. Ryan 829 10 839
Richard P. Sergel 8,086 8,313 16,399
Ronald L. Thomas 1,405 1,405
William Watkins, Jr. 1,113 1,113
All directors and
executive officers,
as a group (14 persons) 73,070 (c) 49,848 122,918
</TABLE>
(a) Number of shares beneficially owned includes: (i) shares
directly owned by certain relatives with whom directors or
officers share voting or investment power; (ii) shares held of
record individually by a director or officer or jointly with
others or held in the name of a bank, broker, or nominee for
such individual's account; (iii) shares in which certain
directors or officers maintain exclusive or shared investment
or voting power whether or not the securities are held for
their benefit; and (iv) with respect to the executive officers,
allocated shares in the Incentive Thrift Plan described above.
(b) Deferred share equivalents are held under the Deferred
Compensation Plan or pursuant to individual deferral
agreements. Under the Plan or deferral agreements, executives
may elect to defer cash compensation and share awards. There
are various deferral periods available under the plans. At the
end of the deferral period, the compensation is paid out in the
same form, cash or NEES shares, as was deferred. The rights
of the executives to payment are those of general, unsecured
creditors. While deferred, the shares do not have voting
rights or other rights associated with ownership. As cash
dividends are declared, the number of deferred share
equivalents will be increased as if the dividends were
reinvested in NEES common shares.
(c) Amount is less than 1 percent of the total number of shares of
NEES outstanding.
(d) Ms. Sala disclaims a beneficial ownership interest in 281
shares held in custodial accounts.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT and ITEM 11. EXECUTIVE COMPENSATION.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits
Unless otherwise indicated, the exhibits listed below are
incorporated by reference to the appropriate exhibit numbers and
the Commission file numbers indicated in parentheses.
NEES
----
(3) Agreement and Declaration of Trust dated January 2, 1926,
as amended through April 28, 1992 (Exhibit 3 to 1994 NEES
Form 10-K, File No. 1-3446).
(4) Instruments Defining the Rights of Security Holders
(a) Massachusetts Electric Company First Mortgage
Indenture and Deed of Trust, dated as of July 1,
1949, and twenty-one supplements thereto (Exhibit
7-A, File No. 1-8019; Exhibit 7-B, File No. 2-8836;
Exhibit 4-C, File No. 2-9593; Exhibit 4 to 1980
Form 10-K, File No. 2-8019; Exhibit 4 to 1982 Form
10-K, File No. 0-5464; Exhibit 4 to 1986 Form 10-K,
File No. 0-5464; Exhibit 4(a) to 1988 Form 10-K,
File No. 1-3446; Exhibit 4(a) to 1989 Form 10-K,
File No. 1-3446; Exhibit 4(a) to 1992 Form 10-K,
File No. 1-3446; Exhibit 4(a) to 1993 Form 10-K,
File No. 1-3446; Exhibit 4(a) to 1995 Form 10-K,
File No. 1-3446).
(b) The Narragansett Electric Company First Mortgage
Indenture and Deed of Trust, dated as of September
1, 1944, and twenty-two supplements thereto
(Exhibit 7-1, File No. 2-7042; Exhibit 7-B, File
No. 2-7490; Exhibit 4-C, File No. 2-9423; Exhibit
4-D, File No. 2-10056; Exhibit 4 to 1980 Form 10-K,
File No. 0-898; Exhibit 4 to 1982 Form 10-K, File
No. 0-898; Exhibit 4 to 1983 Form 10-K, File No.
0-898; Exhibit 4 to 1985 Form 10-K, File No. 0-898;
Exhibit 4 to 1986 Form 10-K, File No. 0-898;
Exhibit 4 to 1987 Form 10-K, File No. 0-898;
Exhibit 4 to 1991 Form 10-K, File No. 0-898;
Exhibit 4(b) to 1992 Form 10-K, File No. 1-3446;
Exhibit 4(b) to 1993 Form 10-K, File No. 1-3446;
Exhibit 4(b) to 1995 Form 10-K, File No. 1-3446).
<PAGE>
(c) The Narragansett Electric Company Preference
Provisions, as amended, dated December 15, 1997
(filed herewith).
(d) New England Power Company Indentures General and
Refunding Mortgage Indenture and Deed of Trust
dated as of January 1, 1977 and twenty
supplementsthereto (Exhibit 4(b) to 1980 Form 10-K,
File No. 0-1229; Exhibit 4(b) to 1982 Form 10-K,
File No. 0-1229; Exhibit 4(b) to 1983 Form 10-K,
File No. 0-1229; Exhibit 4(b) to 1985 Form 10-K,
File No. 0-1229; Exhibit 4(b) to 1986 Form 10-K,
File No. 0-1229; Exhibit 4(c)(ii) to 1988 Form
10-K, File No. 1-3446; Exhibit 4(c)(ii) to 1989
Form 10-K, File No. 1-3446; Exhibit 4(c)(ii) to
1990 Form 10-K, File No. 1-3446; Exhibit 4(c)(ii)
to 1991 Form 10-K, File No. 1-3446; Exhibit
4(c)(ii) to 1992 Form 10-K, File No. 1-3446;
Exhibit 4(d) to 1993 Form 10-K, File No. 1-3446;
Exhibit 4(d) to 1995 Form 10-K, File No. 1-3446).
(10) Material Contracts
(a) Boston Edison Company et al. and New England Power
Company: Amended REMVEC Agreement dated August 12,
1977 (Exhibit 5-4(d), File No. 2-61881).
(i) Boston Edison Company et al. and New England
Power Company: REMVEC II Agreement dated on
or about July 1, 1994 (filed herewith).
(ii) Boston Edison Company et al. and New England
Power Company: Security Analysis Service
Agreement dated on or about July 1, 1994
(filed herewith).
(b) The Connecticut Light and Power Company et al. and
New England Power Company: Sharing Agreement for
Joint Ownership, Construction and Operation of
Millstone Unit No. 3 dated as of September 1, 1973,
and Amendment dated as of August 1, 1974 (Exhibit
10-5, File No. 2-52820); Amendments dated as of
December 15, 1975 and April 1, 1986; (Exhibit
10(b), to 1990 Form 10-K, File No. 1-3446).
Transmission Support Agreement dated August 9,
1974; Instrument of Transfer to NEP with respect to
the 1979 Connecticut Nuclear Unit, and Assumption
of Obligations, dated December 17, 1975 (Exhibit
10-6(b), File No. 2-57831).
(c) Connecticut Yankee Atomic Power Company et al. and
New England Power Company: Stockholders Agreement
dated July 1, 1964 (Exhibit 13-9-A, File No.
2-23006); Power Purchase Contract dated July 1,
1964 (Exhibit 13-9-B, File No. 2-23006); Additional
Power Contract dated as of April 30, 1984 and 1996
<PAGE>
Amendatory Agreement dated as of December 4, 1996
(Exhibit 10(c) to 1996 Form 10-K, File No. 1-3446);
Supplementary Power Contract dated as of April 1,
1987 (Exhibit 10(c) to 1987 Form 10-K, File No.
1-3446); Capital Funds Agreement dated September 1,
1964 (Exhibit 13-9-C, File No. 2-23006);
Transmission Agreement dated October 1, 1964
(Exhibit 13-9-D, File No. 2-23006); Agreement
revising Transmission Agreement dated July 1, 1979
(Exhibit to 1979 Form 10-K, File No. 1-3446);
Amendment revising Transmission Agreement dated as
of January 19, 1994 (Exhibit 10(c) to 1995 Form 10-
K, File No. 1-3446).
(d) Maine Yankee Atomic Power Company et al. and New
England Power Company: Capital Funds Agreement
dated May 20, 1968 and Power Purchase Contract
dated May 20, 1968 (Exhibit 4-5, File No. 2-29145);
Amendments dated as of January 1, 1984, March 1,
1984 (Exhibit 10(d) to 1983 Form 10-K, File No.
1-3446), October 1, 1984, and August 1, 1985
(Exhibit 10(d) to 1985 Form 10-K, File No. 1-3446);
Stockholders Agreement dated May 20, 1968 (Exhibit
10-20, File No. 2-34267); Additional Power Contract
dated as of February 1, 1984 (Exhibit 10(d) to 1985
Form 10-K, File No. 1-3446); 1997 Amendatory
Agreement dated as of August 6, 1997 (filed
herewith).
(e) New England Energy Incorporated Contracts
(i) Capital Funds Agreement with NEES dated
November 1, 1974 (Exhibit 10-29(b), File No.
2-52969); Amendment dated July 1, 1976, and
Amendment dated July 26, 1979 (Exhibit
10(g)(i) to 1980 Form 10-K, File No. 1-3446);
Amendment dated August 26, 1981 (Exhibit
10(f)(i) to 1981 Form 10-K, File No. 1-3446);
Amendment dated March 26, 1985 (Exhibit
10(e)(i) to 1985 Form 10-K, File No. 1-3446);
Amendment dated as of April 28, 1989 (Exhibit
10(e)(i) to 1989 Form 10-K, File No. 1-3446);
Amendment dated as of June 1, 1990 (Exhibit
10(e)(i) to 1990 Form 10-K, File No. 1-3446);
Amendment dated as of April 13, 1995 (Exhibit
10(e)(i) to 1996 Form 10-K, File No. 1-3446).
(ii) Loan Agreement with NEES dated July 19, 1978
and effective November 1, 1974, and Amendment
dated July 26, 1979 (Exhibit 10(g)(iii) to
1980 Form 10-K, File No. 1-3446); Amendment
dated August 26, 1981 (Exhibit 10(f)(ii) to
1981 Form 10-K, File No. 1-3446); Amendment
dated March 26, 1985 (Exhibit 10(e)(ii) to
1985 Form 10-K, File No. 1-3446); Amendment
dated as of April 28, 1989 (Exhibit 10(e)(ii)
to 1989 Form 10-K, File No. 1-3446);
<PAGE>
Amendment dated as of June 1, 1990 (Exhibit
10(e)(ii) to 1990 Form 10-K, File No. 1-3446);
Amendment dated as of April 13, 1995 (Exhibit
10(e)(ii) to 1996 Form 10-K, File No. 1-3446).
(iii) Fuel Purchase Contract with New England Power
Company dated July 26, 1979, and Amendment
dated August 26, 1981 (Exhibit 10(f)(iii) to
1981 Form 10-K, File No. 1-3446); Amendment
dated March 26, 1985, and Amendment effective
January 1, 1984 (Exhibit 10(e)(iii) to 1985
Form 10-K, File No. 1-3446); Amendment dated
as of April 28, 1989 (Exhibit 10(e)(iii) to
1989 Form 10-K, File No. 1-3446).
(iv) Partnership Agreement with Samedan Oil
Corporation as Amended and Restated on
February 5, 1985 (Exhibit 10(e)(iv) to 1984
Form 10-K, File No. 1-3446); Amendment dated
as of January 14, 1992 (Exhibit 10(e)(iv) to
1991 Form 10-K, File No. 1- 3446).
(v) Credit Agreement dated as of April 13, 1995
(Exhibit 10(e)(iv) to 1995 Form 10-K, File
No. 1-3446).
(vi) Capital Maintenance Agreement dated November
15, 1985, and Assignment and Security
Agreement dated November 15, 1985 (Exhibit
10(e)(vi) to 1985 Form 10-K, File No.
1-3446); Amendment dated as of April 28, 1989
(Exhibit 10(e)(vi) to 1989 Form 10-K, File
No. 1-3446); Amendment dated as of April 13,
1995 (Exhibit 10(e)(vi) to 1996 Form 10-K,
File No. 1-3446).
(f) New England Power Company and New England Electric
Transmission Corporation et al.: Phase I Terminal
Facility Support Agreement dated as of December 1,
1981 (Exhibit 10(g) to 1981 Form 10-K, File No.
1-3446); Amendments dated as of June 1, 1982, and
November 1, 1982 (Exhibit 10(f) to 1982 Form 10-K,
File No. 1-3446); Agreement with respect to Use of
the Quebec Interconnection dated as of December 1,
1981 (Exhibit 10(g) to 1981 Form 10-K, File No.
1-3446); Amendments dated as of May 1, 1982, and
November 1, 1982 (Exhibit 10(f) to 1982 Form 10-K,
File No. 1-3446); Amendment dated as of January 1,
1986 (Exhibit (10)(f) 1986 Form 10-K, File No.
1-3446); Agreement for Reinforcement and
Improvement of New England Power Company's
Transmission System dated as of April 1, 1983
(Exhibit 10(f) to 1983 Form 10-K, File No. 1-3446);
Lease dated as of May 16, 1983 (Exhibit 10(f) to
1983 Form 10-K, File No. 1-3446); Upper Development
- Lower Development Transmission Line Support
Agreement dated as of May 16, 1983 (Exhibit 10(f)
to 1983 Form 10-K, File No. 1-3446).
<PAGE>
(g) New England Electric Transmission Corporation and
PruCapital Management, Inc. et al: Note Agreement
dated as of September 1, 1986 (Exhibit 10(g) to
1986 Form 10-K, File No. 1-3446); Mortgage, Deed of
Trust and Security Agreement dated as of September
1, 1986 (Exhibit 10(g) to 1986 Form 10-K, File No.
1-3446); Equity Funding Agreement with New England
Electric System dated as of December 1, 1985
(Exhibit 10(g) to 1991 Form 10-K, File No. 1-3446).
(h) Vermont Electric Transmission Company, Inc. et al.
and New England Power Company: Phase I Vermont
Transmission Line Support Agreement dated as of
December 1, 1981; Amendments dated as of June 1,
1982, and November 1, 1982 (Exhibit 10(g) to 1982
Form 10-K, File No. 1-3446); Amendment dated as of
January 1, 1986 (Exhibit 10(h) to 1986 Form 10-K,
File No. 1-3446).
(i) New England Power Pool Agreement: (Exhibit 4(e),
File No. 2-43025); Amendments dated July 1, 1972,
and March 1, 1973 (Exhibit 10-15, File No.
2-48543); Amendment dated March 15, 1974 (Exhibit
10-5, File No. 2-52775); Amendment dated June 1,
1975 (Exhibit 10-14, File No. 2-57831); Amendment
dated September 1, 1975 (Exhibit 10-13, File No.
2-59182); Amendments dated December 31, 1976,
January 31, 1977, July 1, 1977, and August 1, 1977
(Exhibit 10-16, File No. 2-61881); Amendments dated
August 15, 1978, January 3, 1980, and February 1980
(Exhibit 10-3, File No. 2-68283); Amendment dated
September 1, 1981 (Exhibit 10(h) to 1981 Form 10-K,
File No. 1-3446); Amendment dated as of December 1,
1981 (Exhibit 10(h) to 1982 Form 10-K, File No.
1-3446); Amendments dated June 1, 1982, June 15,
1983, and October 1, 1983 (Exhibit 10(i) to 1983
Form 10-K, File No. 1-3446); Amendments dated
August 1, 1985, August 15, 1985, September 1, 1985,
and January 1, 1986 (Exhibit 10(i) to 1985 Form
10-K, File No. 1-3446); Amendment dated
September 1, 1986 (Exhibit 10(i) to 1986 Form 10-K,
File No. 1-3446); Amendment dated April 30, 1987
(Exhibit 10(i) to 1987 Form 10-K, File No. 1-3446);
Amendments dated March 1, 1988 and May 1, 1988
(Exhibit 10(i) to 1988 Form 10-K, File No. 1-3446);
Amendment dated March 15, 1989 (Exhibit 10(i) to
1989 Form 10-K, File No. 1-3446); Amendment dated
October 1, 1990 (Exhibit 10(i) to 1990 Form 10-K,
File No. 1-3446); Amendment dated as of September
15, 1992 (Exhibit 10(i) to 1992 Form 10-K, File No.
1-3446); Amendments dated as of June 1, 1993, July
1, 1995, and September 1, 1995 (Exhibit 10(i) to
1995 Form 10-K, File No. 1-3446); Amendment dated
as of December 1, 1996 (Exhibit 10(i) to 1996 Form
10-K, File No. 1-3446); Amendment dated as of
September 1, 1997 (filed herewith); Amendment dated
as of November 15, 1997 (filed herewith).
<PAGE>
(j) Public Service Company of New Hampshire et al. and
New England Power Company: Agreement for Joint
Ownership, Construction and Operation of New
Hampshire Nuclear Units dated as of May 1, 1973;
Amendments dated May 24, 1974, June 21, 1974,
September 25, 1974 and October 25, 1974 (Exhibit
10-18(b), File No. 2-52820); Amendment dated
January 31, 1975 (Exhibit 10-16(b), File No.
2-57831); Amendments dated April 18, 1979,
April 25, 1979, June 8, 1979, October 11, 1979,
December 15, 1979, June 16, 1980, December 31, 1980
(Exhibit 10(i) to 1980 Form 10-K, File No. 1-3446);
Amendments dated June 1, 1982, April 27, 1984,
June 15, 1984 (Exhibit 10(j) to 1984 Form 10-K,
File No. 1-3446); Amendments dated March 8, 1985,
March 14, 1986, May 1, 1986 and September 19, 1986
(Exhibit 10(j) to 1986 Form 10-K, File No. 1-3446);
Amendment dated November 12, 1987 (Exhibit 10(j) to
1987 Form 10-K, File No. 1-3446); Amendment dated
January 13, 1989 (Exhibit 10(j) to 1989 Form 10-K,
File No. 1-3446); Amendment dated as of November 1,
1990 (Exhibit 10(j) to 1991 Form 10-K, File No. 1-
3446). Transmission Support Agreement dated as of
May 1, 1973 (Exhibit 10-23, File No. 2-49184);
Instrument of Transfer to NEP with respect to the
New Hampshire Nuclear Units and Assumptions of
Obligations dated December 17, 1975 and Agreement
Among Participants in New Hampshire Nuclear Units,
certain Massachusetts Municipal Systems and
Massachusetts Municipal Wholesale Electric Company
dated May 28, 1976 (Exhibit 10-16(c), File No.
2-57831); Seventh Amendment To and Restated
Agreement for Seabrook Project Disbursing Agent
(Exhibit 10(j) to 1991 Form 10-K, File No. 1-
3446); Amendments dated as of June 29, 1992
(Exhibit 10(j) to 1992 Form 10-K, File No. 1-
3446); Seabrook Project Managing Agent Operating
Agreement dated as of June 29, 1992, and amendment
to Seabrook Project Managing Agent Agreement dated
as of June 29, 1992 (Exhibit 10(j) to 1992 Form 10-
K, File No. 1-3446).
(k) Vermont Yankee Nuclear Power Corporation et al. and
New England Power Company: Capital Funds Agreement
dated February 1, 1968, Amendment dated March 12,
1968, and Power Purchase Contract dated February 1,
1968 (Exhibit 4-6, File No. 2-29145); Amendments
dated as of June 1, 1972 and April 15, 1983
(Exhibit 10(k) to 1983 Form 10-K, File No. 1-3446)
and April 24, 1985 (Exhibit 10(k) to 1985 Form
10-K, File No. 1-3446); Amendment dated as of June
1, 1985 (Exhibit 10(k) to 1987 Form 10-K, File No.
1-3446); Amendments dated as of May 6, 1988
(Exhibit 10(k) to 1988 Form 10-K, File No. 1-3446);
Amendment dated as of June 15, 1989 (Exhibit 10(k)
to 1989 Form 10-K, File No. 1-3446); Additional
<PAGE>
Power Contract dated as of February 1, 1984
(Exhibit 10(k) to 1983 Form 10-K, File No. 1-3446);
Guarantee Agreement dated as of November 5, 1981
(Exhibit 10(j) to 1981 Form 10-K, File No. 1-3446).
(l) Yankee Atomic Electric Company et al. and New
England Power Company: Amended and Restated Power
Contract dated April 1, 1985 (Exhibit 10(l) to 1985
Form 10-K, File No. 1-3446); Amendment dated May 6,
1988 (Exhibit 10(l) to 1988 Form 10-K, File No.
1-3446); Amendments dated as of June 26, 1989 and
July 1, 1989 (Exhibit 10(l) to 1989 Form 10-K, File
No. 1-3446); Amendment dated as of February 1, 1992
(Exhibit 10(l) to 1992 Form 10-K, File No. 1-3446).
*(m) New England Electric Companies' Deferred
Compensation Plan as amended through November 26,
1996 (Exhibit 10(m) to 1996 Form 10-K, File No. 1-
3446).
*(n) New England Electric System Companies Retirement
Supplement Plan as amended through June 1, 1996
(Exhibit 10(n) to 1996 Form 10-K, File No. 1-3446).
*(o) New England Electric Companies' Executive
Supplemental Retirement Plan I as amended through
May 20, 1996 (Exhibit 10(o) to 1996 Form 10-K, File
No. 1-3446).
*(p) New England Electric Companies' Executive
Supplemental Retirement Plan II as amended through
October 25, 1995 (Exhibit 10(p) to 1996 Form 10-K,
File No. 1-3446).
*(q) New England Electric Companies' Incentive
Compensation Plan I as amended through October 24,
1995 (Exhibit 10(q) to 1996 Form 10-K, File No. 1-
3446).
*(r) New England Electric Companies' Incentive
Compensation Plan II as amended through January 1,
1995 (Exhibit 10(r) to 1995 Form 10-K, File No. 1-
3446).
*(s) New England Electric Companies' Incentive
Compensation Plan III as amended through January
1, 1996 (Exhibit 10(s) to 1996 Form 10-K, File No.
1-3446).
*(t) New England Electric Companies' Senior Incentive
Compensation Plan as amended through January 1,
1995 (Exhibit 10(q) to 1995 Form 10-K, File No. 1-
3446).
*(u) New England Electric System Directors Deferred
Compensation Plan as amended through December 1,
1996 (Exhibit 10(u) to 1996 Form 10-K, File No. 1-
3446).
<PAGE>
*(v) Forms of Life Insurance Program (Exhibit 10(s) to
1986 Form 10-K, File No. 1-3446); and Form of Life
Insurance (Collateral Assignment) (Exhibit 10(t) to
1991 Form 10-K, File No. 1-3446).
*(w) New England Electric Companies' Incentive Share
Plan as amended through February 24, 1997 (Exhibit
10(w) to 1996 Form 10-K, File No. 1-3446).
*(x) New England Electric Companies' Long-Term
Performance Share Award Plan amended through
February 24, 1997 (Exhibit 10(x) to 1996 Form 10-K,
File No. 1-3446).
*(y) New England Electric System Directors' Retirement
Plan dated May 1, 1994 (Exhibit 10(y) to 1996 Form
10-K, File No. 1-3446).
*(z) Forms of Severance Protection Agreement (Exhibit
10(z) to 1996 Form 10-K, File No. 1-3446).
*(aa) New England Power Service Company and Joan T. Bok:
Service Credit Letter dated October 21, 1982
(Exhibit 10(cc) to 1992 Form 10-K, File No.
1-3446).
*(bb) New England Electric System and John W. Rowe:
Service Credit Letter dated December 5, 1988
(Exhibit 10(dd) to 1992 Form 10-K, File No.
1-3446).
*(cc) New England Power Service Company and the Company:
Form of Supplemental Pension Service Credit
Agreement (Exhibit 10(ee) to 1992 Form 10-K, File
No. 1-3446).
(dd) New England Power Company and New England
Hydro-Transmission Electric Company, Inc. et al:
Phase II Massachusetts Transmission Facilities
Support Agreement dated as of June 1, 1985 (Exhibit
10(t) to 1986 Form 10-K, File No. 1-3446);
Amendment dated as of May 1, 1986 (Exhibit 10(t) to
1986 Form 10-K, File No. 1-3446); Amendments dated
as of February 1, 1987, June 1, 1987, September 1,
1987, and October 1, 1987 (Exhibit 10(u) to 1987
Form 10-K, File No. 1-3446); Amendment dated as of
August 1, 1988 (Exhibit 10(u) to 1988 Form 10-K,
File No. 1-3446); Amendment dated January 1, 1989
(Exhibit 10(u) to 1990 Form 10-K, File No. 1-3446).
(ee) New England Power Company and New England
Hydro-Transmission Corporation et al: Phase II New
Hampshire Transmission Facilities Support Agreement
dated as of June 1, 1985 (Exhibit 10(u) to 1986
Form 10-K, File No. 1-3446); Amendment dated as of
May 1, 1986 (Exhibit 10(u) to 1986 Form 10-K, File
<PAGE>
No. 1-3446); Amendments dated as of February 1,
1987, June 1, 1987, September 1, 1987, and
October 1, 1987 (Exhibit 10(v) to 1987 Form 10-K,
File No. 1-3446); Amendment dated as of August
1,1988 (Exhibit 10(v) to 1988 Form 10-K, File No.
1-3446); Amendments dated January 1, 1989 and
January 1, 1990 (Exhibit 10(v) to 1990 Form 10-K,
File No. 1-3446).
(ff) New England Power Company et al: Phase II New
England Power AC Facilities Support Agreement dated
as of June 1, 1985 (Exhibit 10(v) to 1986 Form
10-K, File No. 1-3446); Amendment dated as of May
1, 1986 (Exhibit 10(v) to 1986 Form 10-K, File No.
1-3446); Amendments dated as of February 1, 1987,
June 1, 1987, and September 1, 1987 (Exhibit 10(w)
to 1987 Form 10-K, File No. 1-3446); Amendment
dated as of August 1, 1988 (Exhibit 10(w) to 1988
Form 10-K, File No. 1-3446).
(gg) New England Hydro-Transmission Electric Company,
Inc. and New England Electric System et al: Equity
Funding Agreement dated as of June 1, 1985 (Exhibit
10(w) to 1986 Form 10-K, File No. 1-3446);
Amendment dated as of May 1, 1986 (Exhibit 10(w) to
1986 Form 10-K, File No. 1-3446); Amendment dated
as of September 1, 1987 (Exhibit 10(x) to 1987
Form 10-K, File No. 1-3446); Amendment dated as of
August 1, 1988 (Exhibit 10(x) to 1988 Form 10-K,
File No. 1-3446).
(hh) New England Hydro-Transmission Corporation and New
England Electric System et al: Equity Funding
Agreement dated as of June 1, 1985 (Exhibit 10(x)
to 1986 Form 10-K, File No. 1-3446); Amendment
dated as of May 1, 1986 (Exhibit 10(x) to 1986 Form
10-K, File No. 1-3446); Amendment dated as of
September 1, 1987 (Exhibit 10(y) to 1987 Form 10-K,
File No. 1-3446); Amendment dated as of August 1,
1988 (Exhibit 10(y) to 1988 Form 10-K, File No.
1-3446).
(ii) Ocean State Power, et al., and Narragansett Energy
Resources Company: Equity Contribution Agreement
dated as of December 29, 1988 (Exhibit 10(aa) to
1988 Form 10-K, File No. 1-3446); Amendment dated
as of September 29, 1989 (Exhibit 10(aa) to 1989
Form 10-K File No. 1-3446); Ocean State Power, et
al., and New England Electric System: Equity
Contribution Support Agreement dated as of
December 29, 1988 (Exhibit 10(aa) to 1988 Form
10-K, File No. 1-3446); Amendment dated as of
September 29, 1989 (Exhibit 10(aa) to 1989 Form
10-K, File No. 1-3446); Ocean State Power II, et
al., and Narragansett Energy Resources Company:
Equity Contribution Agreement dated as of September
29, 1989 (Exhibit 10(aa) to 1989 Form 10-K File No.
<PAGE>
1-3446); Ocean State Power II, et al., and New
England Electric System: Equity Contribution
Support Agreement dated as of September 29, 1989
(Exhibit 10(aa) to 1989 Form 10-K File No. 1-3446).
(jj) NEES Energy, Inc./AllEnergy Marketing Company,
L.L.C.: Limited Liability Company Agreement dated
as of September 18, 1996 (Exhibit B-1 to Amendment
No. 1 to Form U-1, File No. 70-8921); Amendment No.
1 to Limited Liability Company Agreement dated as
of December 3, 1997 (filed herewith).
(kk) USGen, New England Energy, Inc. and New England
Power Company and The Narragansett Electric
Company: Asset Purchase Agreement dated as of
August 5, 1997 (Exhibit 2 to Form 10-Q for period
ended September 30, 1997, File No. 1-3446).
*(ll) New England Power Service Company and Robert L.
McCabe: Employment Agreement entered into as of
March 11, 1998 (filed herewith).
* Compensation related plan, contract, or arrangement.
(13) 1997 Annual Report to Shareholders (filed herewith).
(21) Subsidiary list appears in Part I of this document.
(24) Power of Attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
NEP
---
(3) (a) Articles of Organization as amended through June
27, 1987 (Exhibit 3(a) to 1988 Form 10-K, File No.
0-1229).
(b) By-laws of the Company as amended December 12, 1997
(filed herewith).
(4) General and Refunding Mortgage Indenture and Deed of Trust
dated as of January 1, 1977 and twenty supplements thereto
(Exhibit 4(b) to 1980 Form 10-K, File No. 0-1229; Exhibit
4(b) to 1982 Form 10-K, File No. 0-1229; Exhibit 4(b) to
1983 Form 10-K, File No. 0-1229; Exhibit 4(b) to 1985 Form
10-K, File No. 0-1229; Exhibit 4(b) to 1986 Form 10-K,
File No. 0-1229; Exhibit 4(b) to 1986 Form 10-K, File No.
0-1229; Exhibit 4(b) to 1988 Form 10-K, File No. 0-1229;
Exhibit 4(c)(ii) to 1989 NEES Form 10-K, File No. 1-3446;
Exhibit 4(c)(ii) to 1990 NEES Form 10-K, File No. 1-3446;
<PAGE>
Exhibit 4(c)(ii) to 1991 NEES Form 10-K, File No. 1-3446;
Exhibit 4(c)(ii) to 1992 NEES Form 10-K, File No. 1-3446;
Exhibit 4(d) to 1993 NEES Form 10-K, File No. 1-3446;
Exhibit 4(d) to 1995 NEES Form 10-K, File No. 1-3446).
(10) Material Contracts
(a) Boston Edison Company et al. and the Company:
Amended REMVEC Agreement dated August 12, 1977
(Exhibit 5-4(d), File No. 2-61881).
(i) Boston Edison Company et al. and the Company:
REMVEC II Agreement dated on or about July 1,
1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10-
K, File No. 1-3446).
(ii) Boston Edison Company et al. and the Company:
Security Analysis Services Agreement dated on
or about July 1, 1997 (Exhibit 10(a)(ii) to
NEES' 1997 Form 10-K, File No. 1-3446).
(b) The Connecticut Light and Power Company et al. and
the Company: Sharing Agreement for Joint
Ownership, Construction and Operation of Millstone
Unit No. 3 dated as of September 1, 1973, and
Amendment dated as of August 1, 1974 (Exhibit 10-5,
File No. 2-52820); Amendments dated as of December
15, 1975 and April 1, 1986 (Exhibit 10(b) to NEES'
1990 Form 10-K File No. 1-3446). Transmission
Support Agreement dated August 9, 1974; Instrument
of Transfer to the Company with respect to the 1979
Connecticut Nuclear Unit, and Assumption of
Obligations, dated December 17, 1975 (Exhibit
10-6(b), File No. 2-57831).
(c) Connecticut Yankee Atomic Power Company et al. and
the Company: Stockholders Agreement dated July 1,
1964 (Exhibit 13-9-A, File No. 2-2006); Power
Purchase Contract dated July 1, 1964 (Exhibit
13-9-B, File No. 2-23006); Additional Power
Contract dated as of April 30, 1984 and 1996
Amendatory Agreement dated as of December 4, 1996
(Exhibit 10(c) to 1996 Form 10-K, File No. 1-3446);
Supplementary Power Contract dated as of April 1,
1987 (Exhibit 10(c) to 1987 Form 10-K, File No.
0-1229); Capital Funds Agreement dated September 1,
1964 (Exhibit 13-9-C, File No. 2-23006);
Transmission Agreement dated October 1, 1964
(Exhibit 13-9-D, File No. 2-23006); Agreement
revising Transmission Agreement dated July 1, 1979
(Exhibit to NEES' 1979 Form 10-K, File No. 1-3446);
Amendment revising Transmission Agreement dated as
of January 19, 1994 (Exhibit 10(c) to NEES' 1995
Form 10-K, File No. 1-3446; Five Year Capital
Contribution Agreement dated November 1, 1980
(Exhibit 10(e) to NEES' 1980 Form 10-K, File No.
1-3446).
<PAGE>
(d) Maine Yankee Atomic Power Company et al. and the
Company: Capital Funds Agreement dated May 20,
1968 and Power Purchase Contract dated May 20, 1968
(Exhibit 4-5, File No. 2-29145); Amendments dated
as of January 1, 1984, March 1, 1984 (Exhibit 10(d)
to NEES' 1983 Form 10-K, File No. 1-3446); October
1, 1984, and August 1, 1985 (Exhibit 10(d) to NEES'
1985 Form 10-K, File No. 1-3446); Stockholders
Agreement dated May 20, 1968 (Exhibit 10-20; File
No. 2-34267); Additional Power Contract dated as of
February 1, 1984 (Exhibit 10(d) to NEES' 1985 Form
10-K, File No. 1-3446); 1997 Amendatory Agreement
dated as of August 6, 1997 (Exhibit 10(d) to NEES'
1997 Form 10-K, File No. 1-3446).
(e) Mass. Electric and the Company: Primary Service
for Resale dated February 15, 1974 (Exhibit
5-17(a), File No. 2-52969); Amendment of Service
Agreement dated June 22, 1983 (Exhibit 10(b) to
Mass. Electric's 1986 Form 10-K, File No. 0-5464);
Amendment of Service Agreement effective
November 1, 1993 (Exhibit 10(e) to 1993 Form 10-K,
File No. 0-1229); Memorandum of Understanding
effective May 22, 1994 (Exhibit 10(e) to 1994 Form
10-K, File No. 0-1229); Amendment of Service
Agreement effective July 1, 1996 (filed herewith);
Amendment to Service Agreement dated as of February
1, 1997 (filed herewith).
(f) The Narragansett Electric Company and the Company:
Primary Service for Resale dated February 15, 1974
(Exhibit 4-1(b), File No. 2-51292); Amendment of
Service Agreement dated July 26, 1990 (Exhibit 4(f)
to New England Power Company's 1990 Form 10-K, File
No. 0-1229). Amendment of Service Agreement dated
July 24, 1991 (Exhibit 10(f) to 1991 Form 10-K,
File No. 0-1229); Amendment of Service Agreement
effective November 1, 1993 (Exhibit 10(f) to 1993
Form 10-K, File No. 0- 1229); Memorandum of
Understanding effective May 22, 1994 (Exhibit 10(e)
to 1994 Form 10-K, File No. 0-1229); Amendment of
Service Agreement effective January 1, 1995
(Exhibit 10(f) to 1995 Form 10-K, File No. 0-1229);
Amendment of Service Agreement effective October
30, 1995 (filed herewith); Amendment to Service
Agreement dated as of February 1, 1997 (filed
herewith).
(g) New England Electric Transmission Corporation et
al. and the Company: Phase I Terminal Facility
Support Agreement dated as of December 1, 1981
(Exhibit 10(g) to NEES' 1981 Form 10-K, File No.
1-3446); Amendments dated as of June 1, 1982 and
November 1, 1982 (Exhibit 10(f) to NEES' 1982 Form
10-K, File No. 1-3446); Agreement with respect to
Use of the Quebec Interconnection dated as of
<PAGE>
December 1, 1981 (Exhibit 10(g) to NEES' 1981 Form
10-K, File No. 1-3446); Amendments dated as of May
1, 1982 and November 1, 1982 (Exhibit 10(f) to
NEES' 1982 Form 10-K, File No. 1-3446); Amendment
dated as of January 1, 1986 (Exhibit 10(f) to NEES'
1986 Form 10-K, File No. 1-3446); Agreement for
Reinforcement and Improvement of the Company's
Transmission System dated as of April 1, 1983
(Exhibit 10(f) to NEES' 1983 Form 10-K, File No.
1-3446); Lease dated as of May 16, 1983 (Exhibit
10(f) to NEES' 1983 Form 10-K, File No. 1-3446);
Upper Development-Lower Development Transmission
Line Support Agreement dated as of May 16, 1983
(Exhibit 10(f) to NEES' 1983 Form 10-K, File No.
1-3446).
(h) Vermont Electric Transmission Company, Inc. et al.
and the Company: Phase I Vermont Transmission Line
Support Agreement dated as of December 1, 1981;
Amendments dated as of June 1, 1982 and November 1,
1982 (Exhibit 10(g) to NEES' 1982 Form 10-K, File
No. 1-3446); Amendment dated as of January 1, 1986
(Exhibit 10(h) to NEES' 1986 Form 10-K, File No.
1-3446).
(i) New England Energy Incorporated and the Company:
Fuel Purchase Contract dated July 26, 1979, and
Amendment dated August 26, 1981 (Exhibit 10(f)(iii)
to NEES' 1981 Form 10-K, File No. 1-3446);
Amendment dated March 26, 1985, and Amendment
effective January 1, 1984 (Exhibit 10(e)(iii) to
NEES' 1985 Form 10-K, File No. 1-3446); Amendment
dated as of April 28, 1989 (Exhibit 10(e)(iii) to
1989 NEES Form 10-K, File No. 1-3446).
(j) New England Power Pool Agreement: (Exhibit 4(e),
File No. 2-43025); Amendments dated July 1, 1972,
March 1, 1973 (Exhibit 10-15, File No.
2-48543);Amendment dated March 15, 1974 (Exhibit
10-5, File No. 2-52775); Amendment dated June 1,
1975 (Exhibit 10-14, File No. 2-57831); Amendment
dated September 1, 1975 (Exhibit 10-13, File No.
2-59182); Amendments dated December 31, 1976,
January 31, 1977, July 1, 1977, and August 1, 1977
(Exhibit 10-16, File No. 2-61881); Amendments dated
August 15, 1978, January 3, 1980, and February 1980
(Exhibit 10-3, File No. 2-68283); Amendment dated
September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form
10-K, File No. 1-3446); Amendment dated December 1,
1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File
No. 1-3446); Amendments dated June 1, 1982,
June 15, 1983, and October 1, 1983 (Exhibit 10(i)
to NEES' 1983 Form 10-K, File 1-3446); Amendments
dated August 1, 1985, August 15, 1985, September 1,
1985, and January 1, 1986 (Exhibit 10(i) to NEES'
1985 Form 10-K, File No. 1-3446); Amendment dated
September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form
<PAGE>
10-K, File No. 1-3446); Amendment dated April 30,
1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File
No. 1-3446); Amendments dated March 1, 1988 and May
1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K,
File No. 1-3446); Amendment dated March 15, 1989
(Exhibit 10(i) to 1989 NEES Form 10-K, File No.
1-3446); Amendment dated October 1, 1990 (Exhibit
10(i) to 1990 NEES Form 10-K, File No. 1-3446);
Amendment dated October 1, 1990 Exhibit 10(i) to
1990 NEES Form 10-K, File No. 1-3446); Amendment
dated as of September 15, 1992 (Exhibit 10(i) to
1992 NEES Form 10-K, File No. 1-3446); Amendments
dated as of June 1, 1993, July 1, 1995, and
September 1, 1995 (Exhibit 10(i) to 1995 NEES Form
10-K, File No. 1-3446); Amendment dated as of
December 1, 1996 (Exhibit 10(i) to 1996 NEES Form
10-K, File No. 1-3446). Amendment dated as of
September 1, 1997 and Amendment dated as of
November 15, 1997 (Exhibit 10(i) to 1997 NEES Form
10-K, File No. 1-3446).
(k) New England Power Service Company and the Company:
Specimen of Service Contract (Exhibit 10(l) to 1994
Form 10-K, File No. 0-1229).
(l) Massachusetts Electric Company, et al. and the
Company: Form of Mutual Assistance Agreement
(Exhibit 10(n) to 1996 Form 10-K, File No. 0-1229).
(m) Massachusetts Electric Company, et al. and the
Company: Restructuring Settlement Agreement
approved by the Massachusetts Department of Public
Utilities (Exhibit 10(o) to 1996 Form 10-K, File
No. 0-1229).
(n) Public Service Company of New Hampshire et al. and
the Company: Agreement for Joint Ownership,
Construction and Operation of New Hampshire Nuclear
Units dated as of May 1, 1973; Amendments dated May
24, 1974, June 21, 1974, September 25, 1974 and
October 25, 1974 (Exhibit 10-18(b), File No.
2-52820); Amendment dated January 31, 1975 (Exhibit
10-16(b), File No. 2-57831); Amendments dated April
18, 1979, April 25, 1979, June 8, 1979, October 11,
1979, December 15, 1979, June 16, 1980, and
December 31, 1980 (Exhibit 10(i) to NEES' 1980 Form
10-K, File No. 1-3446); Amendments dated June 1,
1982, April 27, 1984, and June 15, 1984 (Exhibit
10(j) to NEES' 1984 Form 10-K, File No. 1-3446);
Amendments dated March 8, 1985, March 14, 1986,
May 1, 1986, and September 19, 1986 (Exhibit 10(j)
to NEES' 1986 Form 10-K, File No. 1-3446);
Amendment dated November 12, 1987 (Exhibit 10(j) to
NEES' 1987 Form 10-K, File No. 1-3446); Amendment
dated January 13, 1989 (Exhibit 10(j) to NEES' 1990
Form 10-K, File No. 1-3446); Seventh Amendment as
of November 1, 1990 (Exhibit 10(m) to NEES' 1991
Form 10-K, File No. 1-3446). Transmission Support
<PAGE>
Agreement dated as of May 1, 1973 (Exhibit 10-23,
File No. 2-49184); Instrument of Transfer to the
Company with respect to the New Hampshire Nuclear
Units and Assumptions of Obligations dated December
17, 1975 and Agreement Among Participants in New
Hampshire Nuclear Units, certain Massachusetts
Municipal Systems and Massachusetts Municipal
Wholesale Electric Company dated May 28, 1976
(Exhibit 16(c), File No. 2-57831); Seventh
Amendment To and Restated Agreement for Seabrook
Project Disbursing Agent dated as of November 1,
1990 (Exhibit 10(m) to NEES' 1991 Form 10-K, File
No. 1-3446); Amendments dated as of June 29, 1992
(Exhibit 10(j) to NEES' 1992 Form 10-K, File No. 1-
3446). Settlement Agreement dated as of July 19,
1990 between Northeast Utilities Service Company
and the Company (Exhibit 10(m) to NEES' 1991 Form
10-K, File No. 1-3446). Seabrook Project Managing
Agent Operating Agreement dated as of June 29,
1992, Amendment to Seabrook Project Managing Agent
Operating Agreement dated as of June 29, 1992
(Exhibit 10(j) to NEES' 1992 Form 10-K, File No. 1-
3446).
(o) Vermont Yankee Nuclear Power Corporation et al. and
the Company: Capital Funds Agreement dated
February 1, 1968, Amendment dated March 12, 1968
and Power Purchase Contract dated February 1, 1968
(Exhibit 4-6, File No. 2-29145); Amendments dated
as of June 1, 1972, April 15, 1983 (Exhibit 10(k)
to NEES' 1983 Form 10-K, File No. 0-1229) and
April 24, 1985 (Exhibit 10(n) to NEES' 1985 Form
10-K, File No. 1-3446); Amendment dated as of
June 1, 1985 (Exhibit 10(n) to 1988 Form 10-K, File
No. 0-1229); Amendments dated May 6, 1988 (Exhibit
10(n) to 1988 Form 10-K, File No. 0-1229);
Amendment dated as of June 15, 1989 (Exhibit 10(k)
to 1989 NEES Form 10-K, File No. 1-3446);
Additional Power Contract dated as of February 1,
1984 (Exhibit 10(k) to NEES' 1983 Form 10-K, File
No. 1-3446); Guarantee Agreement dated as of
November 5, 1981 (Exhibit 10(j) to NEES' 1981 Form
10-K, File No. 1-3446).
(p) Yankee Atomic Electric Company et al. and the
Company: Amended and Restated Power Contract dated
April 1, 1985 (Exhibit 10(l) to NEES' 1985 Form
10-K, File No. 1-3446); Amendment dated May 6, 1988
(Exhibit 10(l) to NEES' 1988 Form 10-K, File No.
1-3446); Amendments dated as of June 26, 1989 and
July 1, 1989 (Exhibit 10(l) to 1989 NEES Form 10-K,
File No. 1-3446); Amendment dated as of February 1,
1992 (Exhibit 10(l) to 1992 NEES Form 10-K, File
No. 1-3446).
<PAGE>
*(q) New England Electric Companies' Deferred
Compensation Plan as amended through November 26,
1996 (Exhibit 10(m) to NEES' 1996 Form 10-K, File
No. 1-3446).
*(r) New England Electric System Companies Retirement
Supplement Plan as amended through June 1, 1996
(Exhibit 10(n) to NEES' 1996 Form 10-K, File No.
1-3446).
*(s) New England Electric Companies' Executive
Supplemental Retirement Plan I as amended through
May 20, 1996 (Exhibit 10(o) to NEES' 1996 Form
10-K, File No. 1-3446).
*(t) New England Electric Companies Executive
Supplemental Retirement Plan II as amended through
October 25, 1995 (Exhibit 10(p) to NEES' 1996 Form
10-K, File No. 1-3446).
*(u) New England Electric Companies' Incentive
Compensation Plan I as amended through October 24,
1995 (Exhibit 10(p) to NEES' 1996 Form 10-K, File
No. 1-3446).
*(v) New England Electric Companies' Incentive
Compensation Plan II as amended through January 1,
1995 (Exhibit 10(r) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(w) New England Electric Companies' Incentive
Compensation Plan III as amended through January 1,
1996 (Exhibit 10(s) to NEES' 1996 Form 10-K, File
No. 1-3446).
*(x) New England Electric Companies' Senior Incentive
Compensation Plan as amended through January 1,
1995 (Exhibit 10(q) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(y) Forms of Life Insurance Program: (Exhibit 10(s) to
NEES' 1986 Form 10-K, File No. 1-3446); and Form of
Life Insurance (Collateral Assignment) (Exhibit
10(t) to NEES' 1991 Form 10-K, File No. 1-3446).
*(z) New England Electric Companies' Incentive Share
Plan as amended through February 24, 1997 (Exhibit
10 (w) to NEES 1996 Form 10-K, File No. 1-3446).
*(aa) New England Electric System Directors' Retirement
Plan dated May 1, 1994 (Exhibit 10(y) to 1996 NEES
Form 10-K, File No. 1-3446.
*(bb) Forms of Severance Protection Agreement (Exhibit 10
(z) to NEES' 1996 Form 10-K, File No. 1-3446).
<PAGE>
*(cc) New England Electric Companies' Long-Term
Performance Share Award Plan amended through
February 24, 1997 (Exhibit 10(x) to NEES' 1996 Form
10-K, File No. 1-3446).
(dd) New England Hydro-Transmission Electric Company,
Inc. et al. and the Company: Phase II
Massachusetts Transmission Facilities Support
Agreement dated as of June 1, 1985 (Exhibit 10(t)
to NEES' 1986 Form 10-K, File No. 1-3446);
Amendment dated as of May 1, 1986 (Exhibit 10(t) to
NEES' 1986 Form 10-K, File No. 1-3446); Amendments
dated as of February 1, 1987, June 1, 1987,
September 1, 1987, and October 1, 1987 (Exhibit
10(u) to NEES' 1987 Form 10-K, File No. 1-3446);
Amendment dated as of August 1, 1988 (Exhibit 10(u)
to NEES' 1988 Form 10-K, File No. 1-3446);
Amendment dated January 1, 1989 (Exhibit 10(u) to
NEES' 1990 Form 10-K, File No. 1-3446).
(ee) New England Hydro-Transmission Corporation et al.
and the Company: Phase II New Hampshire
Transmission Facilities Support Agreement dated as
of June 1, 1985 (Exhibit 10(u) to NEES' 1986 Form
10-K, File No. 1-3446); Amendment dated as of
May 1, 1986 (Exhibit 10(u) to NEES' 1986 Form 10-K,
File No. 1-3446); Amendments dated as of February
1, 1987, June 1, 1987, September 1, 1987, and
October 1, 1987 (Exhibit 10(v) to NEES' 1987 Form
10-K, File No. 1-3446). Amendment dated as of
August 1, 1988 (Exhibit 10(v) to NEES' 1988 Form
10-K, File No. 1-3446); Amendments dated January 1,
1989 and January 1, 1990 (Exhibit 10 (v) to NEES'
1990 Form 10-K, File No. 1-3446).
(ff) Vermont Electric Power Company et al. and the
Company: Phase II New England Power AC Facilities
Support Agreement dated as of June 1, 1985 (Exhibit
10(v) to NEES' 1986 Form 10-K, File No. 1-3446);
Amendment dated as of May 1, 1986 (Exhibit 10(v) to
NEES' 1986 Form 10-K, File No. 1-3446). Amendments
dated as of February 1, 1987, June 1, 1987, and
September 1, 1987 (Exhibit 10(w) to NEES' 1987 Form
10-K, File No. 1-3446); Amendment dated as of
August 1, 1988 (Exhibit 10(w) to NEES' 1988 Form
10-K, File No. 1-3446).
(gg) USGen New England Contracts
(i) Asset Purchase Agreement between the Company
and The Narragansett Electric Company: dated
as of August 5, 1997 (Exhibit 2 to NEES' Form
10-Q for period ended September 30, 1997,
File No. 1-3446).
<PAGE>
(ii) Wholesale Sales Agreement between the Company
and USGen New England, Inc. dated as of
August 5, 1997 (filed herewith).
(iii) PPA Transfer Agreement between the Company
and USGen New England, Inc. dated as of
August 5, 1997 (filed herewith).
(iv) Form of PSA Performance Support Agreement
between the Company, USGen New England, Inc.,
and each of the following; North Attleboro
Electric Department, Groton Electric Light
Department, Middleton Municipal Electric
Department, Hingham Municipal Lighting Plant,
Town of Holden Municipal Light Department,
Unitil Power Corp. (Salem Harbor), Unitil
Power Corp. (Ocean State), Bangor Hydro-
Electric Company, Montaup Electric Company,
Central Vermont Public Service Corporation,
Braintree Electric Light Department,
Littleton Electric Light Department,
Massachusetts Government Land Bank, Reading
(MA) Municipal Light Department, Shrewsbury
Electric Light Plant, Taunton Municipal Light
Plant, and Vermont Electric Company, dated as
of August 5, 1997 (filed herewith).
*(hh) New England Power Company and Andrew H. Aitken:
Employment Agreement entered into as of December 9,
1997 (filed herewith).
* Compensation related plan, contract, or arrangement.
(13) 1997 Annual Report to Stockholders (filed herewith).
(21) Subsidiary list (filed herewith).
(24) Power of Attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
Mass. Electric
--------------
(3) (a) Articles of Organization of the Company as amended
March 5, 1993, August 11, 1993, September 20, 1993,
and November 15, 1993 (Exhibit 3(a) to 1993 Form
10-K, File No. 0-5464).
(b) By-Laws of the Company as amended December 12, 1997
(filed herewith).
(4) First Mortgage Indenture and Deed of Trust, dated as of
July 1, 1949, and twenty-one supplements thereto (Exhibit
7-A, File No. 1-8019; Exhibit 7-B, File No. 2-8836;
<PAGE>
Exhibit 4-C, File No. 2-9593; Exhibit 4 to 1980 Form 10-K,
File No. 2-8019; Exhibit 4 to 1982 Form 10-K, File No.
0-5464; Exhibit 4 to 1986 Form 10-K, File No. 0-5464);
Exhibit 4 to 1988 Form 10-K, File No. 0-5464; Exhibit 4(a)
to 1989 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to
1992 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1993
NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1995 NEES
Form 10-K, File No. 1-3446).
(10) Material Contracts
(a) Boston Edison Company et al. and Company: Amended
REMVEC Agreement dated August 12, 1977 (Exhibit
5-4(d), File No. 2-61881).
(i) Boston Edison Company et al. and Company:
REMVEC II Agreement dated on or about July 1,
1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10-
K, File No. 1-3446).
(ii) Boston Edison Company et al. and Company:
Security Analysis Services Agreement dated on
or about July 1, 1997 (Exhibit 10(a)(ii) to
NEES' 1997 Form 10- K, File No. 1-3446).
(b) New England Power Company and the Company: Primary
Service for Resale dated February 15, 1974 (Exhibit
5-17(a), File No. 2-52969); Amendment of Service
Agreement dated July 22, 1983 (Exhibit 10(b) to
1986 Form 10-K, File No. 0-5464); Amendment of
Service Agreement effective November 1, 1993
(Exhibit 10(e) to 1993 NEP Form 10-K, File No. 0-
1229); Memorandum of Understanding effective May
22, 1994 (Exhibit 10(e) to 1994 NEP Form 10-K, File
No. 0-1229); Amendment of Service Agreement
effective July 1, 1996 (Exhibit 10(e) to 1997 NEP
Form 10-K, File No. 0-1229); Amendment to Service
Agreement dated as of February 1, 1997 (Exhibit
10(e) to 1997 NEP Form 10-K, File No. 0-1229).
(c) New England Power Pool Agreement: (Exhibit 4(e),
File No. 2-43025); Amendments dated July 1, 1972,
and March 1, 1973 (Exhibit 10-15, File No.
2-48543); Amendment dated March 15, 1974 (Exhibit
10-5, File No. 2-52775); Amendment dated June 1,
1975 (Exhibit 10-14, File No. 2-57831); Amendment
dated September 1, 1975 (Exhibit 10-13, File No.
2-59182); Amendments dated December 31, 1976,
January 31, 1977, July 1, 1977, and August 1, 1977
(Exhibit 10-16, File No. 2-61881); Amendments dated
August 15, 1978, January 3, 1980, and February 1980
(Exhibit 10-3, File No. 2-68283); Amendment dated
September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form
10-K, File No. 1-3446); Amendment dated as of
December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form
10-K, File No. 1-3446); Amendments dated June 1,
1982, June 15, 1983, and October 1, 1983 (Exhibit
10(i) to NEES' 1983 Form 10-K, File No. 1-3446);
Amendments dated August 1, 1985, August 15, 1985,
September 1, 1985, and January 1, 1986 (Exhibit
<PAGE>
10(i) to NEES' 1985 Form 10-K, File No. 1-3446);
Amendment dated September 1, 1986 (Exhibit 10(i) to
NEES' 1986 Form 10-K, File No. 1-3446); Amendments
dated April 30, 1987 (Exhibit 10(i) to NEES' 1987
Form 10-K, File No. 1-3446); Amendments dated
March 1, 1988 and May 1, 1988 (Exhibit 10(i) to
NEES' 1988 Form 10-K, File No. 1-3446); Amendment
dated March 15, 1989 (Exhibit 10(i) to 1989 NEES
Form 10-K, File No. 1-3446). Amendment dated
October 1, 1990 (Exhibit 10(i) to 1990 NEES Form
10-K, File No. 1-3446); Amendment dated as of
September 15, 1992 (Exhibit 10(i) to 1992 NEES Form
10-K, File No. 1-3446). Amendments dated as of
June 1, 1993, July 1, 1995, and September 1, 1995
(Exhibit 10(i) to 1995 NEES Form 10-K, File No. 1-
3446); Amendment dated as of December 1, 1996
(Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1-
3446); Amendment dated as of November 28, 1997
(Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-
3446); Amendment dated as of September 1, 1997 and
Amendment dated as of November 15, 1997 (Exhibit
10(i) to 1997 NEES Form 10-K, File No. 1-3446).
(d) New England Power Service Company and the Company:
Specimen of Service Contract (Exhibit 10(l) to 1994
NEP Form 10-K, File No. 0-1229).
(e) New England Power Company et al. and the Company:
Form of Mutual Assistance Agreement (Exhibit 10(n)
to 1996 NEP Form 10-K, File No. 0-1229).
(f) New England Power Company et al. and the Company:
Restructuring Settlement Agreement approved by the
Massachusetts Department of Public Utilities
February 26, 1997 (Exhibit 10(o) to 1996 Form 10-K,
File No. 0-1229).
(g) New England Telephone and Telegraph Company and the
Company: Specimen of Joint Ownership Agreement for
Wood Poles (Exhibit 4(e), File No. 2-24458).
*(h) New England Electric Companies' Deferred
Compensation Plan as amended through November 26,
1996 (Exhibit 10(m) to NEES' 1996 Form 10-K, File
No. 1-3446).
*(i) New England Electric System Companies Retirement
Supplement Plan as amended through June 1, 1996
(Exhibit 10(n) to NEES' 1996 Form 10-K, File No.
1-3446).
*(j) New England Electric Companies' Executive
Supplemental Retirement Plan I as amended through
May 20, 1996 (Exhibit 10(o) to NEES' 1996 Form
10-K, File No. 1-3446).
<PAGE>
*(k) New England Electric Companies' Executive
Supplemental Retirement Plan II as amended through
October 25, 1995 (Exhibit 10(p) to NEES' 1996 Form
10-K, File No. 1-3446).
*(l) New England Electric Companies' Incentive
Compensation Plan as amended through January 1,
1995 (Exhibit 10(p) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(m) New England Electric Companies' Incentive
Compensation Plan II as amended through January 1,
1995 (Exhibit 10(r) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(n) New England Electric Companies' Incentive
Compensation Plan III as amended through January 1,
1996 (Exhibit 10(s) to NEES' 1996 Form 10-K, File
No. 1-3446).
*(o) New England Electric Companies' Form of Deferred
Compensation Agreement for Directors (Exhibit 10(p)
to NEES' 1980 Form 10-K, File No. 1-3446).
*(p) New England Electric Companies' Senior Incentive
Compensation Plan as amended through January 1,
1995 (Exhibit 10(q) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(q) Forms of Life Insurance Program: (Exhibit 10(s) to
NEES' 1986 Form 10-K, File No. 1-3446); and Form of
Life Insurance (Collateral Assignment) (Exhibit
10(t) to NEES' 1991 Form 10-K, File No. 1-3446).
*(r) New England Electric Companies' Incentive Share
Plan as amended through February 24, 1997 (Exhibit
10(w) to NEES' 1996 Form 10-K, File No. 1-3446).
*(s) New England Electric Companies' Long-Term
Performance Share Award Plan amended through
February 24, 1997 (Exhibit 10 (x) to NEES' 1996
Form 10-K, File No. 1-3446).
*(t) New England Electric System Directors' Retirement
Plan dated May 1, 1994 (Exhibit 10(y) to NEES' 1996
Form 10-K, File No. 1-3446.
*(u) Forms of Severance Protection Agreement (Exhibit 10
(z) to NEES' 1996 Form 10-K, File No. 1-3446).
*(v) New England Power Service Company and the Company:
Form of Supplemental Pension Service Credit
Agreement (Exhibit 10(ee) to 1992 NEES Form 10-K,
File No. 1-3446).
<PAGE>
(w) Amended and Restated Wholesale Standard Offer
Service Agreement among the Company, Nantucket
Electric Company, and USGen New England, Inc. dated
as of October 29, 1997 (filed herewith).
* Compensation related plan, contract, or arrangement.
(12) Statement re computation of ratios for incorporation by
reference into the Mass. Electric registration statement
on Form S-3, Commission File No. 333-46431 (filed
herewith).
(13) 1997 Annual Report to Stockholders (filed herewith).
(24) Power of Attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
Narragansett
------------
(3) (a) Articles of Incorporation as amended June 9, 1988
(Exhibit 3(a) to 1988 Form 10-K, File No. 0-898).
(b) By-Laws of the Company (Exhibit 3 to 1980 Form
10-K, File No. 0-898).
(4) (a) First Mortgage Indenture and Deed of Trust, dated
as of September 1, 1944, and twenty-two supplements
thereto (Exhibit 7-1, File No. 2-7042; Exhibit 7-B,
File No. 2-7490; Exhibit 4-C, File No. 2-9423;
Exhibit 4-D, File No. 2-10056; Exhibit 4 to 1980
Form 10-K, File No. 0-898; Exhibit 4 to 1982 Form
10-K, File No. 0-898; Exhibit 4 to 1983 Form 10-K,
File No. 0-898; Exhibit 4 to 1985 Form 10-K, File
No. 0-898; Exhibit 4 to 1986 Form 10-K, File No.
0-898; Exhibit 4 to 1987 Form 10-K, File No. 0-898;
Exhibit 4(b) to 1991 NEES Form 10-K, File No.
1-3446; Exhibit 4(b) to 1992 NEES Form 10-K, File
No. 1-3446; Exhibit 4(b) to 1993 NEES Form 10-K,
File No. 1-3446; Exhibit 4(b) to 1995 NEES Form 10-
K, File No. 1-3446).
(b) The Narragansett Electric Company Preference
Provisions, as amended, dated December 15, 1997
(Exhibit 4(c) to 1997 NEES Form 10-K, File No. 1-
3446).
(10) Material Contracts
(a) Boston Edison Company et al. and the Company:
Amended REMVEC Agreement dated August 12, 1977
(Exhibit 5-4(d), File No. 2-61881).
<PAGE>
(i) Boston Edison Company et al. and the Company:
REMVEC II Agreement dated on or about July 1,
1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10-
K, File No. 1-3446).
(ii) Boston Edison Company et al. and the Company:
Security Analysis Services Agreement dated on
or about July 1, 1997 (Exhibit 10(a)(ii) to
NEES' 1997 Form 10-K, File No. 1-3446).
(b) New England Power Company and the Company: Primary
Service for Resale dated February 15, 1974 (Exhibit
4-1(b), File No. 2-51292); Amendment of Service
Agreement dated July 26, 1990 (Exhibit 10(f) to
1990 NEP Form 10-K, File No. 0-1229); Amendment of
Service Agreement dated July 24, 1991 (Exhibit 4(f)
to 1991 NEP Form 10-K, File No. 0-1229); Amendment
of Service Agreement effective November 1, 1993
(Exhibit 10(f) to 1993 NEP Form 10-K, File No. 0-
1229); Memorandum of Understanding effective May
22, 1994 (Exhibit 10(f) to 1994 NEP Form 10-K, File
No. 0-1229); Amendment of Service Agreement
effective January 1, 1995 (Exhibit 10(f) to 1995
NEP Form 10-K, File No. 0-1229); Amendment of
Service Agreement effective October 30, 1995,
Amendment of Service Agreement dated as of February
1, 1997 (Exhibit 10(f) to 1997 NEP Form 10-K, File
No. 0-1229).
(c) New England Power Pool Agreement: (Exhibit 4(e),
File No. 2-43025); Amendments dated July 1, 1972,
and March 1, 1973 (Exhibit 10-15, File No.
2-48543); Amendment dated March 15, 1974 (Exhibit
10-5, File No. 2-52775); Amendment dated June 1,
1975 (Exhibit 10-14, File No. 2-57831); Amendment
dated September 1, 1975 (Exhibit 10-13, File No.
2-59182); Amendments dated December 31, 1976,
January 31, 1977, July 1, 1977, and August 1, 1977
(Exhibit 10-16, File No. 2-61881); Amendments dated
August 15, 1978, January 3, 1980, and February 1980
(Exhibit 10-3, File No. 2-68283); Amendment dated
September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form
10-K, File No. 1-3446); Amendment dated December 1,
1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File
No. 1-3446); Amendments dated June 1, 1982,
June 15, 1983, and October 1, 1983 (Exhibit 10(i)
to NEES' 1983 Form 10-K, File No. 1-3446);
Amendments dated August 1, 1985, August 15, 1985,
September 1, 1985, and January 1, 1986 (Exhibit 10
(i) to NEES' 1985 Form 10-K, File No. 1-3446);
Amendment dated September 1, 1986 (Exhibit 10(i) to
NEES' 1986 Form 10-K, File No. 1-3446); Amendment
dated April 30, 1987 (Exhibit 10(i) to NEES' 1987
Form 10-K, File No. 1-3446); Amendments dated March
1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES'
1988 Form 10-K, File No. 1-3446); Amendment dated
<PAGE>
March 15, 1989 (Exhibit 10(i) to 1989 NEES Form
10-K, File No. 1-3446). Amendment dated October 1,
1990 (Exhibit 10(i) to 1990 NEES' Form 10-K, File
No. 1-3446); Amendment dated as of September 15,
1992 (Exhibit 10(i) to NEES' 1992 Form 10-K, File
No. 1-3446); Amendments dated as of June 1, 1993,
July 1, 1995, and September 1, 1995 (Exhibit 10(i)
to NEES' 1995 Form 10-K, File No. 1-3446);
Amendment dated as of December 1, 1996 (Exhibit
10(i) to 1996 NEES Form 10-K, File No. 1-3446);
Amendment dated as of September 1, 1997 and
Amendment dated as of November 15, 1997 (Exhibit
10(i) to 1997 NEES Form 10-K, File No. 1-3446).
(d) New England Power Service Company and the Company:
Specimen of Service Contract (Exhibit 4(l) to 1994
NEP Form 10-K, File No. 0-1229).
(e) New England Power Company et al. and the Company:
Form of Mutual Assistance Agreement (Exhibit 10 (n)
to 1996 Form 10-K, File No. 0-1229).
(f) New England Telephone and Telegraph Company and the
Company: Specimen of Joint Ownership Agreement for
Wood Poles (Exhibit 3(d), File No. 2-24458).
*(g) New England Electric Companies' Deferred
Compensation Plan, as amended through November 26,
1996 (Exhibit 10(m) to NEES' 1996 Form 10-K, File
No. 1-3446).
*(h) New England Electric System Companies Retirement
Supplement Plan, as amended through June 1, 1996
(Exhibit 10(n) to NEES' 1996 Form 10-K, File No.
1-3446).
*(i) New England Electric Companies' Executive
Supplemental Retirement Plan I, as amended through
May 20, 1996 (Exhibit 10(o) to NEES' 1996
Form 10-K, File No. 1-3446).
*(j) New England Electric Companies' Executive
Supplemental Retirement Plan II, as amended through
October 25, 1995 (Exhibit 10(p) to NEES' 1996
Form 10-K, File No. 1-3446).
*(k) New England Companies' Incentive Compensation Plan,
as amended through January 1, 1995 (Exhibit 10(p)
to NEES' 1995 Form 10-K, File No. 1-3446).
*(l) New England Electric Companies' Incentive
Compensation Plan II as amended through January 1,
1995 (Exhibit 10(r) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(m) New England Electric Companies' Incentive
Compensation Plan III as amended through January 1,
1996 (Exhibit 10(s) to NEES' 1996 Form 10-K, File
No. 1-3446).
<PAGE>
*(n) New England Electric Companies' Form of Deferred
Compensation Agreement for Directors (Exhibit 10(p)
to NEES' 1980 Form 10-K, File No. 1-3446).
*(o) New England Electric Companies' Senior Incentive
Compensation Plan as amended through January 1,
1995 (Exhibit 10(q) to NEES' 1995 Form 10-K, File
No. 1-3446).
*(p) Forms of Life Insurance Program (Exhibit 10(s) to
NEES' 1986 Form 10-K, File No. 1-3446); and Form of
Life Insurance (Collateral Assignment) (Exhibit
10(t) to NEES' 1991 Form 10-K, File No. 1-3446).
*(q) New England Electric Companies' Incentive Share
Plan as amended through February 24, 1997 (Exhibit
10(u) to NEES' 1995 Form 10-K, File No. 1-3446).
*(r) New England Power Service Company and the Company:
Form of Supplemental Pension Service Credit
Agreement (Exhibit 10(ee) to 1992 NEES Form 10-K,
File No. 1-3446).
*(s) New England Electric Companies Long-Term
Performance Share Award Plan amended through
February 24, 1997 (Exhibit 10 (x) to NEES' 1996
Form 10-K, File No. 1-3446).
*(t) New England Electric System Directors' Retirement
Plan dated May 1, 1994 (Exhibit 10 (y) to NEES 1996
Form 10-K, File No. 1-3446).
*(u) Forms of Severance Protection Agreement (Exhibit
10(z) to NEES' 1996 Form 10-K, File No. 1-3446).
(v) USGen New England, Inc. Contracts
(i) Asset Purchase Agreement between the Company
and New England Power Company dated as of
August 5, 1997 (Exhibit 2 to NEES' Form 10-Q
for the period ended September 30, 1997, File
No. 1-3446).
(ii) Amended and Restated Wholesale Standard Offer
Service Agreement between the Company and
USGen New England, Inc. dated as of October
29, 1997 (filed herewith).
* Compensation related plan, contract, or arrangement.
(12) Statement re computation of ratios for incorporation by
reference into the Narragansett registration statement on
Form S-3, Commission File No. 33-61131 (filed herewith).
(13) 1997 Annual Report to Stockholders (filed herewith).
<PAGE>
(24) Power of Attorney (filed herewith).
(27) Financial Data Schedule (filed herewith).
Reports on Form 8-K
NEES
----
NEES filed reports on Form 8-K dated November 21, 1997,
December 3, 1997, December 12, 1997, and December 23, 1997, all of
which contained ITEM 5.
NEP
---
NEP filed reports on Form 8-K dated November 21, 1997, December
12, 1997, and December 23, 1997, all of which contained ITEM 5.
Mass. Electric
--------------
Mass. Electric filed reports on Form 8-K dated November 25,
1997, December 12, 1997, and December 23, 1997, all of which
contained ITEM 5.
Narragansett
------------
Narragansett filed reports on Form 8-K dated November 25, 1997
and December 12, 1997, both of which contained ITEM 5.
<PAGE>
NEW ENGLAND ELECTRIC SYSTEM
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf, by the undersigned thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM*
s/Richard P. Sergel
Richard P. Sergel
President and
Chief Executive Officer
March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(Signature and Title)
Principal Executive Officer
s/Richard P. Sergel
Richard P. Sergel
President and
Chief Executive Officer
Principal Financial Officer
s/Michael E. Jesanis
Michael E. Jesanis
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer
s/John G. Cochrane
John G. Cochrane
Treasurer
Directors (a majority)
Joan T. Bok
William M. Bulger
Alfred D. Houston
Paul L. Joskow
John M. Kucharski
Edward H. Ladd
Joshua A. McClure
George M. Sage s/John G. Cochrane
Richard P. Sergel All by:
Charles E. Soule John G. Cochrane
Anne Wexler Attorney-in-fact
James Q. Wilson
James R. Winoker
Date (as to all signatures on this page)
March 31, 1998
*The name "New England Electric System" means the trustee or trustees for the
time being (as trustee or trustees but not personally) under an agreement and
declaration of trust dated January 2, 1926, as amended, which is hereby
referred to, and a copy of which as amended has been filed with the Secretary
of the Commonwealth of Massachusetts. Any agreement, obligation or liability
made, entered into or incurred by or on behalf of New England Electric System
binds only its trust estate, and no shareholder, director, trustee, officer
or agent thereof assumes or shall be held to any liability therefor.
<PAGE>
NEW ENGLAND POWER COMPANY
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. The signature
of the undersigned company shall be deemed to relate only to matters having
reference to such company.
NEW ENGLAND POWER COMPANY
s/Lawrence E. Bailey
Lawrence E. Bailey
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated. The signature of
each of the undersigned shall be deemed to relate only to matters having
reference to the above-named company.
(Signature and Title)
Principal Executive Officer
s/Lawrence E. Bailey
Lawrence E. Bailey
President
Principal Financial Officer
s/John G. Cochrane
John G. Cochrane
Treasurer
Principal Accounting Officer
s/Howard W. McDowell
Howard W. McDowell
Controller
Directors (a majority)
Lawrence E. Bailey
Alfred D. Houston
Cheryl A. LaFleur s/John G. Cochrane
All by:
John G. Cochrane
Attorney-in-fact
Date (as to all signatures on this page)
March 31, 1998
<PAGE>
MASSACHUSETTS ELECTRIC COMPANY
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. The signature
of the undersigned company shall be deemed to relate only to matters having
reference to such company.
MASSACHUSETTS ELECTRIC COMPANY
s/Lawrence J. Reilly
Lawrence J. Reilly
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated. The signature of
each of the undersigned shall be deemed to relate only to matters having
reference to the above-named company.
(Signature and Title)
Principal Executive Officer
s/Lawrence J. Reilly
Lawrence J. Reilly
President
Principal Financial Officer
s/John G. Cochrane
John G. Cochrane
Treasurer
Principal Accounting Officer
s/Howard W. McDowell
Howard W. McDowell
Controller
Directors (a majority)
Cheryl A. LaFleur
Robert L. McCabe
Lydia M. Pastuszek
Lawrence J. Reilly
Christopher E. Root s/John G. Cochrane
Richard P. Sergel All by:
Dennis E. Snay John G. Cochrane
Attorney-in-fact
Date (as to all signatures on this page)
March 31, 1998
<PAGE>
THE NARRAGANSETT ELECTRIC COMPANY
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. The signature
of the undersigned company shall be deemed to relate only to matters having
reference to such company.
THE NARRAGANSETT ELECTRIC COMPANY
s/Lawrence J. Reilly
Lawrence J. Reilly
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated. The signature of
each of the undersigned shall be deemed to relate only to matters having
reference to the above-named company.
(Signature and Title)
Principal Executive Officer
s/Lawrence J. Reilly
Lawrence J. Reilly
President
Principal Financial Officer
s/John G. Cochrane
John G. Cochrane
Treasurer
Principal Accounting Officer
s/Howard W. McDowell
Howard W. McDowell
Controller
Directors (a majority)
s/John G. Cochrane
Cheryl A. LaFleur All by:
Robert L. McCabe John G. Cochrane
Lawrence J. Reilly Attorney-in-fact
Michael F. Ryan
Richard P. Sergel
Ronald L. Thomas
Date (as to all signatures on this page)
March 31, 1998
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
References (Page)
-----------------------
1997 Annual
Form Report to
10-K Shareholders*
---- -------------
<S> <C> <C>
Report of Independent Accountants........................... 45
Statements of Consolidated Income,
Year Ended December 31, 1997, 1996 and 1995............. 23
Statements of Consolidated Retained Earnings,
Year Ended December 31, 1997, 1996 and 1995............. 23
Consolidated Balance Sheets, December 31, 1997 and 1996... 24
Consolidated Statements of Cash Flows,
Year Ended December 31, 1997, 1996 and 1995............. 25
Consolidated Statements of Capitalization,
December 31, 1997 and 1996.............................. 26
Notes to Financial Statements............................... 27-44
For the Year Ended December 31, 1997, 1996 and 1995:
Consent of Independent Accountants........................ 103
* Incorporated by Reference
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration
statements of New England Electric System on Form S-3 of the Dividend
Reinvestment and Common Share Purchase Plan (File No. 33-12313) and on
Forms S-8 of the New England Electric System Companies Incentive Thrift
Plan (File No. 33-26066), the New England Electric System Companies
Incentive Thrift Plan II (File No. 33-35470) and the Yankee Atomic
Electric Company Thrift Plan (File No. 2-67531) of our report dated March
2, 1998 on our audits of the consolidated financial statements of New
England Electric System and subsidiaries as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997,
which report is incorporated by reference in this Annual Report on Form
10-K.
We also consent to the incorporation by reference in the registration
statements of New England Electric System on Form S-4 (File No. 333-
47383), Massachusetts Electric Company on Form S-3 (File No. 333-46431)
and The Narragansett Electric Company on Form S-3 (File No. 33-61131) of
our reports dated March 2, 1998 on our audits of the financial statements
of New England Electric System, Massachusetts Electric Company and The
Narragansett Electric Company, respectively, as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31,
1997, which reports are incorporated by reference in this Annual Report on
Form 10-K.
s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
March 30, 1998
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
References (Page)
----------------------
1997 Annual
Form Report to
10-K Shareholders*
---- -------------
<S> <C> <C>
Report of Independent Accountants........................... 1
Statements of Income,
Year Ended December 31, 1997, 1996 and 1995............... 12
Statements of Retained Earnings,
Year Ended December 31, 1997, 1996 and 1995............... 12
Balance Sheets, December 31, 1997 and 1996.................. 13
Statements of Cash Flows,
Year Ended December 31, 1997, 1996 and 1995............... 14
Notes to Financial Statements............................... 15-35
For the Year Ended December 31, 1997, 1996 and 1995:
Consent of Independent Accountants....................... 103
* Incorporated by Reference.
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
References (Page)
----------------------
1997 Annual
Form Report to
10-K Shareholders*
---- -------------
<S> <C> <C>
Report of Independent Accountants........................... 1
Statements of Income,
Year Ended December 31, 1997, 1996 and 1995............... 8
Statements of Retained Earnings,
Year Ended December 31, 1997, 1996 and 1995............... 8
Balance Sheets, December 31, 1997 and 1996.................. 9
Statements of Cash Flows,
Year Ended December 31, 1997, 1996 and 1995............... 10
Notes to Financial Statements............................... 11-25
For the Year Ended December 31, 1997, 1996 and 1995:
Consent of Independent Accountants........................ 103
* Incorporated by Reference.
</TABLE>
<PAGE>
<TABLE>
THE NARRAGANSETT ELECTRIC COMPANY
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
References (Page)
----------------------
1997 Annual
Form Report to
10-K Shareholders*
---- -------------
<S> <C> <C>
Report of Independent Accountants........................... 1
Statements of Income,
Year Ended December 31, 1997, 1996 and 1995............... 8
Statements of Retained Earnings,
Year Ended December 31, 1997, 1996 and 1995............... 8
Balance Sheets, December 31, 1997 and 1996.................. 9
Statements of Cash Flows,
Year Ended December 31, 1997, 1996 and 1995............... 10
Notes to Financial Statements............................... 11-24
For the Year Ended December 31, 1997, 1996 and 1995:
Consent of Independent Accountants........................ 103
* Incorporated by Reference.
</TABLE>
<PAGE>
NEES
EXHIBIT INDEX
---------------
Exhibit No. Description Page
- ----------- ----------- ----
(3) Agreement and Declaration of Incorporated
Trust dated January 2, 1926, by Reference
as amended through April 28,
1992
(4)(a) Massachusetts Electric Company Incorporated
First Mortgage Indenture and by Reference
Deed of Trust, dated as of
July 1, 1949, and twenty-one
supplements thereto
(4)(b) The Narragansett Electric Incorporated
Company First Mortgage Indenture by Reference
and Deed of Trust, dated as of
September 1, 1944, and twenty-two
supplements thereto
(4)(c) The Narragansett Electric Filed herewith
Company Preference Provisions,
as amended, dated December 15, 1997
(4)(d) New England Power Company General Incorporated
and Refunding Mortgage Indenture by Reference
and Deed of Trust dated as of
January 1, 1977 and twenty
supplements thereto
(10)(a) Boston Edison Company et al. and Incorporated
New England Power Company: by Reference
Amended REMVEC Agreement dated
August 12, 1977
(10)(a)(i) Boston Edison Company et al. and Filed herewith
New England Power Company: REMVEC
II Agreement dated on or about
July 1, 1994
(10(a)(ii) Boston Edison Company et al. and Filed herewith
New England Power Company:
Security Analysis Service
Agreement dated on or about
July 1, 1994
<PAGE>
(10)(b) The Connecticut Light and Power Incorporated
Company et al. and New England by Reference
Power Company: Sharing Agreement
for Joint Ownership, Construction
and Operation of Millstone Unit No.
3 dated as of September 1, 1973, and
Amendments thereto; Transmission
Support Agreement dated August 9,
1974; Instrument of Transfer to NEP
with respect to the 1979 Connecticut
Nuclear Unit, and Assumption of
Obligations, dated December 17, 1975
(10)(c) Connecticut Yankee Atomic Power Incorporated
Company et al. and New England by Reference
Power Company: Stockholders
Agreement dated July 1, 1964;
Power Purchase Contract dated
July 1, 1964; Additional
Power Contract dated as of
April 30, 1984 and 1996 Amendatory
Agreement dated as of December 4,
1996; Supplementary Power Contract
dated as of April 1, 1987, Capital
Funds Agreement dated September 1,
1964; Transmission Agreement
dated October 1, 1964;
Agreement revising Transmission
Agreement dated July 1, 1979 and
Amendment thereto dated January
19, 1994
(10)(d) Maine Yankee Atomic Power Company Incorporated
et al. and New England Power by Reference
Company: Capital Funds Agreement
dated May 20, 1968 and Power
Purchase Contract dated May 20,
1968; Amendments dated as of
January 1, 1984, March 1, 1984,
October 1, 1984, and August 1,
1985; Stockholders Agreement
dated May 20, 1968; Additional
Power Contract dated as of
February 1, 1984
1997 Amendatory Agreement dated Filed herewith
as of August 6, 1997
(10)(e)(i) New England Energy Incorporated Incorporated
Capital Funds Agreement with by Reference
NEES dated November 1, 1974 and
Amendments thereto
(10)(e)(ii) New England Energy Incorporated Incorporated
Loan Agreement with NEES dated by Reference
July 19, 1978 and effective
November 1, 1974, and Amendments
thereto
<PAGE>
(10)(e)(iii) New England Energy Incorporated Incorporated
Fuel Purchase Contract with by Reference
New England Power Company dated
July 26, 1979, and Amendments
thereto
(10)(e)(iv) New England Energy Incorporated Incorporated
Partnership Agreement with by Reference
Samedan Oil Corporation as
Amended and Restated on
February 5, 1985 and Amendment
thereto
(10)(e)(v) New England Energy Incorporated Incorporated
Credit Agreement dated as of by Reference
April 13, 1995
(10)(e)(vi) New England Energy Incorporated Incorporated
Capital Maintenance Agreement by Reference
dated November 15, 1985, and
Assignment and Security Agreement
dated November 15, 1985 and
Amendments thereto
(10)(f) New England Power Company and Incorporated
New England Electric Transmission by Reference
Corporation et al.: Phase I
Terminal Facility Support
Agreement dated as of December 1,
1981 and Amendments thereto;
Agreement with respect to Use
of the Quebec Interconnection
dated as of December 1, 1981
and Amendments thereto; Agreement
for Reinforcement and Improvement
of New England Power Company's
Transmission System dated as of
April 1, 1983; Lease dated as of
May 16, 1983; Upper Development -
Lower Development Transmission
Line Support Agreement dated as
of May 16, 1983
(10)(g) New England Electric Transmission Incorporated
Corporation and PruCapital by Reference
Management, Inc. et al: Note
Agreement dated as of
September 1, 1986; Mortgage,
Deed of Trust and Security
Agreement dated as of
September 1, 1986; Equity
Funding Agreement with New
England Electric System dated
as of December 1, 1985
<PAGE>
(10)(h) Vermont Electric Transmission Incorporated
Company, Inc. et al. and New by Reference
England Power Company: Phase I
Vermont Transmission Line
Support Agreement dated as
of December 1, 1981 and
Amendments thereto
(10)(i) New England Power Pool Incorporated
Agreement and Amendments thereto by Reference
Amendment dated as of September Filed herewith
1, 1997
Amendment dated as of November Filed herewith
15, 1997
(10)(j) Public Service Company of New Incorporated
Hampshire et al. and New England by Reference
Power Company: Agreement for
Joint Ownership, Construction
and Operation of New Hampshire
Nuclear Units dated as of
May 1, 1973 and Amendments
thereto; Transmission Support
Agreement dated as of May 1,
1973; Instrument of Transfer
to NEP with respect to the
New Hampshire Nuclear Units
and Assumptions of Obligations
dated December 17, 1975;
Agreement Among Participants
in New Hampshire Nuclear Units,
certain Massachusetts Municipal
Systems and Massachusetts
Municipal Wholesale Electric
Company dated May 28, 1976;
Seventh Amendment To and Restated
Agreement for Seabrook Project
Disbursing Agent and Amendments
thereto; Seabrook Project
Managing Agent Operating
Agreement dated as of June 29,
1992, and Amendment to Seabrook
Project Managing Agent Agreement
dated as of June 29, 1992
(10)(k) Vermont Yankee Nuclear Power Incorporated
Corporation et al. and New by Reference
England Power Company: Capital
Funds Agreement dated
February 1, 1968, Amendment
dated March 12, 1968, and Power
Purchase Contract dated
February 1, 1968 and Amendments
thereto; Additional Power
Contract dated as of February 1,
1984; Guarantee Agreement dated
as of November 5, 1981
<PAGE>
(10)(l) Yankee Atomic Electric Company Incorporated
et al. and New England Power by Reference
Company: Amended and Restated
Power Contract dated April 1,
1985 and Amendments thereto
(10)(m) New England Electric Companies' Incorporated
Deferred Compensation Plan as by Reference
amended through November 26, 1996
(10)(n) New England Electric System Incorporated
Companies Retirement Supplement by Reference
Plan as amended through June 1,
1996
(10)(o) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan I as amended through May
20, 1996
(10)(p) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan II as amended through
October 25, 1995
(10)(q) New England Electric Companies' Incorporated
Incentive Compensation Plan I by Reference
as amended through October 24,
1995
(10)(r) New England Electric Companies' Incorporated
Incentive Compensation Plan II by Reference
as amended through January 1,
1995
(10)(s) New England Electric Companies' Incorporated
Incentive Compensation Plan III by Reference
as amended through January 1,
1996
(10)(t) New England Electric Companies' Incorporated
Senior Incentive Compensation by Reference
Plan as amended through January
1, 1995
(10)(u) New England Electric System Incorporated
Directors Deferred Compensation by Reference
Plan as amended through
December 1, 1996
(10)(v) Forms of Life Insurance Program Incorporated
and Form of Life Insurance by Reference
(Collateral Assignment)
(10)(w) New England Electric Companies' Incorporated
Incentive Share Plan as amended by Reference
through February 24, 1997
<PAGE>
(10)(x) New England Electric Companies' Incorporated
Long-Term Performance Share by Reference
Award Plan amended through
February 24, 1997
(10)(y) New England Electric System Incorporated
Directors' Retirement Plan by Reference
dated May 1, 1994
(10)(z) Forms of Severance Protection Incorporated
Agreement by Reference
(10)(aa) New England Power Service Incorporated
Company and Joan T. Bok: by Reference
Service Credit Letter dated
October 21, 1982
(10)(bb) New England Electric System Incorporated
and John W. Rowe: Service by Reference
Credit Letter dated
December 5, 1988
(10)(cc) New England Power Service Incorporated
Company and the Company: by Reference
Form of Supplemental Pension
Service Credit Agreement
(10(dd) New England Power Company and Incorporated
New England Hydro-Transmission by Reference
Electric Company, Inc. et al:
Phase II Massachusetts
Transmission Facilities Support
Agreement dated as of June 1,
1985 and Amendments thereto
(10)(ee) New England Power Company and Incorporated
New England Hydro-Transmission by Reference
Corporation et al: Phase II
New Hampshire Transmission
Facilities Support Agreement
dated as of June 1, 1985 and
Amendments thereto
(10)(ff) New England Power Company et Incorporated
al: Phase II New England Power by Reference
AC Facilities Support Agreement
dated as of June 1, 1985 and
Amendments thereto
(10)(gg) New England Hydro-Transmission Incorporated
Electric Company, Inc. and New by Reference
England Electric System et al:
Equity Funding Agreement dated
as of June 1, 1985 and Amendments
thereto
<PAGE>
(10)(hh) New England Hydro-Transmission Incorporated
Corporation and New England by Reference
Electric System et al:
Equity Funding Agreement dated
as of June 1, 1985 and Amendments
thereto
(10)(ii) Ocean State Power, et al., and Incorporated
Narragansett Energy Resources by Reference
Company: Equity Contribution
Agreement dated as of
December 29, 1988; Amendment
dated as of September 29, 1989
Ocean State Power, et al., and Incorporated
New England Electric System: by Reference
Equity Contribution Support
Agreement dated as of
December 29, 1988; Amendment
dated as of September 29, 1989;
Ocean State Power II, et al., Incorporated
and Narragansett Energy Resources by Reference
Company: Equity Contribution
Agreement dated as of September 29,
1989; Ocean State Power II, et al.,
and New England Electric System:
Equity Contribution Support
Agreement dated as of
September 29, 1989
(10)(jj) NEES Energy, Inc./AllEnergy Incorporated
Marketing Company, L.L.C. by Reference
Limited Liability Company
Agreement dated as of
September 18, 1996
Amendment No. 1 to Limited Filed herewith
Liability Company Agreement
dated as of December 3, 1997
(10)(kk) USGen, New England Energy, Inc. Incorporated
and New England Power Company by Reference
and The Narragansett Electric
Company: Asset Purchase Agreement
dated as of August 5, 1997
(10)(ll) New England Power Service Company Filed herewith
and Robert L. McCabe: Employment
Agreement entered into as of
March 11, 1998
(13) 1997 Annual Report to Filed herewith
Shareholders
(21) Subsidiary list Incorporated
by Reference
(24) Power of Attorney Filed herewith
(27) Financial Data Schedule Filed herewith
<PAGE>
NEP
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
(3)(a) Articles of Organization as Incorporated
amended through June 27, 1987 by Reference
(3)(b) By-laws of the Company as Filed herewith
amended December 12, 1997
(4) General and Refunding Mortgage Incorporated
Indenture and Deed of Trust by Reference
dated as of January 1, 1977
and twenty supplements
thereto
(10)(a) Boston Edison Company et al. Incorporated
and the Company: Amended by Reference
REMVEC Agreement dated
August 12, 1977
(10)(a)(i) Boston Edison Company et al. Incorporated
and the Company: REMVEC II by Reference
Agreement dated on or about
July 1, 1997
(10)(a)(ii) Boston Edison Company et al. Incorporated
and the Company: Security by Reference
Analysis Services Agreement
dated on or about July 1, 1997
(10)(b) The Connecticut Light and Power Incorporated
Company et al. and the Company: by Reference
Sharing Agreement for Joint
Ownership, Construction and
Operation of Millstone Unit No. 3
dated as of September 1, 1973,
and Amendments thereto;
Transmission Support Agreement
dated August 9, 1974; Instrument
of Transfer to the Company with
respect to the 1979 Connecticut
Nuclear Unit, and Assumption of
Obligations, dated December 17,
1975
(10)(c) Connecticut Yankee Atomic Power Incorporated
Company et al. and the Company: by Reference
Stockholders Agreement dated
July 1, 1964; Power Purchase
Contract dated July 1, 1964;
Supplementary Power Contract
dated as of April 1, 1987;
<PAGE>
10(c)(cont.) Capital Funds Agreement dated
September 1, 1964; Transmission
Agreement dated October 1, 1964;
Agreement revising Transmission
Agreement dated July 1, 1979;
Amendment revising Transmission
Agreement dated as of January 19,
1994; Five Year Capital Contribution
Agreement dated November 1, 1980;
Guarantee Agreement dated as of
November 13, 1981; Guarantee
Agreement dated as of August 1,
1985
(10)(d) Maine Yankee Atomic Power Incorporated
Company et al. and the Company: by Reference
Capital Funds Agreement dated
May 20, 1968 and Power Purchase
Contract dated May 20, 1968;
and Amendments thereto;
Stockholders Agreement dated
May 20, 1968; Additional Power
Contract dated as of February 1,
1984; 1997 Amendatory Agreement
dated as of August 6, 1997
(10)(e) Mass. Electric and the Company: Incorporated
Primary Service for Resale dated by Reference
February 15, 1974; and Amendments
thereto; Memorandum of Understanding
effective May 22, 1994
Amendment of Service Agreement Filed herewith
effective July 1, 1996
Amendment to Service Agreement Filed herewith
dated as of February 1, 1997
(10)(f) The Narragansett Electric Incorporated
Company and the Company: by Reference
Primary Service for Resale
dated February 15, 1974
and Amendments thereto;
Memorandum of Understanding
effective May 22, 1994 and
Amendment thereto
Amendment of Service Agreement Filed herewith
effective October 30, 1995
Amendment to Service Agreement Filed herewith
dated as of February 1, 1997
<PAGE>
(10)(g) New England Electric Incorporated
Transmission Corporation et al. by Reference
and the Company: Phase I
Terminal Facility Support
Agreement dated as of
December 1, 1981; Amendments
dated as of June 1, 1982 and
November 1, 1982; Agreement with
respect to Use of the Quebec
Interconnection dated as of
December 1, 1981; Amendments
dated as of May 1, 1982 and
November 1, 1982; Amendment
dated as of January 1, 1986;
Agreement for Reinforcement
and Improvement of the Company's
Transmission System dated as
of April 1, 1983; Lease dated
as of May 16, 1983; Upper
Development-Lower Development
Transmission Line Support
Agreement dated as of May 16,
1983
(10)(h) Vermont Electric Transmission Incorporated
Company, Inc. et al. and the by Reference
Company: Phase I Vermont
Transmission Line Support
Agreement dated as of
December 1, 1981 and Amendments
thereto
(10)(i) New England Energy Incorporated Incorporated
and the Company: Fuel Purchase by Reference
Contract dated July 26, 1979,
and Amendments thereto
(10)(j) New England Power Pool Incorporated
Agreement and Amendments by Reference
thereto
(10)(k) New England Power Service Incorporated
Company and the Company: by Reference
Specimen of Service Contract
(10)(l) Massachusetts Electric Incorporated
Company, et al. and the by Reference
Company: Form of Mutual
Assistance Agreement
(10)(m) Massachusetts Electric Incorporated
Company, et al. and the by Reference
Company: Restructuring
Settlement Agreement
approved by the Massachusetts
Department of Public Utilities
<PAGE>
(10)(n) Public Service Company of New Incorporated
Hampshire et al. and the by Reference
Company: Agreement for Joint
Ownership, Construction and
Operation of New Hampshire
Nuclear Units dated as of
May 1, 1973 and Amendments
thereto; Seventh Amendment
as of November 1, 1990;
Transmission Support Agreement
dated as of May 1, 1973;
Instrument of Transfer to the
Company with respect to the New
Hampshire Nuclear Units and
Assumptions of Obligations
dated December 17, 1975 and
Agreement Among Participants
in New Hampshire Nuclear Units,
certain Massachusetts Municipal
Systems and Massachusetts
Municipal Wholesale Electric
Company dated May 28, 1976;
Seventh Amendment To and
Restated Agreement for Seabrook
Project Disbursing Agent dated
as of November 1, 1990;
Amendments dated as of
June 29, 1992
Settlement Agreement dated as Incorporated
of July 19, 1990 between by Reference
Northeast Utilities Service
Company and the Company
Seabrook Project Managing Incorporated
Agent Operating Agreement by Reference
dated as of June 29, 1992;
and Amendment thereto
(10)(o) Vermont Yankee Nuclear Power Incorporated
Corporation et al. and the by Reference
Company: Capital Funds
Agreement dated February 1,
1968, Amendment dated March 12,
1968 and Power Purchase Contract
dated February 1, 1968 and
Amendments thereto; Additional
Power Contract dated as of
February 1, 1984; Guarantee
Agreement dated as of November 5,
1981
(10)(p) Yankee Atomic Electric Company Incorporated
et al. and the Company: by Reference
Amended and Restated Power
Contract dated April 1, 1985
and Amendments thereto
<PAGE>
(10)(q) New England Electric Companies' Incorporated
Deferred Compensation Plan as by Reference
amended through November 26, 1996
(10)(r) New England Electric System Incorporated
Companies Retirement Supplement by Reference
Plan as amended through June 1,
1996
(10)(s) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan I as amended through May 20,
1996
(10)(t) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan II as amended through October
25, 1995
(10)(u) New England Electric Companies' Incorporated
Incentive Compensation Plan I as by Reference
amended through October 24, 1995
(10)(v) New England Electric Companies' Incorporated
Incentive Compensation Plan II as by Reference
amended through January 1, 1995
(10)(w) New England Electric Companies' Incorporated
Incentive Compensation Plan III as by Reference
amended through January 1, 1996
(10)(x) New England Electric Companies' Incorporated
Senior Incentive Compensation by Reference
Plan as amended through
January 1, 1995
(10)(y) Forms of Life Insurance Program Incorporated
and Form of Life Insurance by Reference
(Collateral Assignment)
(10)(z) New England Electric Companies' Incorporated
Incentive Share Plan as amended by Reference
through February 24, 1997
(10)(aa) New England Electric System Incorporated
Directors' Retirement Plan by Reference
dated May 1, 1994
(10)(bb) Forms of Severance Protection Incorporated
Agreement by Reference
(10)(cc) New England Electric Companies' Incorporated
Long-Term Performance Share by Reference
Award Plan amended through
February 24, 1997
<PAGE>
(10)(dd) New England Hydro-Transmission Incorporated
Electric Company, Inc. et al. by Reference
and the Company: Phase II
Massachusetts Transmission
Facilities Support Agreement
dated as of June 1, 1985
and Amendments thereto
(10)(ee) New England Hydro-Transmission Incorporated
Corporation et al. and the by Reference
Company: Phase II New Hampshire
Transmission Facilities Support
Agreement dated as of June 1,
1985 and Amendments thereto
(10)(ff) Vermont Electric Power Company Incorporated
et al. and the Company: Phase by Reference
II New England Power AC
Facilities Support Agreement
dated as of June 1, 1985 and
Amendments thereto
(10)(gg)(i) Asset Purchase Agreement between Incorporated
USGen New England and The Company by Reference
and The Narragansett Electric
Company dated as of August 5, 1997
(10)(gg)(ii) Wholesale Sales Agreement between Filed herewith
the Company and USGen New England,
Inc. dated as of August 5, 1997
(10)(gg)(iii) PPA Transfer Agreement between Filed herewith
the Company and USGen New England,
Inc. dated as of August 5, 1997
(10)(gg)(iv) Form of PSA Performance Support Filed herewith
Agreement between the Company,
USGen New England, Inc., and
various Wholesale Customers
dated as of August 5, 1997
(10)(hh) New England Power Company and Filed herewith
Andrew H. Aitken: Employment
Agreement entered into as of
December 9, 1997
(13) 1997 Annual Report to Filed herewith
Stockholders
(21) Subsidiary list Filed herewith
(24) Power of Attorney Filed herewith
(27) Financial Data Schedule Filed herewith
<PAGE>
Mass. Electric
--------------
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
(3)(a) Articles of Organization of the Incorporated
Company as amended through by Reference
November 15, 1993
(3)(b) By-Laws of the Company as Filed herewith
amended December 12, 1997
(4) First Mortgage Indenture and Incorporated
Deed of Trust, dated as of by Reference
July 1, 1949, and twenty-one
supplements thereto
(10)(a) Boston Edison Company et al. Incorporated
and Company: Amended REMVEC by Reference
Agreement dated August 12,
1977
(10)(a)(i) Boston Edison Company et al. Incorporated
and Company: REMVEC II Agreement by Reference
dated on or about July 1, 1997
(10)(a)(ii) Boston Edison Company et al. Incorporated
and Company: Security Analysis by Reference
Services Agreement dated on
or about July 1, 1997
(10)(b) New England Power Company Incorporated
and the Company: Primary by Reference
Service for Resale dated
February 15, 1974, and
Amendments thereto; Memorandum
of Understanding effective
May 22, 1994
(10)(c) New England Power Pool Incorporated
Agreement and Amendments by Reference
thereto
(10)(d) New England Power Service Incorporated
Company and the Company: by Reference
Specimen of Service Contract
(10)(e) New England Power Company Incorporated
et al. and the Company: by Reference
Form of Mutual Assistance
Agreement
<PAGE>
(10)(f) New England Power Company Incorporated
et al. and the Company: by Reference
Restructuring Settlement
Agreement approved by the
Massachusetts Department of
Public Utilities February
26, 1997
(10)(g) New England Telephone and Incorporated
Telegraph Company and the by Reference
Company: Specimen of Joint
Ownership Agreement for Wood
Poles
(10)(h) New England Electric Companies' Incorporated
Deferred Compensation Plan as by Reference
amended through November 26, 1996
(10)(i) New England Electric System Incorporated
Companies Retirement Supplement by Reference
Plan as amended through June 1,
1996
(10)(j) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan I as amended dated May 20,
1996
(10)(k) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan II as amended through
October 25, 1995
(10)(l) New England Electric Companies' Incorporated
Incentive Compensation Plan by Reference
as amended through January 1,
1995
(10)(m) New England Electric Companies' Incorporated
Incentive Compensation Plan II by Reference
as amended through January 1,
1995
(10)(n) New England Electric Companies' Incorporated
Incentive Compensation Plan III by Reference
as amended through January 1,
1996
(10)(o) New England Electric Companies' Incorporated
Form of Deferred Compensation by Reference
Agreement for Directors
(10)(p) New England Electric Companies' Incorporated
Senior Incentive Compensation by Reference
Plan as amended through January
1, 1995
<PAGE>
(10)(q) Forms of Life Insurance Program Incorporated
and Form of Life Insurance by Reference
(Collateral Assignment)
(10)(r) New England Electric Companies' Incorporated
Incentive Share Plan as amended by Reference
through February 24, 1997
(10)(s) New England Electric Companies' Incorporated
Long-Term Performance Share by Reference
Award Plan amended through
February 24, 1997
(10)(t) New England Electric System Incorporated
Directors' Retirement by Reference
Plan dated May 1, 1994
(10)(u) Forms of Severance Protection Incorporated
Agreement
(10)(v) New England Power Service Incorporated
Company and the Company: by Reference
Form of Supplemental Pension
Service Credit Agreement
(10)(w) Amended and Restated Wholesale Filed herewith
Standard Offer Service Agreement
among the Company, Nantucket
Electric Company, and USGen New
England, Inc. dated as of
October 29, 1997
(12) Statement re computation of Filed herewith
ratios for incorporation by
reference into the Mass. Electric
registration statement on Form
S-3, Commission File No. 333-46431
(13) 1997 Annual Report to Filed herewith
Stockholders
(24) Power of Attorney Filed herewith
(27) Financial Data Schedule Filed herewith
<PAGE>
Narragansett
-------------
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
(3)(a) Articles of Incorporation as Incorporated
amended June 9, 1988 by Reference
(3)(b) By-Laws of the Company Incorporated
by Reference
(4)(a) First Mortgage Indenture and Incorporated
Deed of Trust, dated as of by Reference
September 1, 1944, and
twenty-two supplements thereto
(4)(b) The Narragansett Electric Incorporated
Company Preference Provisions, by Reference
as amended, dated December 15,
1997
(10)(a) Boston Edison Company et al. Incorporated
and the Company: Amended REMVEC by Reference
Agreement dated August 12, 1977
(10)(a)(i) Boston Edison Company et al. and Incorporated
the Company: REMVEC II Agreement by Reference
dated on or about July 1, 1997
(10)(a)(ii) Boston Edison Company et al. and Incorporated
the Company: Security Analysis by Reference
Services Agreement dated on or
about July 1, 1997
(10)(b) New England Power Company and Incorporated
the Company: Primary Service for by Reference
Resale dated February 15, 1974
and Amendments thereto; Memorandum
of Understanding effective May 22,
1994
(10)(c) New England Power Pool Agreement Incorporated
and Amendments thereto by Reference
(10)(d) New England Power Service Incorporated
Company and the Company: by Reference
Specimen of Service Contract
(10)(e) New England Power Company Incorporated
et al. and the Company: by Reference
Form of Mutual Assistance
Agreement
<PAGE>
(10)(f) New England Telephone and Incorporated
Telegraph Company and the by Reference
Company: Specimen of Joint
Ownership Agreement for Wood
Poles
(10)(g) New England Electric Companies' Incorporated
Deferred Compensation Plan by Reference
as amended through November
26, 1996
(10)(h) New England Electric System Incorporated
Companies Retirement Supplement by Reference
Plan, as amended through June
1, 1996
(10)(i) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan I, as amended through May 20,
1996
(10)(j) New England Electric Companies' Incorporated
Executive Supplemental Retirement by Reference
Plan II, as amended through
October 25, 1995
(10)(k) New England Electric Companies' Incorporated
Incentive Compensation Plan I, by Reference
as amended through January 1,
1995
(10)(l) New England Electric Companies' Incorporated
Incentive Compensation Plan II, by Reference
as amended through January 1,
1995
(10)(m) New England Electric Companies' Incorporated
Incentive Compensation Plan III, by Reference
as amended through January 1,
1996
(10)(n) New England Electric Companies' Incorporated
Form of Deferred Compensation by Reference
Agreement for Directors
(10)(o) New England Electric Companies' Incorporated
Senior Incentive Compensation by Reference
Plan as amended through January 1,
1995
(10)(p) Forms of Life Insurance Program Incorporated
and Form of Life Insurance by Reference
(Collateral Assignment)
(10)(q) New England Electric Companies' Incorporated
Incentive Share Plan as amended by Reference
through February 24, 1997
<PAGE>
(10)(r) New England Power Service Incorporated
Company and the Company: by Reference
Form of Supplemental Pension
Service Credit Agreement
(10)(s) New England Electric Companies' Incorporated
Long-Term Performance Share by Reference
Award Plan as amended through
February 24, 1997
(10)(t) New England Electric System Incorporated
Directors' Retirement Plan by Reference
dated May 1, 1994
(10)(u) Forms of Severance Protection Incorporated
Agreement by Reference
(10)(v)(i) Asset Purchase Agreement between Incorporated
the Company and New England Power by Reference
Company dated as of August 5, 1997
(10)(v)(ii) Amended and Restated Wholesale Filed herewith
Standard Offer Service
Agreement between the Company and
USGen New England, Inc. dated
as of October 29, 1997
(12) Statement re computation of Filed herewith
ratios for incorporation by
reference into the Narragansett
registration statement on Form
S-3, Commission File No. 33-61131
(13) 1997 Annual Report to Filed herewith
Stockholders
(24) Power of Attorney Filed herewith
(27) Financial Data Schedule Filed herewith
<PAGE>
THE NARRAGANSETT ELECTRIC COMPANY
PREFERRED STOCK PREFERENCE PROVISIONS
That, effective upon December 15, 1997, the rights and preferences for the
class of preferred stock of this Company which rights and preferences were
initially voted by the common stockholders and the directors of this Company
at meetings held May 28, 1940 and were amended at special meetings of said
common stockholders and directors held on November 10, 1953, March 4, 1971,
March 15, 1971, and March 23, 1993, be and hereby are further amended so that
said preferred stock (all preferred stock, whether of the same or a different
series, the same or a different class, the same or a different par value, so
long as said preferred is on a parity as to dividends and assets, being
hereinafter called the "Preferred Stock") shall entitle the holders thereof to
the following rights and preferences as to dividends, voting power and other
incidents:
1. Before any dividends on, or any distribution of assets (by purchase
of shares or otherwise) to holders of, the Common Stock or any other stock
ranking junior to the Preferred Stock as to dividends (both hereinafter in
this subdivision 1 called "junior stock") shall be paid or set apart for
payment or otherwise provided for, the holders of the Preferred Stock at the
time outstanding shall be entitled to receive, but only when and as declared
by the Board of Directors, out of any funds legally available for the
declaration of dividends, cumulative dividends at the annual dividend rate per
share fixed for the particular series payable quarterly on the first days of
February, May, August and November in each year commencing on a date specified
for the first dividend date as herein provided to shareholders of record on
the respective dates, not exceeding forty-five (45) days preceding such
dividend payment dates, fixed in advance for the purpose by the Board of
Directors prior to the payment of each particular dividend. No dividends
shall be declared on any series of the Preferred Stock in respect of any
quarter-yearly dividend period, unless there shall likewise be declared on all
shares of all series of the Preferred Stock at the time outstanding, like
proportionate dividends, ratably, in proportion to the respective annual
dividend rates fixed therefor, in respect of the same quarter-yearly dividend
period, to the extent that such shares are entitled to receive dividends for
such quarter-yearly dividend period. The dividends on shares of all series of
the Preferred Stock shall be cumulative. In the case of all shares of each
particular series, the dividends on shares of such series shall be cumulative:
(i) on shares of Preferred Stock issued prior to the record
date for the first dividend on the shares of such series,
from the date for the particular series fixed therefor;
(ii) on shares of Preferred Stock issued after a record date
for a dividend, but prior to the dividend payment date for
such dividend, from said dividend payment date; and
(iii) otherwise from the quarter-yearly dividend payment date
next preceding the date of issue of such shares;
so that dividends accrued on all outstanding shares of Preferred Stock to the
next succeeding dividend payment date shall have been paid in full or declared
and set apart for payment before there shall be any dividend or distribution
on, or purchase of, junior stock. The holders of the Preferred Stock shall
not be entitled to receive any dividends thereon other than the dividends
referred to in this subdivision 1 and other than distributions provided in
subdivision 5 below.
2. As used herein, the expression "dividends accrued" shall mean the
sum of amounts with respect to all shares of Preferred Stock then outstanding,
which as to each share shall be an amount computed at the rate per annum of
the par value thereof fixed for the particular series from the date from which
dividends on such share become cumulative to the date with reference to which
the expression is used, less the aggregate of all dividends paid on such
share, irrespective of whether such amount shall have been declared as
dividends or there shall have existed any assets available for the payment
thereof.
<PAGE>
3. The Company, pursuant to action of its Board of Directors or as
provided in subparagraph (1) of subdivision 6 below, may redeem the whole or
any part of any series of the Preferred Stock at the time outstanding, at any
time or from time to time, by paying in cash as herein provided the redemption
price of the shares of the particular series fixed therefor, together with
dividends accrued to the date fixed for sch redemption (hereinafter called the
"redemption date"), and by mailing, postage prepaid, at least thirty (30) days
and not more than ninety (90) days prior to the date fixed for said redemption
a notice specifying said redemption date to the holders of record of the
Preferred Stock to be redeemed, at their respective addresses as the same
shall appear on the books of the Company; provided, however, that the exercise
by the Company of is right to redeem shares of any particular series may be
subject to such restrictions as are determined for said series. In case of
the redemption of a part only of any series of the Preferred Stock at the time
outstanding, the Company shall select by lot or in such other manner as the
Board of Directors may determine, the shares so to be redeemed. If such
notice of redemption shall have been so mailed, and if on or before the
redemption date specified in such notice all funds necessary for such
redemption shall have been set aside by the Company, separate and apart from
its other funds, in trust for the account of the holders of the shares to be
redeemed, so as to be and continue to be available therefor, then, on and
after said redemption date, notwithstanding that any certificate for the
shares of the Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the shares represented thereby shall no longer
be deemed outstanding, the right to receive dividends thereon shall cease to
accrue, and all rights with respect to such shares of Preferred Stock so
called for redemption shall forthwith cease and terminate, except only the
right of the holders thereof to receive, out of the funds so set aside in
trust, the amount payable upon redemption thereof, but without interest;
provided, however, that if, after mailing said notice as aforesaid and prior
to the redemption date specified in sch notice, said funds shall be set aside
by deposit in trust, for the account of the holders of the Preferred Stock to
be redeemed, with a bank or trust company in good standing, organized under
the laws of the United States of America or of the State of Rhode Island,
having a capital, undivided profits and surplus aggregating at least
$5,000,000, thereupon all shares of the Preferred Stock with respect to which
such deposit shall have been made shall no longer be deemed to be outstanding,
and all rights with respect to such shares of Preferred Stock shall forthwith
upon such deposit in trust cease and terminate, except only the right of the
holders thereof to receive from such deposit the amount payable upon the
redemption but without interest. In case the holders of the Preferred Stock
which shall have been redeemed shall not within four years of the date of
redemption thereof claim any amount so deposited in trust for the redemption
of such shares, such bank or trust company shall, upon demand, pay over to the
Company any such unclaimed amount so deposited with it and shall thereupon be
relieved of all responsibility in respect thereof, and the Company shall not
be required to hold the amount so paid over to it separate and apart from its
other funds, and thereafter the holders of such shares of Preferred Stock
shall as unsecured creditors look only to the Company for payment of the
redemption price thereof, but without interest; provided, however, that before
any such unclaimed amount so deposited shall be paid over to the Company
notice of such payment shall be given to holders of such shares of Preferred
Stock by mailing in the manner hereinbefore provided in this subdivision 3 at
least sixty (60) days prior to the date of any such payment. If there are any
dividends accrued to the last preceding quarterly dividend payment date or
dates on the outstanding Preferred Stock, no Preferred Stock shall be
redeemed, purchased or otherwise acquired by the Company unless all series of
Preferred Stock which are redeemable shall be redeemed and unless an offer is
made to purchase all Preferred Stock of any series which is not redeemable at
the time under limited restrictions then applicable thereto at a price equal
to the then redemption price for such series if such restrictions were not
applicable and to purchase all Preferred Stock of any series which is not
redeemable at the time at a price equal to the highest then redemption price
on any outstanding shares of Preferred Stock, after giving effect to the
difference in par value among series or classes of Preferred Stock, or unless
a partial redemption or any purchase or other acquisition shall have been
ordered, approved or permitted under the Public Utility Holding Company Act of
1935. All stock redeemed or purchased under the provisions of this
subdivision 3 shall be retired.
<PAGE>
4. If and while at any time a majority of the Common Stock shall be
held by or for the benefit of a single stockholder, said holder may, upon such
consent by the Board of Directors of the Company as would have been required
in the event of a redemption under subdivision 3 above, purchase the whole or
any part of any series of the Preferred Stock at the time outstanding, at any
time or from time to time, at the same price, upon the same notice of
purchase, and in the same manner as near as may be, and with the same effect
on the rights of the then holders of Preferred Stock so purchased as is
provided for the redemption of such series of the Preferred Stock by the
Company itself, provided that when after deposit of funds the rights of the
holders of Preferred Stock (except to receive payment therefrom) shall have
ceased as above provided, the shares of Preferred Stock being purchased shall
not be deemed to be redeemed but such shares shall vest in such holder of the
Common Stock whether or not the certificates for such shares so purchased
shall have been surrendered or whether or not the date specified for such
purchase shall have arrived and such holder of the Common Stock shall be
entitled to all dividends and other distributions on the Preferred Stock so
purchased accruing from such purchase date; and provided further that if there
be a deposit of funds in trust with a bank or trust company unclaimed funds
shall not be paid over to such holder of Common Stock at the end of four years
but shall remain in trust with said bank or trust company until claimed by the
holders of Preferred Stock.
5. In the event of any liquidation, dissolution or winding up of the
affairs of the Company or any distribution of its capital, then before any
distribution shall be made to the holders of Common Stock or any other stock
ranking junior to the Preferred Stock as to assets, the holders of each series
of the Preferred Stock at the time outstanding shall be entitled to be paid in
cash the amount for the particular series fixed therefor, together in each
case with dividends accrued thereon to the date fixed for payment of such
distributive amounts, and no more. No payments on account of such
distributive amounts shall be made to the holders of any series of the
Preferred Stock unless there shall likewise be paid at the same time to the
holders of each other series of the Preferred Stock at the time outstanding
like proportionate distributive amounts, ratably, in proportion to the full
distributive amounts to which they are respectively entitled. After such
payment to the holders of Preferred Stock, the remaining assets and funds of
the Company shall be divided and distributed among the holders of Common Stock
or any other stock ranking junior to the Preferred Stock as to assets then
outstanding according to their respective rights.
6. (a) The holders of Preferred Stock shall have no right to vote
except as hereinafter specifically provided.
(b) If dividends accrued on the outstanding Preferred Stock
shall at any time and from time to time equal or exceed an amount equivalent
to four (4) full quarterly dividends on any shares of any series of the
Preferred Stock at the time outstanding, then until all dividends in default
on the Preferred Stock shall have been paid, the holders of Preferred Stock,
voting separately as one class, shall be entitled to elect the smallest number
of directors necessary to constitute a majority of the full Board of
Directors, and the holders of stock generally entitled to vote, voting
separately as one class, shall be entitled to elect the remaining members of
the Board of Directors. If and when all dividends then in default on the
Preferred Stock shall thereafter be paid (and such dividends shall be declared
and paid out of any funds legally available therefor as soon as reasonably
practicable), the Preferred Stock shall thereupon be divested of such special
right to elect any member of the Board of Directors, but subject always to the
same provisions for the vesting of such special right in the Preferred Stock
in case of further like default or defaults.
(c) Upon accrual of the right of the holders of the Preferred
Stock to elect a majority of the Board of Directors as above provided in this
subdivision 6, the president, a vice president or the secretary of the Company
shall call a special meeting of the stockholders of the Company for the
purpose of electing a new Board of Directors to be held not less than forty-
five (45) nor more than sixty (60) days after the accrual of such right;
provided, however, that no such special meeting shall be called if the date of
<PAGE>
such accrual of such right shall be less than one hundred twenty (120) days
but not less than forty-five (45) days prior to the date otherwise fixed by
the by-laws of the Company for the next annual meeting of the stockholders, in
which event said annual meeting shall be held on the date specified in the by-
laws or a special meeting in lieu thereof called to be held within three (3)
days thereafter. If said officers fail to call such meeting, or fail to hold
such annual meeting or special meeting in lieu thereof within three (3) days
of the date provided therefor in the by-laws, any holder or holders of
Preferred Stock holding in the aggregate one thousand (1,000) shares may call
a special meeting for such purpose.
(d) The notice of any such special meeting, any annual meeting
of the Company or any special meeting in lieu thereof, at which the holders of
the Preferred Stock shall have the right to elect directors, shall be mailed
by the Company not less than thirty (30) days prior to the meeting and state
(x) that by reason of the fact that dividends payable on the Preferred Stock
are or have been in default in an amount equal to or in excess of four (4)
full quarterly dividends on shares of the Preferred Stock, the holders of the
Preferred Stock, voting together as a class, are entitled to elect the
smallest number of directors necessary to constitute a majority of the full
Board of Directors, (y) that any holder of the Preferred Stock has the right
at any reasonable time to inspect and make copies of the list or lists of the
holders of Preferred Stock maintained at the principal office of the Company
or at the office of any transfer agent for the Preferred Stock, and (z) the
substance of the next succeeding paragraph with respect to the number of
shares of Preferred Stock required to be represented at any meeting or
adjournment thereof for the election of directors of the Company at which such
holders have the right to elect directors.
(e) At any such special or annual meeting at which the holders
of the Preferred Stock shall have the right to elect directors, the presence
in person or by proxy of the holders of a majority of the outstanding stock
generally entitled to vote shall be required to constitute a quorum of such
class for the election of directors and the presence in person or by proxy of
the holders of a majority of the outstanding Preferred Stock shall be required
to constitute a quorum of such class for the election of directors; provided,
however, that in the absence of such a quorum of the holders of the Preferred
Stock, no election of directors shall be held but a majority of the holders of
the Preferred Stock who are present in person or by proxy shall have the power
to adjourn the meeting for election of directors to a date not less than
twenty-five (25) nor more than sixty (60) days from the date of such original
meeting. At such adjourned meeting the presence in person or by proxy of the
holders of thirty-five per cent (35%) of the outstanding Preferred Stock shall
constitute a quorum of such class for the election of directors.
(f) In the event any such special or annual meeting of
stockholders shall be adjourned as aforesaid, the president, any vice
president or the secretary of the Company shall, within ten (10) days after
the date of the original meeting, cause notice of the adjourned meeting to be
given to all stockholders of the Company entitled to vote thereat. Such
notice shall contain substantially the statements hereinabove required with
respect to the original meeting, and shall further state that the required
quorum of the holders of the Preferred Stock was not present at such original
meeting and that the holders of thirty-five per cent (35%) of the outstanding
Preferred Stock will constitute a quorum of such class for the election of
directors at such adjourned meeting.
(g) If the requisite quorum of holders of the Preferred Stock
shall not be present at such adjourned meeting, then, in case the original
meeting was a special meeting called as aforesaid, the directors of the
Company then in office shall remain in office until the next annual meeting of
the stockholders of the Company and until their successors have been elected
and shall qualify; or if such original meeting was an annual meeting of the
stockholders or special meeting in lieu thereof, all members of the Board of
Directors to be elected at such meeting shall be elected by a vote of the
holders of a majority of the shares of the stock generally entitled to vote
present in person or represented by proxy at such adjourned meeting.
<PAGE>
(h) Upon reversion, pursuant to subparagraph (b) of this
subdivision 6, of the voting powers to their status prior to default, a
special or annual meeting of stockholders generally entitled to vote shall be
held for the purpose of electing directors. Notice thereof shall be given
promptly by the Company and in any case within fifteen (15) days after such
reversion, such notice to be mailed by the Company not less than seven (7) nor
more than ten (10) days prior to such meeting to all stockholders generally
entitled to vote at their respective addresses appearing upon the books of the
Company, unless such notice shall have been waived either before or after the
holding of such meeting by all such stockholders. If the Company fails to
call such meeting or fails to hold such annual meeting within three (3) days
of the date provided therefor in the by-laws, any holder or holders of stock
generally entitled to vote holding in the aggregate one thousand (1,000)
shares may call a special meeting for such purpose.
(i) Forthwith upon the initial election of a majority of the
Board of Directors of the Company by the holders of Preferred Stock pursuant
to subparagraph (b) of this subdivision 6, the terms of office of all persons
who may be directors of the Company at the time shall terminate, whether or
not the holders of stock generally entitled to vote shall then have elected
the remaining members of the Board of Directors, and, if the holders of stock
generally entitled to vote shall not have elected the remaining members of the
Board of Directors, then the directors of the Company in office just prior to
the election of the majority of the Board of Directors by the holders of
Preferred Stock shall appoint the remaining directors of the Company pending
such election by the holders of stock generally entitled to vote. Any
director elected by holders of Preferred Stock shall hold office until the
next annual meeting of the holders of Preferred Stock and until his successor
is chosen and qualified, except that upon the reversion, pursuant to
subparagraph (b) of this subdivision 6, of the voting powers to their status
prior to default, then forthwith upon the election of new directors by the
holders of stock generally entitled to vote, the terms of office of the
directors elected by the holders of Preferred Stock shall terminate.
(j) During any period in which the holders of Preferred Stock
have the right, pursuant to subparagraph (b) of this subdivision 6, to elect a
majority of the Board of Directors, the number of directors constituting the
full Board of Directors shall be the number constituting the full Board of
Directors immediately prior to said period unless it be changed at an annual
meeting of stockholders, by a vote of the holders of at least two-thirds of
the total number of shares of the Preferred Stock of all series then
outstanding and by a vote of the holders of at least two-thirds of the total
number of shares of stock generally entitled to vote and then outstanding, to
such number as shall have been stated in the notice of said annual meeting.
(k) In case of any vacancy in the office of a director elected
by the holders of Preferred Stock pursuant to the foregoing provisions of this
subdivision 6, the remaining directors elected by the holders of Preferred
Stock by affirmative vote of a majority thereof, or the remaining director so
elected if there be but one, may elect a successor or successors to hold
office for the unexpired term of the director or directors whose place or
places shall be vacant. The holders of the Preferred Stock at a special
meeting called for the purpose by the holders of an aggregate of not less than
one thousand (1,000) shares of the Preferred Stock, upon notice mailed not
less than thirty (30) days prior to such meeting to all stockholders entitled
to vote thereat, by a vote of a majority of the Preferred Stock issued and
outstanding, may remove from office a director elected by the holders of
Preferred Stock and may elect a successor for the remainder of his term.
(l) Under all circumstances, however, the directors elected by
the holders of stock generally entitled to vote shall have the right, and
neither the holders of Preferred Stock nor any directors elected by the
holders of Preferred Stock under these provisions shall have any right, to
vote upon the question of calling for redemption, or of purchasing, all of the
Preferred Stock at the time outstanding.
<PAGE>
(m) Except when some mandatory provision of law shall be
controlling and except as otherwise provided in subparagraph (a) of
subdivision 9 hereof and, as regards the special rights of any series or class
of the Preferred Stock, as provided in the votes creating such series or
class, whenever shares of two or more series or classes of the Preferred Stock
are outstanding, no particular series or class of the Preferred Stock shall be
entitled to vote as a separate series or class on any matter and all shares of
the Preferred Stock of all series or classes shall be deemed to constitute but
one class for any purpose for which a vote of the stockholders of the Company
by classes may now or hereafter be required.
(n) For the purposes of this subdivision 6, in the calculation
of any number, majority, vote, or quorum of the Preferred Stock, each share of
stock bearing $50 par value shall be counted as one and each share of stock
with another par value shall be counted for that proportion of one as its par
bears to $50.
7. No holder of Preferred Stock shall be entitled as such as a matter
of right to subscribe for or purchase any part of any new or additional issue
of stock or warrants carrying rights to stock, or securities convertible into
stock, of any class whatever, whether now or hereafter authorized, and whether
issued for cash, property, services or otherwise. The holders of Preferred
Stock shall have no right to require any distribution to be made by the
Company upon a reduction of the capital stock.
8. Subject to the limitations, if any, hereinafter contained, the
Company may from time to time issue additional capital stock divided into
classes with such preferences as to dividends, voting power and other
incidents as may be determined in accordance with applicable provisions of
law, the charter of the Company and the outstanding capital stock of the
Company. Without limiting the generality of the foregoing, any such
additional capital stock may be an additional series of Preferred Stock or
additional shares of the initial or any other series of Preferred Stock. The
shares of Preferred Stock of different series and classes, subject to any
applicable provisions of law, may vary as to the following rights and
preferences:
(a) The annual dividend rate, or method of calculation thereof, and
the date from which the dividends on shares issued prior to the record date
for the first dividend shall be cumulative and the date for the first
dividend;
(b) The redemption price or prices, or method of calculation thereof,
and any restriction on the exercise by the Company of its right to redeem such
shares;
(c) The amount or amounts payable upon any liquidation or dissolution
or winding up;
(d) The terms and amount of any sinking fund provided for the purchase
or redemption of shares; and
(e) The conversion, participation or other special rights.
9. So long as any Preferred Stock of any series is outstanding, the
Company shall not, without the vote at a meeting called for that purpose of
the holders of at least two-thirds of the total number of shares of the
Preferred Stock of all series then outstanding and, so long as any shares of
the 4-1/2% Series of the Preferred Stock are outstanding, of at least seventy-
five per cent of the total number of shares of the Preferred Stock of all
series present or represented at the meeting, at which meeting a quorum as
hereinafter provided shall be present or represented:
(a) Make any change in the provisions relative to the Preferred Stock,
or of any outstanding series thereof, which would change the express terms and
provisions of such stock in any manner prejudicial to the holders thereof
<PAGE>
except that if such change is prejudicial to the holders of one or more, but
not all of such series, only such two-thirds vote and, so long as any shares
of the 4-1/2% Series of the Preferred Stock are outstanding, such seventy-five
per cent vote of the shares or classes of all series so affected shall be
required; or
(b) Create or authorize any class of stock which shall be preferred as
to dividends or assets over the Preferred Stock or any security convertible
into such class of stock.
No preferred stock so preferred as to dividends or assets over the Preferred
Stock (other than such preferred stock issued upon conversion of another
security) shall be issued more than six months after the above referred to
vote creating or authorizing such class of stock unless within six months
prior to such issue approval thereof has been obtained, at a meeting called
for the purpose, by vote of at least two-thirds of the total number of shares
of Preferred Stock of all series outstanding.
10. So long as any shares of the Preferred Stock of any series are
outstanding, the Company shall not, without the vote at a meeting called for
that purpose of the holders of at least a majority of the total number of
shares of the Preferred Stock of all series then outstanding and, so long as
any shares of the 4-1/2% Series of the Preferred Stock are outstanding and
with respect to subparagraphs (b)(i) and (b)(iv) only of this subdivision, of
at least seventy-five per cent of the total number of shares of Preferred
Stock of all series present or represented at the meeting, at which meeting a
quorum as hereinafter provided shall be present or represented:
(a) Issue shares of any series of Preferred Stock or of any other
stock ranking on a parity therewith as to dividends or assets if after such
issue the aggregate outstanding shares of all series of Preferred Stock and
such parity stock would exceed $60,000,000 par value.
(b) Issue additional shares of any series of Preferred Stock or of any
other stock ranking prior thereto or on a parity therewith as to dividends or
assets:
(i) So long as any shares of the 4-1/2% Series of the Preferred
Stock are outstanding, unless the par value of its stock ranking
junior to the Preferred Stock as to dividends and assets to be
outstanding immediately after such issue (plus, if the Company so
elects, its surplus as shown by its books provided distribution
on, or purchase of, such junior stock out of such surplus, or a
part thereof to be included for this purpose, is prohibited while
such additional preferred stock is outstanding) shall be at least
equal to the greater of the aggregate par value of, the aggregate
stated value of or the aggregate amount payable on involuntary
liquidation, dissolution or winding up of the affairs of the
Company upon all Preferred Stock of all series and of any other
such prior or parity stock to be outstanding immediately after
such issue;
(ii) Unless the junior stock equity (as defined in subdivision 11
hereof) to be outstanding immediately after such issue shall be at
least equal to the aggregate amount payable on involuntary
liquidation, dissolution or winding up of the affairs of the
Company upon all Preferred Stock of all series and of any other
such prior or parity stock to be outstanding immediately after
such issue; provided, however, that if for the purpose of meeting
this requirement it shall have been necessary to take into
consideration any portion of the earned surplus of the Company,
the Company shall not (until such junior stock equity exclusive of
such portion of earned surplus shall equal such aggregate) pay any
dividends or make any distribution on shares of its stock ranking
junior to the Preferred Stock as to dividends or assets which
would result in reducing such junior stock equity to an amount
less than such aggregate amount payable on involuntary
liquidation, dissolution or winding up of the affairs of the
Company.
<PAGE>
(iii) Unless the gross income of the Company after taxes available
for interest on its indebtedness and for dividends on its
Preferred Stock and any other such prior or parity stock,
determined in accordance with generally accepted accounting
principles, for a period of twelve (12) consecutive calendar
months within the fifteen (15) calendar months immediately
preceding the calendar month in which such additional stock is
issued, or in which a contract for the issuance and sale thereof
is made, is at least one and one-half (1-1/2) times the aggregate
of the annual interest charges and dividend requirements on all
interest bearing indebtedness and all series of Preferred Stock
and of such prior or parity stock to be outstanding immediately
after the proposed issue; and
(iv) So long as any shares of the 4-1/2% Series of the Preferred
Stock are outstanding, unless the net earnings of the Company
available for dividends determined in accordance with sound
accounting practice for the same twelve (12) month period are at
least two and one-half (2-1/2) times the annual dividend
requirements on all series of Preferred Stock and of such prior or
parity stock to be outstanding immediately after the proposed
issue.
In said computations in subparagraphs (iii) and (iv)
(aa) Interest on indebtedness and dividends on stock in each
case to be retired with the proceeds of the proposed issue
and similar charges on indebtedness and stock retired or to
be retired prior to the proposed issue from the proceeds of
any such junior stock issued by the Company are to be
excluded;
(bb) Such gross income or net earnings, respectively,
similarly determined for said twelve (12) months period,
from any property acquired by purchase, merger or otherwise
during or after said period or to be acquired in connection
with the proposed issue, may be included for such part of
such period as shall have preceded such acquisition thereof
by the Company; and
(cc) The amount deducted for depreciation shall be the
amount charged by the Company on its books for depreciation
during such period but not less than the greater of (x) two
and one-quarter per cent (2-1/4%) of the arithmetical
average of the gross plant investment in depreciable
property on the books of the Company on the first and last
days of such period (not including in depreciable property
any amounts carried in adjustment accounts on the books of
the Company at each such date) or (y) the largest minimum
depreciation requirement for such period of any mortgage
indenture to which the Company is a party during such
period, computed on the basis as set forth in said mortgage
indenture for a calendar or fiscal year period.
(c) Merge or consolidate with or into any other corporation or
corporations or sell, lease or dispose of all or substantially all its assets,
unless such merger, consolidation, sale, lease or disposition, or the issuance
and assumption of all securities to be issued or assumed in connection
therewith, shall have been ordered, approved, or permitted under the
provisions of the Public Utility Holding Company Act of 1935; provided that
the provisions of this subparagraph (c) shall not apply to a purchase or other
acquisition by the Company of franchises or assets of another corporation in
any manner which does not involve a merger or consolidation.
11. So long as any shares of the Preferred Stock of any series are
outstanding, the payment of dividends on Common Stock or on any other stock of
the Company ranking junior to the Preferred Stock as to dividends or assets
(other than (i) dividends payable in stock ranking junior to the Preferred
<PAGE>
Stock as to dividends and assets or (ii) dividends paid in cash if immediately
thereafter there shall be paid to the Company in cash an amount equal to such
dividends for shares of or as a capital contribution with respect to stock
ranking junior to the Preferred Stock as to dividends and assets) and the
making of any distribution of assets to holders of stock ranking junior to the
Preferred Stock as to dividends or assets by purchase of shares or otherwise
(each of such actions being herein embraced within the term "payment of junior
stock dividends") shall be subject to the following limitations:
(a) If and so long as the junior stock equity is, or as a result of
the proposed payment would become, less than twenty per cent (20%) of total
capitalization the payment of junior stock dividends, including the proposed
payment, during the twelve months ending with the last day of the month in
which the proposed payment is to be made shall not exceed fifty per cent (50%)
of the net income of the Company available for the payment of dividends on the
stock ranking junior to the Preferred Stock as to dividends and assets for the
twelve full calendar months immediately preceding the calendar month in which
such dividend is declared; and
(b) If and so long as the junior stock equity is, or as a result of
the proposed payment would become, less than twenty-five per cent (25%) but is
twenty per cent (20%) or more of total capitalization the payment of junior
stock dividends, including the proposed payment, during the twelve months
ending with the last day of the month in which the proposed payment is to be
made shall not exceed seventy-five per cent (75%) of the net income of the
Company available for the payment of dividends on the stock ranking junior to
the Preferred Stock as to dividends and assets for the twelve full calendar
months immediately preceding the calendar month in which such dividend is
declared.
For the purposes of this subdivision 11 "net income" shall be determined
in accordance with generally accepted accounting principles, provided,
however, that the amount deducted for depreciation shall be an amount computed
in accordance with clause (cc) of subparagraph (b) of subdivision 10 hereof.
The term "junior stock equity" as used in this subdivision 11 means the
aggregate of the par vale of, or stated capital represented by, the
outstanding shares of stock ranking junior to the Preferred Stock as to
dividends and assets, of the premium on capital stock and of the surplus
(including earned surplus, capital surplus and surplus invested in plant) of
the Company less the excess, if any, of the aggregate amount payable on
involuntary liquidation, dissolution or winding up of the affairs of the
Company upon all outstanding Preferred Stock of the Company over the aggregate
par or stated value thereof and less, unless the amounts or items are being
amortized or are being provided for by reserves, (i) any amounts recorded on
the books of the Company in adjustment accounts for utility plant and other
plant in excess of the original cost thereof, (ii) any intangible items set
forth on the asset side of the balance sheet of the Company as the result of
accounting convention, such as unamortized debt discount and expense and
capital stock discount and expense, and (iii) the excess, if any, during the
period from January 1, 1954 to the end of a month within ninety (90) days
preceding the date as of which junior stock equity is determined, over the
amount charged by the Company on its books during such period for depreciation
of an amount determined as follows:
(x) for the calendar year 1954 and for each full calendar year
thereafter, an amount equal to two and one-quarter per cent (2-
1/4%) of the arithmetical average of the gross plant investment in
depreciable property on the books of the Company on January 1 and
December 31 of such calendar year (not including in depreciable
property any amounts carried in adjustment accounts on the books
of the Company at each such date); and
<PAGE>
(y) for any other period an amount equal to the product of one-
twelfth (1/12th) of two and one-quarter per cent (2-1/4%) of the
gross plant investment in depreciable property on the books of the
Company on the first day of the calendar year in such period (not
including in depreciable property any amounts carried in
adjustment accounts on the books of the Company at such date)
multiplied by the number of full calendar months in such period.
The term "total capitalization" as used in this subdivision 11 means the
aggregate of (x) the junior stock equity, (y) the par value of, or stated
capital represented by, the outstanding shares of Preferred Stock and any
other stock ranking prior thereto or on a parity therewith as to dividends or
assets and (z) the principal amount of all outstanding indebtedness of the
Company represented by bonds, notes and other evidences of indebtedness
maturing by their terms more than one year from the date of issue thereof.
12. No stockholders, director, officer or agent of the Company shall
be held individually responsible for any action taken in good faith though
subsequently adjudged to be in violation of these rights and preferences.
13. Every holder of Preferred Stock of the Company by becoming such
shall be held to have consented to all of these provisions and to have agreed
to be bound thereby and to have waived to the full extent permitted by law any
right such holder may have either now or at any time in the future contrary to
these provisions.
<PAGE>
REMVEC II AGREEMENT
-------------------
DATED AS OF JULY 1, 1994
-----------------------
<PAGE>
REMVEC II AGREEMENT
--------------------
This Agreement is made as of July 1, 1994, by and among various Entities
(as that term is defined in Section 15.14 of the New England Power Pool
Agreement dated as of September 1, 1971, as it may be amended from time to
time (the "NEPOOL Agreement")) which are engaged in the electric utility
business within the geographic area served as of June 30, 1994 through the
Rhode Island, Eastern Massachusetts, Vermont Energy Control ("REMVEC")
satellite dispatching center established under the Amended REMVEC Agreement
dated as of August 12, 1977 (the "Expiring Agreement") and that have become
participants in the New England Power Pool ("NEPOOL") in accordance with the
terms of the NEPOOL Agreement. As of the effective date hereof, each entity
or group of entities listed below constitutes a single original "REMVEC II
Participant" under this Agreement. For the definition of "REMVEC II
Participant" at subsequent times, see Article XII, below.
ARTICLE I. Basic Understandings
--------------------
As a result of the implementation by NEPOOL of recommendations made in
the 1993 Strategic Pool Operations Review Task Force Report, New England Power
Exchange ("NEPEX"), the central dispatch and interchange office established
pursuant to the NEPOOL Agreement, will assume direct control over the
generating units in New England on or about July 1, 1997. REMVEC, which was
established to operate as a satellite of NEPEX by the Expiring Agreement,
would be expected to become a transmission security analysis center and to
assist NEPEX in the coordination and control of the transmission system.
Thus, REMVEC's responsibilities as a NEPEX satellite organization would be
significantly reduced. It would no longer have generation control
responsibilities (voice communication with and dispatching of its
participants' generation real power output). REMVEC's tasks would be limited
to those directly related to preserving the security of its participants' bulk
power systems.
Following extensive discussion and deliberation by REMVEC's
Participants, the REMVEC Operating Committee and the REMVEC Executive
Committee, the REMVEC Executive Committee, by unanimous vote taken on April
22, 1994, accepted a proposal made by New England Power Company ("NEP") to
provide security analysis services to participants in a new organization to be
established and maintained by the participants for the purposes of operating
as a satellite of NEPEX and fulfilling its satellite responsibilities by
entering into, overseeing and administering on behalf of its participants a
security analysis services agreement with NEP. This Agreement (to be called
the "REMVEC II Agreement") establishes the contemplated organization, and sets
forth the terms and conditions under which its Participants agree to be bound.
In consideration of their mutual undertakings herein, the REMVEC II
Participants hereby agree to establish and maintain an organization, called
Rhode Island, Eastern Massachusetts, Vermont Energy Control II ("REMVEC II").
REMVEC II shall become and shall operate as a satellite of NEPEX as of the
date on which NEP commences to provide "Base Services" under the provisions of
the Security Analysis Services Agreement between and among NEP, REMVEC II and
REMVEC II Participants (the "SAS Agreement") which is being executed
concurrent with this Agreement. A copy of the SAS Agreement is attached to
and incorporated into this Agreement as "Appendix A". Prior to that date,
REMVEC will continue to operate as a satellite of NEPEX. It is expressly
understood that the Expiring Agreement shall remain in effect until it is
terminated in accordance with its terms and that, until it is so terminated,
it will coexist with this Agreement. Any and all expenses incurred or to be
incurred under the Expiring Agreement shall be treated as separate and
distinct from any and all expenses incurred or to be incurred under this
Agreement and/or the SAS Agreement. The REMVEC II Participants further agree
to the following terms and conditions.
<PAGE>
ARTICLE II. Objectives
----------
The objectives of REMVEC II are:
1. To preserve the security of the bulk power systems of the REMVEC II
Participants.
2. To operate as a satellite of NEPEX.
ARTICLE III. Effective Date and Term
-----------------------
Following (i) execution of this Agreement by all entities that were
Participants in REMVEC as of July 1, 1994, and (ii) the receipt of all
necessary regulatory approvals of this Agreement (including, without
limitation, that of the Federal Energy Regulatory Commission), this Agreement
shall become effective as of July 1, 1994. Each REMVEC II Participant shall
remain a REMVEC II Participant at least through midnight on June 30, 1998. A
REMVEC II Participant (with the sole exception of NEP) may terminate its
participation in REMVEC II as of midnight on June 30 of any calendar year
beginning with 1998 and ending with 2004 by providing REMVEC II not less than
two (2) years' prior written notice; provided, however, that such REMVEC II
Participant shall have received approval prior to the giving of such notice
from the NEPOOL Management Committee allowing it to be a direct reporting
entity to NEPEX under the NEPOOL Agreement. A REMVEC II Participant may
terminate its participation in REMVEC II as of midnight on June 30, 2005 or as
of midnight on June 30 of any subsequent year by providing REMVEC II not less
than three (3) years prior written notice. REMVEC II shall cease to exist and
this Agreement shall be terminated, except as to any remaining payment
obligations, as of the date on which the last remaining REMVEC II Participant
terminates its participation in REMVEC II in accordance with the foregoing
provisions.
If (i) a REMVEC II Participant or entity which is a member of a REMVEC
II Participant ceases to be a member of NEPOOL pursuant to Section 16.2 of the
NEPOOL Agreement or ceases to be a member of NEPOOL for any other reason or
(ii) if the REMVEC II Executive Committee determines that any REMVEC II
Participant or entity which is a member of a REMVEC II Participant has failed
to take in good faith such steps as may reasonably be required to perform its
obligations pursuant to this Agreement and such failure continues for an
unreasonable length of time following appropriate notice to such REMVEC II
Participant or entity, the REMVEC II Executive Committee may thereupon
terminate such Participant's or entity's status as a REMVEC II Participant or
member of a REMVEC II Participant.
Any REMVEC II Participant or entity whose participation in REMVEC II is
terminated pursuant to this Article or any other provision of this Agreement
shall be responsible for and shall make provision for (i) any termination
charges due NEP under the SAS Agreement; (ii) all debts and obligations then
due or to become due from said REMVEC II Participant or entity from
transactions up to said withdrawal; and (iii) making available to REMVEC II,
at least until the remaining REMVEC II Participants can provide alternate
facilities, any facilities said REMVEC II Participant or entity then has for
use in whole or in part in connection with REMVEC II operations.
Nothing herein shall be construed in such fashion as to make a REMVEC II
Participant or entity, without its consent, a guarantor or endorser of, or
otherwise liable for, any indebtedness (including any indebtedness for money
borrowed or payments deferred) incurred by or on behalf of REMVEC II or others
in connection with REMVEC II matters other than the REMVEC II Participant's or
entity's obligation under this Agreement to pay its share of the expenses of
REMVEC II referred to in this Article III, and in Articles IX and X hereof and
contractual obligations referred to in Article VI hereof.
<PAGE>
ARTICLE IV. REMVEC II Participant Obligations with Respect to the SAS
Agreement
---------------------------------------------------------
Concurrent with execution of this Agreement, each REMVEC II Participant
shall execute a copy of the SAS Agreement, and shall fulfill its obligations
under that Agreement.
ARTICLE V. Executive Committee
-------------------
An Executive Committee shall be established. Each REMVEC II Participant
whose Territorial KWH during the preceding calendar year represents 3% or more
of the aggregate REMVEC II Territorial KWH for such period shall be entitled
to one member and one alternate on the Executive Committee. The remaining
REMVEC II Participants shall be divided into two groups, (a) one group
consisting of investor-owned REMVEC II Participants and (b) the other group
consisting of municipally-owned utilities, cooperatively-owned utilities and
the balance of the REMVEC II Participants; and each group shall have the right
to appoint and be represented by one member and one alternate.
At its annual meeting the Executive committee shall elect from its
membership a Chairperson and a Vice Chairperson and shall also elect a
Secretary who need not be a member of the Committee. They shall have the
powers and duties usually incident to such offices.
The Executive Committee shall hold its annual meeting in January or at a
special meeting called for such purpose in lieu thereof at such time and place
as the Chairperson shall designate and shall hold other meetings at the call
of the Chairperson. Any two or more members may call a meeting of the
Executive Committee in case the Chairperson shall fail to call a meeting upon
request. Normally, notices of meetings shall specify the subject matters to
be acted upon at the meeting and shall be made available to each member of the
Executive Committee at least five days prior to the date of the meeting.
However, in the case of emergency, the Executive Committee may meet upon call
of any member in such manner as the Executive Committee shall determine.
Each member of the Executive Committee or his/her alternate shall have
the right to cast a number of votes equal to the Territorial KWH of his/her
REMVEC II Participant(s) during the preceding calendar year. The affirmative
votes of at least three members representing REMVEC II Participants who have
at least two-thirds (2/3) of the aggregate Territorial KWH of all REMVEC II
Participants during the preceding calendar year shall be required for the
adoption of a resolution which shall become binding upon the REMVEC II
Participants, with respect to REMVEC II matters; provided, however,
(i) No single member shall be capable of defeating the adoption of a
resolution relating to any operational matter;
(ii) the negative votes of any two or more members representing REMVEC
II Participants having at least 15% of such total number of votes
shall defeat any such action; and
(iii) the unanimous affirmative vote of all members of the Executive
Committee shall be required for the adoption of a resolution
arranging for the addition of any "Supplemental Services" under
Article IV ("Services") of the SAS Agreement.
As used in this Agreement, "Territorial KWH" will be the annual KWH load
of a REMVEC II Participant calculated by adding for the 12-month calendar year
the REMVEC II Participant's net generated KWH, all non-firm purchases from
other REMVEC II Participants, all purchases (firm and non-firm) from non-
REMVEC II Participants, and subtracting all sales (firm and non-firm) to non-
participants and all non-firm sales to other REMVEC II Participants. In the
case of REMVEC II Participants that do not have load, a proxy shall be
developed for use as the Participant's "Territorial KWH" by the Operating
Committee and submitted for approval by the Executive Committee. Such proxy
may be based on the Participant's generation on an equivalent load basis or on
some other reasonable criteria.
<PAGE>
ARTICLE VI. Duties and Authority of the Executive Committee.
-----------------------------------------------
The Executive Committee shall have and may exercise all powers of this
REMVEC II Agreement and may administer, enforce and interpret the provisions
of this Agreement in order to accomplish the objectives of REMVEC II
consistent with the provisions of this Agreement. It may delegate powers to
others, including the Operating Committee, and may arrange for accounting,
engineering, legal and other required services. However, with the sole
exception of the SAS Agreement, all contracts on account of REMVEC II shall be
approved by resolution of the Executive Committee and when executed by at
least three of the REMVEC II Participants who have at least two-thirds (2/3)
of the aggregate Territorial KWH of all REMVEC II Participants during the
preceding calendar year shall be binding on all REMVEC II Participants.
The chairperson of the Executive Committee is hereby authorized to
execute the SAS Agreement on behalf of REMVEC II and such other documents as
may be necessary to seek and obtain approval of the same from the Federal
Energy Regulatory Commission under the Federal Power Act.
The Executive Committee shall direct the Operating Committee to conduct
a review of all criteria, rules and standards and operating procedures in
effect under the Existing Agreement and to make a recommendation to it
concerning the criteria, rules and standards and operating procedures that
should be adopted under this Agreement. Prior to January 1, 1997, the
Executive Committee shall adopt appropriate criteria, rules and standards and
operating procedures for REMVEC II.
In the event that a notice of termination is received from NEP under the
provisions of Article III or the SAS Agreement, the Executive Committee shall
meet and explore alternative arrangements under which the objectives of REMVEC
II might be met under this Agreement.
Any disputes hereunder or related to the REMVEC II operations will be
submitted to the Executive Committee, including, without limitation, disputes
between NEP and a REMVEC II Participant or Participants of a technical and/or
operational nature relating to the provision of service by NEP under the SAS
Agreement that are not resolved by the Operating Committee in accordance with
the provisions of Article VIII, below. Each REMVEC II Participant, subject to
its right to arbitration pursuant to Article XI hereof, agrees to be bound by
the decisions of the Executive Committee.
The Secretary of the Executive Committee shall maintain a current list
of addresses for the giving of notices to REMVEC II and all REMVEC II
Participants under the provisions of the SAS Agreement and shall provide a
copy of such list to all parties to the SAS Agreement upon any party's
request.
ARTICLE VII. Operating Committee
-------------------
An Operating Committee shall be established. REMVEC II Participants and
groups of REMVEC II Participants shall be entitled to membership on the
Operating Committee in the same manner and to the same extent as they are
entitled to membership on the Executive Committee. At its annual meetings the
Operating Committee shall elect from its membership a Chairperson, who shall
be a member other than NEP's member, and a Vice Chairperson and shall also
elect a Secretary who need not be a member of the Committee. They shall have
the powers and duties usually incident to such offices.
The Operating Committee shall hold its annual meeting in January or at a
special meeting called for such purpose in lieu thereof at such time and place
as the Chairperson shall designate and shall hold other meetings at the call
of the Chairperson. Any two or more members may call a meeting of the
Operating Committee in case the Chairperson shall fail to call a meeting upon
request. Normally, notices of meetings shall specify the subject matters to
be acted upon at the meeting and shall be made available to each member of the
Operating Committee at least five days prior to the date of the meeting.
However, in case of emergency, the Operating Committee may meet upon call of
any member in such manner as the Operating Committee shall determine.
<PAGE>
Each member of the Operating Committee or his/her alternate shall have
the right to cast a number of votes equal to the Territorial KWH of its REMVEC
II Participant(s) during the preceding calendar year. The affirmative votes
of at least three members representing REMVEC II Participants who have at
least two-thirds (2/3) of the aggregate Territorial KWH of all Participants
during the preceding calendar year shall be required for the adoption of a
resolution which shall become binding upon the Participants; provided,
however, no single member shall be capable of defeating the adoption of a
resolution relating to any operational matter.
Any Participant may appeal to the Executive Committee any action taken
by the Operating Committee. Such an appeal shall be taken prior to the end of
the tenth business day following the meeting of the Operating Committee to
which the appeal relates by delivering to the Secretary of the Executive
Committee a signed and written notice of appeal and by mailing a copy of the
notice to each member of the Executive Committee. Pending a vote of the
Executive Committee affirming the action taken by the Operating Committee the
filing of a notice of appeal as aforesaid shall suspend the action appealed.
ARTICLE VIII. Duties and Authority of the Operating Committee
-----------------------------------------------
Subject to direction from the Executive Committee, and to the terms of
this Agreement, the Operating Committee shall be responsible for the day-to-
day oversight and administration of the SAS Agreement and of this Agreement in
such a manner as to achieve the objectives of REMVEC II as a satellite of
NEPEX. Each of the REMVEC II Participants agrees to comply with directions
from the Operating Committee in this regard, provided that such directions
conform to sound principles of utility operation and to provisions of
applicable laws and contracts. All disputes between NEP and a REMVEC II
Participant or Participants of a technical and/or operational nature relating
to the provision of service by NEP under the SAS Agreement shall be submitted
by NEP and/or the REMVEC II Participant or Participants to the Operating
Committee for resolution.
The Operating Committee shall have the authority to appoint task forces
for particular studies and shall name thereto available employees of REMVEC II
Participants. A REMVEC II Participant may be reimbursed for the time and
expenses of any of its employees engaged in such task force work in such
manner as is determined by the Executive Committee. Subject to direction from
the Executive Committee, the Operating Committee may delegate its specific
duties to subcommittees, task forces, and others.
The Operating Committee shall, to the extent appropriate to achieve the
objectives of REMVEC II, establish reasonable standards, criteria and rules
and operating procedures relating to protective equipment, metering,
telemetering, communications, switching, voltage control, load shedding,
operating and emergency procedures, and the operation and maintenance of the
facilities of the REMVEC II Participants. The Operating Committee shall be
responsible for the development of appropriate billing procedures in concert
with the billing agent (New England Power Service Company) for any
transactions pursuant to this Agreement.
Each REMVEC II Participant shall furnish to the Operating Committee such
data and information as the Operating Committee may reasonably expect for the
performance of its duties.
ARTICLE IX. Expenses of REMVEC II
---------------------
All expenses of REMVEC II authorized under this Agreement, other than
expenses incurred under the SAS Agreement, shall be paid by REMVEC II
Participants monthly to New England Power Service Company as billing agent,
upon receipt of bills, in proportion to their previous year's Territorial KWH
as compared to the aggregate of such Territorial KWH for all Participants.
All REMVEC II Participants agree that, as necessary, New England Power
Service Company will render a bill to each REMVEC II Participant on the first
working day of each month for all amounts payable by such REMVEC II
Participant hereunder with respect to the particular month, on an estimated
<PAGE>
basis for that month to be adjusted to actual experience quarterly. All bills
shall be due when rendered except as specified below in this paragraph.
Unless New England Power Service Company and the REMVEC II Participant in
arrears agree otherwise, when all or part of any bill shall remain unpaid for
more than fifteen (15) days after the due date, interest at an annual rate of
2% above the lowest interest rate then being charged by the Bank of Boston, or
its successor, on 90 day commercial loans shall accrue to New England Power
Service Company from and after said due date and be payable to New England
Power Service Company on such unpaid amount, or in the event the amount of the
bill is disputed, on the amount finally determined to be due and payable. A
REMVEC II Participant may require New England Power Service Company to render
bills fifteen (15) days prior to said first working day. However such early
rendered bills shall not be deemed due until such first working day.
Whenever an additional entity which is a participant in NEPOOL becomes
or joins a REMVEC II Participant in REMVEC II pursuant to the provisions of
Article XII hereof, it shall pay a charge equal to the proportion of the
REMVEC II expenses, if any, unpaid by it which it would have incurred if it
had been a REMVEC II Participant during the period between the date it became
a NEPOOL participant, not subject to composite treatment under Section 3.3 of
the NEPOOL Agreement, and the date it actually becomes a REMVEC II Participant
hereunder. The payments received for such charge shall be credited and paid
to the REMVEC II Participants who incurred the corresponding charges.
ARTICLE X. Amendment
---------
This Agreement may be amended at any time upon the consent of all REMVEC
II Participants, or upon six months' notice sent to the Participants by the
Secretary of the Executive Committee following a duly approved resolution of
the Executive Committee. Further, this Agreement shall be amended at anytime
upon a determination by the Executive Committee, at a meeting called pursuant
to Article V and upon a duly approved resolution taken pursuant to Article V,
that such amendment is necessitated on account of REMVEC II operating as a
satellite of NEPEX or a successor organization. However, (i) no amendment is
to adversely affect any contractual arrangement entered into on account of the
establishment and operation of REMVEC II pursuant to this Agreement; and (ii)
without consent of all REMVEC II Participants, no amendment shall limit a
REMVEC II Participant's rights under Article III to terminate its
participation in REMVEC II or alter the provisions of the last paragraph of
Article III, above.
ARTICLE XI. Arbitration
-----------
In case any dispute shall arise as to the interpretation or the
performance of this Agreement which cannot be settled by the Executive
Committee, or in the case any dispute so settled by the Executive Committee is
considered by a REMVEC II Participant to work an undue hardship on it, such
dispute shall be submitted to arbitration by the request of the complaining
REMVEC II Participant. Copies of any such request shall be served on all
REMVEC II Participants and it shall specify the issue or issues in dispute and
summarize the REMVEC II Participant's claim with respect thereto. Within
thirty (30) days after receipt of such a request authorized representatives of
all REMVEC II Participants shall confer and attempt to agree upon appointment
of a single arbitrator. If such agreement is not accomplished, the
Chairperson of the Executive Committee shall request the American Arbitration
Association to appoint an arbitrator in accordance with its Commercial
Arbitration Rules, which rules shall govern the conduct of the arbitration in
the absence of contrary agreement by all REMVEC II Participants. The
arbitrator shall conduct a hearing at a place in Massachusetts of his/her
designation, and within thirty (30) days thereafter, unless such time is
extended by agreement of all REMVEC II Participants, shall notify the REMVEC
II Participants in writing of his/her decision, stating his/her reasons for
such decision and separately listing his/her findings of fact and conclusions
of law. The arbitrator shall not have power to amend or add to this Agreement
or, if involved, the SAS Agreement. Subject to such limitation, the decision
of the arbitrator shall be final and binding on all REMVEC II Participants
except that any REMVEC II Participant may petition to a court of competent
jurisdiction for review of any conclusions of law. The decision of the
arbitrator shall determine and specify how the expenses of the arbitration
shall be allocated among the REMVEC II Participants.
<PAGE>
ARTICLE XII. Becoming a REMVEC II Participant
--------------------------------
Any Entity (as that term is defined in Section 15.14 of the NEPOOL
Agreement) which is engaged in the electric utility business within the
geographic area served as of June 30, 1994 through the REMVEC satellite
dispatching center, and which has become a Participant in NEPOOL in accordance
with the terms of the NEPOOL Agreement may, upon compliance with such
reasonable conditions as the Executive Committee shall prescribe, become a
REMVEC II Participant by depositing a counterpart of this Agreement, as
theretofore amended, duly executed by it, with the Secretary of the Executive
Committee, accompanied by a certified copy of a vote of its board of
directors, or such other body or bodies as may be appropriate, duly
authorizing its execution and performance of this Agreement, and a check in
payment of the charge provided by Article IX.
The Executive Committee shall include in its prescribed conditions the
requirement that the entity as a condition of membership in REMVEC II:
(i) have installed specified protective equipment, metering,
telemetering, communications, switching, voltage control and
load shedding equipment and other specified facilities;
(ii) adopt REMVEC II's current criteria, rules, standards and
operating procedures;
(iii) furnish in a timely manner such operating data and other
information as may be needed to permit NEP, REMVEC II and
NEPEX to coordinate the operation and maintenance of the
entity's generation and transmission in accordance with
Section 12 and other provisions of the NEPOOL Agreement;
and
(iv) if the entity has territorial load and/or owns or operates
generation and/or transmission facilities, become a
signatory to the SAS Agreement.
Any entity which satisfies these requirements shall become a REMVEC II
Participant, and this Agreement shall become fully binding and effective in
accordance with its terms as to such entity, as of the first day of the second
calendar month following its satisfaction of such requirements; provided that
an earlier or later effective time may be fixed by the Executive Committee
with the concurrence of such entity.
ARTICLE XIII. Miscellaneous
-------------
Without the consent of the Executive Committee, no REMVEC II Participant
may assign its interest under this Agreement except in connection with a
merger, consolidation or transfer of substantially all its assets.
The signatories hereto shall not become partners by reason of this
Agreement or their activities hereunder, but as to each other and to third
persons, they shall be and remain independent contractors in all matters
relating to this Agreement. This Agreement shall not be construed to create
any liability on the part of any signatory to anyone not a party to this
Agreement. Each signatory shall retain its separate identity and, to the
extent not limited hereby, its individual freedom in rendering service to its
customers.
All amendments to this Agreement shall be in writing signed by the duly
authorized representative(s) of the parties. This Agreement constitutes the
entire understanding of the parties and there are no representations,
understandings or agreements, oral or written, that are not included herein.
Should any provision of this Agreement be held invalid, such provision shall
be considered severable and such invalidity shall not affect the remainder of
the provisions herein.
<PAGE>
This Agreement, and all the rights, obligations and performance of the
REMVEC II Participants hereunder, are subject to applicable state and federal
laws and to all duly promulgated rules, regulations and orders of regulatory
bodies having jurisdiction in the premises. Each REMVEC II Participant agrees
to proceed forthwith with the filing of this Agreement with, and the taking of
any requisite action before, any regulatory authority having jurisdiction over
said Participant and its interests herein.
IN WITNESS WHEREOF the parties hereto comprising the REMVEC II
Participants, for themselves and as agents for the other entities which from
time to time become members of their respective REMVEC II Participant groups,
have caused their corporate names to be subscribed by their respective
officers or agents thereunto duly authorized, all as of July 1, 1994, but
actually on the respective dates indicated below.
BOSTON EDISON COMPANY
/s/ Robert A. Ruscitto 2/16/96
By Date
BLACKSTONE VALLEY ELECTRIC COMPANY
EASTERN EDISON COMPANY
MONTAUP ELECTRIC COMPANY
NEWPORT ELECTRIC CORPORATION
Subsidiaries of EASTERN UTILITIES ASSOCIATES
/s/ Kevin A. Kirby 2/16/96
By Date
NEW ENGLAND POWER COMPANY
GRANITE STATE ELECTRIC COMPANY
MASSACHUSETTS ELECTRIC COMPANY
THE NARRAGANSETT ELECTRIC COMPANY
Subsidiaries of NEW ENGLAND ELECTRIC SYSTEM
/s/ R. P. Sergel 5/1/96
/s/ Jeffrey D. Tranen 4/8/96
By Date
CAMBRIDGE ELECTRIC LIGHT COMPANY
COMMONWEALTH ELECTRIC COMPANY
CANAL ELECTRIC COMPANY
Subsidiaries of COMMONWEALTH ENERGY SYSTEM
/s/ James J. Keane 2/15/96
By Date
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY
/s/David Foote 4/5/96
By Date
<PAGE>
VERMONT ELECTRIC POWER COMPANY, INC.
By: VERMONT ELECTRIC POWER COMPANY, INC.
For itself and as agent for the following Vermont electric
utilities who have joined with it as a single participant under
the terms of the NEPOOL Agreement :
BARTON VILLAGE, INC.
CITY OF BURLINGTON ELECTRIC DEPARTMENT
CENTRAL VERMONT PUBLIC SERVICE CORPORATION
CITIZENS UTILITIES COMPANY
VILLAGE OF ENOSBURG FALLS WATER AND LIGHT DEPARTMENT
GREEN MOUNTAIN POWER CORPORATION
TOWN OF HARDWICK ELECTRIC DEPARTMENT
VILLAGE OF HYDE PARK, INC.
VILLAGE OF JACKSONVILLE ELECTRIC COMPANY
VILLAGE OF JOHNSON ELECTRIC LIGHT DEPARTMENT
VILLAGE OF LUDLOW ELECTRIC LIGHT DEPARTMENT
VILLAGE OF LYNDONVILLE ELECTRIC DEPARTMENT
VILLAGE OF MORRISVILLE WATER AND LIGHT DEPARTMENT
VILLAGE OF NORTHFIELD ELECTRIC DEPARTMENT
VILLAGE OF ORLEANS ELECTRIC DEPARTMENT
VILLAGE OF READSBORO ELECTRIC LIGHT DEPARTMENT
ROCHESTER ELECTRIC LIGHT AND POWER COMPANY
VILLAGE OF STOWE WATER AND LIGHT DEPARTMENT
VILLAGE OF SWANTON
VERMONT ELECTRIC GENERATION & TRANSMISSION COORPERATIVE,
INC.
VERMONT MARBLE POWER DIVISION OF OMYA, INC.
VERMONT PUBLIC POWER SUPPLY AUTHORITY
WASHINGTON ELECTRIC COOPERATIVE, INC.
/s/ 2/23/96
By Date
Vice President
ASHBURNHAM MUNICIPAL LIGHT DEPARTMENT
/s/ Thomas E. Lewis 8/2/96
By Date
TOWN OF BOYLSTON MUNICIPAL LIGHT DEPARTMENT
/s H. Bradford White
By Date
TOWN OF BRAINTREE ELECTRIC LIGHT DEPARTMENT
/s/ Walter R. McGrath 3/15/96
By Date
TOWN OF DANVERS ELECTRIC DEPARTMENT
/s/ Wayne P. Marquis 5/9/96
By Date
Manager
<PAGE>
TOWN OF GEORGETOWN MUNICIPAL LIGHT DEPARTMENT
/s/ Wayne Snow 8/5/96
By Date
TOWN OF GROTON ELECTRIC LIGHT DEPARTMENT
/s/ Roger H. Beeltje 3/14/96
By Date
HINGHAM MUNICIPAL LIGHTING PLANT
/s/ Joseph R. Spadea Jr. 3/12/96
By Date
HOLDEN MUNICIPAL LIGHT DEPARTMENT
/s/ Edla Ann Bloom 8/7/96
By Date
HUDSON LIGHT AND POWER DEPARTMENT
/s/ Anthony J. Monteiro 9/3/96
By Date
TOWN OF HULL MUNICIPAL LIGHTING PLANT
/s/ 9/4/96
By Date
TOWN OF IPSWICH MUNICIPAL ELECTRIC DEPARTMENT
/s/ Donald R. Stone Sr. 7/31/96
By Date
LITTLETON ELECTRIC LIGHT DEPARTMENT
/s/ Savas C. Danos 7/30/96
By Date
TOWN OF MANSFIELD MUNICIPAL ELECTRIC DEPARTMENT
/s/ John Larch 9/27/96
By Date
MARBLEHEAD MUNICIPAL LIGHT DEPARTMENT
/s/ Robert V. Jolly Jr. 4/2/96
By Date
<PAGE>
MIDDLEBOROUGH MUNICIPAL GAS AND ELECTRIC DEPARTMENT
/s/ John W. Dunfey 4/19/96
By Date
TOWN OF MIDDLETON MUNICIPAL LIGHT DEPARTMENT
/s/ William E. Kelley Oct. 15, 1996
By Date
TOWN OF NORTH ATTLEBOROUGH ELECTRIC DEPARTMENT
/s/ David I. Sweetland 3/25/96
By Date
PASCOAG FIRE DISTRICT
/s/ Albert Palmisciano 8/5/96
By Date
PAXTON MUNICIPAL LIGHT DEPARTMENT
/s/ Harold L. Smith Mgr 08/01/96
By Date
PEABODY MUNICIPAL LIGHT PLANT
/s/ Bruce P. Patten 3/15/96
By Date
PRINCETON MUNICIPAL LIGHT DEPARTMENT
/s/ Sharon A. Staz 3/21/96
By Date
TOWN OF READING MUNICIPAL LIGHT DEPARTMENT
/s/ Leonard D. Rucker August 23, 1996
By Date
ROWLEY MUNICIPAL LIGHT PLANT
/s/ G. Robert Merry April 18, 1996
By Date
SHREWSBURY'S ELECTRIC LIGHT PLANT
/s/ Thomas R. Josie 8/5/96
By Date
<PAGE>
STERLING MUNICIPAL ELECTRIC LIGHT PLANT
/s/ John Kilgo Jr. 6/18/96
By Date
TAUNTON MUNICIPAL LIGHTING PLANT
/s/ Joseph M. Blain 3/21/96
By Date
TEMPLETON MUNICIPAL LIGHTING PLANT
/s/ Gerald Skelton 3/5/96
By Date
TOWN OF WAKEFIELD MUNICIPAL LIGHT DEPARTMENT
/s/ William J. Wallace 3/13/96
By Date
WEST BOYLSTON MUNICIPAL LIGHTING PLANT
/s/ John Scirpoli 5/1/96
By Date
<PAGE>
APPENDIX A
----------
<PAGE>
SECURITY ANALYSIS SERVICES AGREEMENT
BETWEEN AND AMONG
NEW ENGLAND POWER COMPANY
REMVEC II
AND
REMVEC II PARTICIPANTS
<PAGE>
AGREEMENT dated as of July 1, 1994 by and among NEW ENGLAND POWER
COMPANY, a Massachusetts corporation, REMVEC II, an organization established
by the REMVEC II Agreement, and REMVEC II PARTICIPANTS. Each REMVEC II
Participant is (or, as a condition to becoming a REMVEC II Participant under
the REMVEC II Agreement, will become) a signatory to this Agreement and, as
such, agrees to be bound by this Agreement's terms and conditions. The
signatories hereto shall not become partners by reason of this Agreement or
their activities hereunder, but as to each other and to third persons, they
shall be and remain independent contractors in all matters relating to this
Agreement. This Agreement shall not be construed to create any liability on
the part of any signatory to anyone not a party to this Agreement. Each
signatory shall retain its separate identity and, to the extent not limited
hereby, its individual freedom in rendering service to its customers.
ARTICLE I. Definitions
-----------
As used in this Agreement, the following words and terms shall have the
meanings set forth herein:
"Base Services" shall mean the scope of service defined in the document
entitled "Case 1A Functional Analysis for REMVEC" dated August 24, 1993, a
copy of which is attached to and incorporated into this Agreement as "Appendix
A", and services reasonably deemed by NEP to be incidental and reasonably
related to such scope of service.
"Contract Year" shall mean an annual period from July 1 through June 30
(i.e. Contract Year 1994-5 shall constitute the annual period from July 1,
1994 through June 30, 1995).
"Expiring Agreement" shall mean the Amended REMVEC Agreement dated as of
August 12, 1977.
"NEP" shall mean New England Power Company.
"NEPEX" shall mean the New England Power Exchange, the central dispatch
and interchange office established pursuant to the NEPOOL Agreement.
"NEPOOL" shall mean the New England Power Pool.
"NEPOOL Agreement" shall mean the New England Power Pool Agreement dated
as of September 1, 1971, as it may be amended from time to time. The NEPOOL
Agreement is incorporated into this Agreement by reference.
"Participant" shall mean an entity or group of entities (other than NEP)
that is or becomes a REMVEC II Participant in accordance with the terms of the
REMVEC II Agreement.
"REMVEC" shall mean Rhode Island, Eastern Massachusetts, Vermont Energy
Control, an organization established by the Expiring Agreement and, until the
date on which NEP commences to provide Base Services under this Agreement, a
satellite of NEPEX.
"REMVEC II" shall mean Rhode Island, Eastern Massachusetts, Vermont
Energy Control II, an organization established by the REMVEC II Agreement and,
as of the date on which NEP commences to provide Base Services under this
Agreement, a satellite of NEPEX.
"REMVEC II Agreement" shall mean the REMVEC II Agreement dated as of
July 1, 1994, as it may be amended from time to time, by and among various
Entities (as that term is defined in Section 15.4 of the NEPOOL Agreement)
engaged in the electric utility business within the geographic area served as
<PAGE>
of June 30, 1994 under the Expiring Agreement through the REMVEC satellite
dispatching center and that are or become a Participant in NEPOOL in
accordance with the terms of the NEPOOL Agreement. A copy of the REMVEC II
Agreement is attached to and incorporated into this Agreement as "Appendix
B".
"Supplemental Services" shall mean services in addition to Base Services
to be provided by NEP under this Agreement that have been arranged for by
REMVEC II under the provisions of Article IV ("Services"), below.
ARTICLE II. Basic Understandings
--------------------
As a result of the implementation by NEPOOL of recommendations made in
the 1993 Strategic Pool Operations Review Task Force Report, NEPEX will assume
direct control over the generating units in New England on or about July 1,
1997. REMVEC, which was established to operate as a satellite of NEPEX by the
Expiring Agreement, would be expected to become a transmission security
analysis center and to assist NEPEX in the coordination and control of the
transmission system. Thus, REMVEC's responsibilities as a NEPEX satellite
organization would be significantly reduced. It would no longer have
generation control responsibilities (voice communication with and dispatching
of participants' generation real power output). REMVEC's tasks would be
limited to those directly related to preserving the security of its
participants' bulk power systems.
Following extensive discussion and deliberation by REMVEC's
Participants, the REMVEC Operating Committee and the REMVEC Executive
Committee, the REMVEC Executive Committee, by unanimous vote taken on April
22, 1994, accepted a proposal made by NEP to provide security analysis
services to participants in a new organization to be established and
maintained by the participants for the purposes of operating as a satellite of
NEPEX and fulfilling its satellite responsibilities by entering into,
overseeing and administering on behalf of its participants a security analysis
services agreement with NEP. The REMVEC II Agreement establishes REMVEC II as
the contemplated organization, and the terms and conditions under which its
Participants agree to be bound. This Agreement provides the terms and
conditions under which NEP agrees to provide the contemplated security
analysis services to REMVEC II and the Participants.
In consideration of their mutual undertakings herein, NEP, REMVEC II and
each Participant hereby agree to the following terms and conditions.
ARTICLE III. Term
----
Following (i) execution of this Agreement by all entities that were
Participants in REMVEC as of July 1, 1994, and (ii) the receipt of all
necessary regulatory approvals of this Agreement (including, without
limitation, that of the Federal Energy Regulatory Commission), this Agreement
shall become effective as of July 1, 1994 and shall remain in effect for a
term coterminous with the term of the REMVEC II Agreement; provided, however,
that NEP shall have the right to terminate its rights and obligations under
this Agreement as of midnight on June 30, 2005 or of any subsequent year by
providing REMVEC II not less than three (3) years' prior written notice, and
further provided that each Participant shall have the right to terminate its
rights and obligations under this Agreement coincident with the termination of
its participation in REMVEC II in accordance with the provisions of Article
III of the REMVEC II Agreement. In the event of the termination of the REMVEC
II Agreement, or the termination by a Participant of its participation in
REMVEC II, prior to June 30, 2002, each Participant, or the Participant
<PAGE>
terminating its participation in REMVEC II, as the case may be, agrees to pay
NEP the termination charge specified in "Appendix C", attached to and
incorporated into this Agreement.
ARTICLE IV. Services
--------
NEP is in the process of consolidating its North Andover and Worcester
dispatch centers and procuring a new energy management system ("EMS") for
installation in the space now occupied by REMVEC at the New England Electric
complex in Westborough, Massachusetts. In conjunction with this effort, NEP
agrees that the EMS that it designs, constructs and installs will be capable
of providing Base Services to Participants under this Agreement. NEP agrees to
keep REMVEC II advised concerning the selection of the EMS vendor and the
design specifications being employed in the EMS that relate to Base Services
to be provided hereunder. NEP shall take into consideration, but shall not be
bound by, any recommendation made by REMVEC II regarding these matters.
Finally, NEP agrees to provide Base Services to Participants in accordance
with good utility practices using a segregated control room employing five (5)
system operators and three full time equivalent employees performing
engineering and support functions.
NEP shall use its best efforts to begin providing Base Services to
Participants on July 1, 1997. It is recognized, however, that circumstances
may exist on that date under which NEPEX is not ready to commence generation
control and connect to and operate with the new security analysis system(s) of
its satellite organizations and/or NEP is not ready to commence providing Base
Services despite its best efforts to be in a position to do so. If such
circumstances exist, the existing arrangements under the Expiring Agreement
shall be continued until the disability is removed, provided, however, that
NEP shall bear all expenses associated with continuing such existing
arrangements during any period that NEPEX is ready but NEP is not for reasons
not excused under Article VIII ("Force Majeure").
REMVEC II may, in accordance with the provisions of Article V of the
REMVEC II Agreement, arrange for NEP to provide Supplemental Services under
this Agreement. It is expressly understood that such Supplemental Services
may include, without limitation, the addition of a full-time manager reporting
directly to the REMVEC II Executive Committee to oversee the provision of
services under this Agreement. The price for any such Supplemental Services
shall be established by mutual agreement between NEP and REMVEC II but shall
be based on NEP's best estimate of the incremental cost to it of providing
such Supplemental Services. If any such arrangements are made, each
Participant agrees to be bound by the arrangement, including, without
limitation, its pricing aspects, and this Agreement shall be amended as
necessary to reflect the terms of the arrangement.
Nothing in this Agreement shall be deemed to preclude any Participant or
NEP from independently arranging for the provision of other services under
separate agreement, provided that the cost or provision of such services shall
not adversely affect the cost or provision of service under this Agreement.
ARTICLE V. Participant Obligations
-----------------------
Each Participant shall have installed and shall maintain (i) all
protective equipment, metering, telemetering, communications, switching,
voltage control and load shedding equipment required to fulfill the
Participant's obligations as a Participant of NEPOOL and/or REMVEC II under
the Criteria, Rules and Standards and Operating Procedures adopted under the
NEPOOL Agreement and/or the REMVEC II Agreement and (ii) such other facilities
<PAGE>
as may be requested by NEP and approved by the REMVEC II Executive Committee
to facilitate NEP's provision of Base Services and Supplemental Services, if
any, under this Agreement. Each Participant shall also furnish in a timely
manner the operating data and other information necessary to perform Base
Services and Supplemental Services, if any, under this Agreement. NEP shall
have the responsibility to establish, subject to review and approval by the
REMVEC II Executive Committee, all such operating data and information
requirements. To the extent that NEP is impeded from performing its
obligations under this Agreement due to a Participant's failure to have
installed or maintained any such equipment or facilities or to furnish any
such data or information, NEP shall be relieved from such obligations.
NEP agrees to establish, implement and follow procedures for the
confidential treatment (both internally within its own organization and
externally with any third party) of information provided it by Participants
under this Agreement consistent with any requirements regarding the
confidential treatment of such information established by (i) the Federal
Energy Regulatory Commission under the Federal Power Act and (ii) NEPOOL.
Such procedures, and any amendments thereto, shall be subject to the review
and approval of the REMVEC II Executive Committee.
Each Participant shall be responsible for the accuracy of the operating
data and information it provides NEP.
ARTICLE VI. Price
-----
The price for Base Services to be provided hereunder in Contract Years
1994-5 through 2001-2 shall be fixed for each Participant at the price for the
Contract Year specified for such Participant and for the Contract Year in
"Appendix D", attached to and incorporated into this Agreement by reference.
Thereafter, commencing with Contract Year 2002-3, and continuing with each
subsequent Contract Year until this Agreement terminates, the price in effect
on the last day of the preceding Contract Year shall be escalated as of
midnight on such last day by the percent of annual change that occurred in the
preceding calendar year in the Gross Domestic Product Implicit Price Deflator
(expressed as a decimal fraction representing thousandths), as published by
the Bureau of Economic Analysis in the United States Department of Commerce.
The price for Base Services per Contract Year of any entity or group of
entities that subsequently become or join REMVEC II shall be mutually agreed
upon by NEP and such entity or group of entities.
The price for Supplemental Services, if any, shall be as agreed upon
between NEP and the REMVEC II Executive Committee under the provisions of
Article IV ("Services"), above.
ARTICLE VII. Billing
-------
As soon as practicable following satisfaction of the conditions
precedent to the effectiveness of this Agreement set forth in Article III
("Term"), above, NEP shall bill each Participant for amounts due under this
Agreement from July 1, 1994 through the date of such billing.
Thereafter, each month during the term of this Agreement, NEP shall bill
each Participant one twelfth of the price specified in Article VI ("Price"),
above, for the then current Contract Year. Bills will be rendered during the
first week of each month covering amounts due for the month.
Any amount remaining unpaid after fifteen days following receipt of the
bill shall bear interest thereon from the date of the bill at an annual rate
<PAGE>
of 2% above the lowest interest rate then being charged by the Bank of Boston,
or its successor, on 90 day commercial loans.
ARTICLE VIII. Force Majeure
-------------
The term "force majeure" as used herein shall mean a cause beyond the
control of NEP, REMVEC II or a Participant, as the case may be, that wholly or
partially prevents performance of its obligations under this Agreement.
Examples (without limitation) of force majeure, but only if beyond the control
of NEP, REMVEC II or the Participant, as the case may be, are the following:
acts of God; acts of the public enemy; insurrection; riots; strikes; labor
disputes (including wildcat strikes, slowdowns, sabotage and the like); fires;
explosions; floods; extraordinary breakdowns of or damage to facilities or
equipment; laws, regulations, orders or acts of regulatory agencies; orders or
acts of civil or military authority; or any other cause of a similar nature
that materially impairs the performance of this Agreement.
If because of force majeure either NEP, REMVEC II or a Participant is
unable to carry out its obligations under this Agreement, in whole or in part,
and if such party promptly gives the other parties written notice of such
force majeure then the obligations and liabilities of the party giving such
notice and the corresponding obligations of the other parties shall be
suspended to the extent made necessary by and during the continuance of such
force majeure; provided, however, that the party giving notice shall use its
best efforts to eliminate the cause of such force majeure in the shortest
practicable time. Notwithstanding the foregoing, settlement of labor disputes
shall be entirely at the discretion of the affected party, and force majeure
shall not excuse any party from fulfilling its payment obligations under this
Agreement.
ARTICLE IX. Waivers
-------
The failure of either NEP, REMVEC II or a Participant to insist in any
one or more instance upon strict performance of any of the provisions of this
Agreement or to take advantage of any of its rights under this Agreement shall
not be construed as a general waiver of any such provision or the
relinquishment of any such right, but the same shall continue and remain in
full force and effect, except with respect to the particular instance or
instances.
ARTICLE X. Limitation of Liability
-----------------------
To the fullest extent permissible under law, neither NEP, REMVEC II or
any Participant, nor their agents, officers, directors, employees or
affiliates or their agents, officers, directors or employees shall be liable
to the other parties or their agents, officers, directors or employees for
claims for incidental, indirect, punitive, multiple or consequential damages
(including attorney's fees) connected with or resulting from performance or
non-performance of this Agreement, irrespective of whether such claims are
based upon warranty, tort, strict liability, contract, statute (including
Mass. Gen. Laws ch. 93A), operation of law or otherwise. NEP shall be liable
to REMVEC II and/or the Participants only for its gross negligence or willful
misconduct in carrying out its contractual obligations under this Agreement.
<PAGE>
ARTICLE XI. Dispute Resolution
------------------
All disputes between NEP and a Participant or Participants of a
technical or operational nature relating to the provision of service by NEP
under this Agreement shall be referred exclusively to the REMVEC II Operating
Committee and shall be resolved by REMVEC II under the terms of the REMVEC II
Agreement. All other disputes between the parties arising out of or relating
to this Agreement, regardless of the nature of the cause of action, including
without limitation, disputed claims of force majeure, the exercise of
termination rights, breach of contract, breach of duty of good faith and fair
dealing, actions under Mass. Gen. Laws ch. 93A, tort (including without
limitation negligence and misrepresentation), or any other cause of action
under federal or state statute, common law or in equity shall be submitted to
arbitration by the request of the complaining party. Copies of any such
request shall be served on NEP, REMVEC II and all Participants and it shall
specify the issue or issues in dispute and summarize the party's claim with
respect thereto. Within thirty (30) days after receipt of such a request
authorized representatives of NEP, REMVEC II and all Participants shall confer
and attempt to agree upon appointment of a single arbitrator. If such
agreement is not accomplished, the Chairperson of the REMVEC II Executive
Committee shall request the American Arbitration Association to appoint an
arbitrator in accordance with its Commercial Arbitration Rules, which rules
shall govern the conduct of the arbitration in the absence of contrary
agreement by all parties. The arbitrator shall conduct a hearing at a place
in Massachusetts of his/her designation, and within thirty (30) days
thereafter, unless such time is extended by agreement of all parties, shall
notify the parties in writing of his/her decision, stating his/her reasons for
such decision and separately listing his/her findings of fact and conclusions
of law. The arbitrator shall not have power to amend or add to this Agreement
or, if involved, the REMVEC II Agreement. Subject to such limitation, the
decision of the arbitrator shall be final and binding on all parties except
that any party may petition to a court of competent jurisdiction for review of
any conclusions of law. The decision of the arbitrator shall determine and
specify how the expenses of the arbitration shall be allocated among the
parties.
ARTICLE XII. Successors and Assigns
----------------------
This Agreement shall inure to the benefit of and shall be binding upon
the parties hereto and their respective successors and assigns. No party may
transfer or assign this Agreement in whole or in part, without the prior
written consent of the others; provided, however, NEP may transfer and assign
all or a portion of this Agreement, without such prior written consent, to any
wholly owned subsidiary of New England Electric System.
ARTICLE XIII. Notices
-------
Any notice required or permitted to be given hereunder shall be given in
writing and shall be delivered (i) in person, (ii) by registered mail, or
(iii) by telecopy, addressed to NEP at:
New England Power Company
25 Research Drive
Westborough, Massachusetts 0l582
Telecopy: 508-389-3129
Attn: Chief System Dispatcher
<PAGE>
and addressed to the REMVEC II Executive Committee Chairperson and all
Participants at addresses to be maintained on a current basis by the Secretary
of the REMVEC II Executive Committee under the REMVEC II Agreement. REMVEC II
shall cause the Secretary of its Executive Committee to provide all parties to
this Agreement with a current list of all such addresses upon any party's
request.
NEP, upon any change of its address as above set forth, shall promptly
notify the other parties in writing and from and after the giving of such
notice the address therein specified shall be deemed to be the address of NEP
for the giving of notices hereunder.
ARTICLE XIV. Applicable Law
--------------
This Agreement is made in and shall be governed by and interpreted in
accordance with the laws of The Commonwealth of Massachusetts.
ARTICLE XV. Compliance With Law
-------------------
The parties hereto shall comply strictly with all applicable statutes,
ordinances, rules, regulations, permits and orders lawfully imposed by any
governmental authority on any activity of the parties hereunder, and this
Agreement is made subject to all such applicable statutes, ordinances, rules,
regulations, orders, and permits in effect now or in the future.
ARTICLE XVI. Miscellaneous
-------------
The headings in this Agreement are provided for convenience of reference
only and are not to be considered a part of this Agreement for any other
purpose.
All amendments to this Agreement shall be in writing signed by the duly
authorized representative(s) of the parties. This Agreement constitutes the
entire understanding of the parties and there are no representations,
understandings or agreements, oral or written, that are not included herein.
Should any provision of this Agreement be held invalid, such provision shall
be considered severable and such invalidity shall not affect the remainder of
the provisions herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective as of the date first above written.
New England Power Company Rhode Island, Eastern Massachusetts,
Vermont Energy Control II
/s/ Jeffrey D. Tranen /s/ Roger W. Bacon
By: By:
Its: Chairman, REMVEC II
Executive Committee
<PAGE>
ACCEPTED AND AGREED:
BOSTON EDISON COMPANY
/s/ Robert A. Ruscitto 2/16/96
By Date
BLACKSTONE VALLEY ELECTRIC COMPANY
EASTERN EDISON COMPANY
MONTAUP ELECTRIC COMPANY
NEWPORT ELECTRIC CORPORATION
Subsidiaries of EASTERN UTILITIES ASSOCIATES
/s/ Kevin A. Kirby 2/16/96
By Date
NEW ENGLAND POWER COMPANY
GRANITE STATE ELECTRIC COMPANY
MASSACHUSETTS ELECTRIC COMPANY
THE NARRAGANSETT ELECTRIC COMPANY
Subsidiaries of NEW ENGLAND ELECTRIC SYSTEM
/s/ R. P. Sergel 5/1/96
Jeffrey D. Tranen 4/8/96
By Date
CAMBRIDGE ELECTRIC LIGHT COMPANY
COMMONWEALTH ELECTRIC COMPANY
CANAL ELECTRIC COMPANY
Subsidiaries of COMMONWEALTH ENERGY SYSTEM
/s/ James J. Keane 2/15/96
By Date
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY
/s/ David Foote 4/5/96
By Date
VERMONT ELECTRIC POWER COMPANY, INC.
By: VERMONT ELECTRIC POWER COMPANY, INC.
For itself and as agent for the following Vermont electric utilities who
have joined with it as a single participant under the terms of the NEPOOL
Agreement :
BARTON VILLAGE, INC.
CITY OF BURLINGTON ELECTRIC DEPARTMENT
CENTRAL VERMONT PUBLIC SERVICE CORPORATION
CITIZENS UTILITIES COMPANY
VILLAGE OF ENOSBURG FALLS WATER AND LIGHT DEPARTMENT
GREEN MOUNTAIN POWER CORPORATION
TOWN OF HARDWICK ELECTRIC DEPARTMENT
VILLAGE OF HYDE PARK, INC.
VILLAGE OF JACKSONVILLE ELECTRIC COMPANY
VILLAGE OF JOHNSON ELECTRIC LIGHT DEPARTMENT
VILLAGE OF LUDLOW ELECTRIC LIGHT DEPARTMENT
VILLAGE OF LYNDONVILLE ELECTRIC DEPARTMENT
VILLAGE OF MORRISVILLE WATER AND LIGHT DEPARTMENT
VILLAGE OF NORTHFIELD ELECTRIC DEPARTMENT
<PAGE>
VILLAGE OF ORLEANS ELECTRIC DEPARTMENT
VILLAGE OF READSBORO ELECTRIC LIGHT DEPARTMENT
ROCHESTER ELECTRIC LIGHT AND POWER COMPANY
VILLAGE OF STOWE WATER AND LIGHT DEPARTMENT
VILLAGE OF SWANTON
VERMONT ELECTRIC GENERATION & TRANSMISSION
COORPERATIVE, INC.
VERMONT MARBLE POWER DIVISION OF OMYA, INC.
VERMONT PUBLIC POWER SUPPLY AUTHORITY
WASHINGTON ELECTRIC COOPERATIVE, INC.
/s/ 2/23/96
By Date
Vice President
ASHBURNHAM MUNICIPAL LIGHT DEPARTMENT
/s/ Thomas E. Lewis 8/2/96
By Date
TOWN OF BOYLSTON MUNICIPAL LIGHT DEPARTMENT
/s/ H. Bradford White
By Date
TOWN OF BRAINTREE ELECTRIC LIGHT DEPARTMENT
/s/ Walter R. McGrath 3/15/96
By Date
TOWN OF DANVERS ELECTRIC DEPARTMENT
/s/ Wayne P. Marquis 5/9/96
By Date
TOWN OF GEORGETOWN MUNICIPAL LIGHT DEPARTMENT
/s/ Wayne Snow Aug 5, 1996
By Date
TOWN OF GROTON ELECTRIC LIGHT DEPARTMENT
/s/ Roger H. Beeltje 3/14/96
By Date
HINGHAM MUNICIPAL LIGHTING PLANT
/s/ Joseph F. Spadea Jr. 3/12/96
By Date
HOLDEN MUNICIPAL LIGHT DEPARTMENT
/s/ Edla Ann Bloom August 7, 1996
By Date
<PAGE>
HUDSON LIGHT AND POWER DEPARTMENT
/s/ Anthony J. Monteiro 9/30/96
By Date
TOWN OF HULL MUNICIPAL LIGHTING PLANT
/s/ 9/4/96
By Date
TOWN OF IPSWICH MUNICIPAL ELECTRIC DEPARTMENT
/s/ Donald R. Stone Sr. 7/31/96
By Date
LITTLETON ELECTRIC LIGHT DEPARTMENT
/s/ Savas C. Danos 7/30/96
By Date
TOWN OF MANSFIELD MUNICIPAL ELECTRIC DEPARTMENT
/s/ John Larch 9/27/96
By Date
MARBLEHEAD MUNICIPAL LIGHT DEPARTMENT
/s/ Robert V. Jolly Jr. 4/2/96
By Date
MIDDLEBOROUGH MUNICIPAL GAS AND ELECTRIC DEPARTMENT
/s/ John W. Dunfey 10/4/96
By Date
TOWN OF MIDDLETON MUNICIPAL LIGHT DEPARTMENT
/s/ William E. Kelley Oct 15, 1996
By Date
TOWN OF NORTH ATTLEBOROUGH ELECTRIC DEPARTMENT
/s/ David I. Sweetland 3/25/96
By Date
PASCOAG FIRE DISTRICT
/s/ Albert Palmisciano 8/5/96
By Date
PAXTON MUNICIPAL LIGHT DEPARTMENT
/s/ Harold L. Smith Mgr 08/01/96
By Date
<PAGE>
PEABODY MUNICIPAL LIGHT PLANT
/s/ Bruce P. Patten 3/15/96
By Date
PRINCETON MUNICIPAL LIGHT DEPARTMENT
/s/ Sharon A. Staz 3/21/96
By Date
TOWN OF READING MUNICIPAL LIGHT DEPARTMENT
/s/ Leonard D. Rucker August 23, 1996
By Date
ROWLEY MUNICIPAL LIGHT PLANT
/s/ G. Robert Merry April 18, 1996
By Date
SHREWSBURY'S ELECTRIC LIGHT PLANT
/s/ Thomas R. Josie 5/21/96
By Date
STERLING MUNICIPAL ELECTRIC LIGHT PLANT
/s/ John Kilgo Jr. 6/18/96
By Date
TAUNTON MUNICIPAL LIGHTING PLANT
/s/ Joseph M. Blain 3/21/96
By Date
TEMPLETON MUNICIPAL LIGHTING PLANT
/s/ Gerald Skelton 11/22/96
By Date
TOWN OF WAKEFIELD MUNICIPAL LIGHT DEPARTMENT
/s/ William J. Wallace 7/26/96
By Date
WEST BOYLSTON MUNICIPAL LIGHTING PLANT
/s/ John Scirpoli 5/1/96
By Date
<PAGE>
APPENDIX A
----------
<PAGE>
APPENDIX B
----------
<PAGE>
APPENDIX C
----------
<PAGE>
APPENDIX D
----------
<PAGE>
MAINE YANKEE ATOMIC POWER COMPANY
1997 AMENDATORY AGREEMENT
-------------------------
This 1997 Amendatory Agreement, dated as of August 6, 1997, is entered
into by and between MAINE YANKEE ATOMIC POWER COMPANY, a Maine corporation
("Maine Yankee" or "Seller"), and NEW ENGLAND POWER COMPANY ("Purchaser").
For good and valuable consideration, the receipt of which is hereby
acknowledged, it is agreed as follows:
1. Basic Understandings
Maine Yankee was organized in 1966 to provide a supply of power to its
sponsoring utility companies, including the Purchaser (collectively the
"Purchasers"). It constructed a nuclear electric generating unit, having a
net capability of approximately 830 megawatts electric (the "Unit") at a site
on tidewater in the Town of Wiscasset, Maine. On June 27, 1973, Maine Yankee
was issued a full-term, Facility Operating License for the Unit by the Atomic
Energy Commission (predecessor to the Nuclear Regulatory Commission which,
together with any successor agencies, is hereafter called the "NRC"), which
license is now stated to expire on October 21, 2008. The Unit has been in
commercial operation since January 1, 1973.
The Unit was conceived to supply economic power on a cost of service
formula basis to the Purchasers. Maine Yankee and the Purchaser are parties
to a Power Contract dated as of May 20, 1968 (as herefore amended, the "Power
Contract"). Pursuant to the Power Contract and other identical contracts
(collectively, the "Power Contracts") between Maine Yankee and the other
Purchasers, Maine Yankee contracted to supply to the Purchasers all of the
capacity and electric energy available from the Unit for a term of thirty (30)
years following January 1, 1973.
Maine Yankee and the Purchaser are also parties to an Additional Power
Contract, dated as of February 1, 1984 ("Additional Power Contract"). The
Additional Power Contract and other similar contracts (collectively, the
"Additional Power Contracts") between Maine Yankee and the other Purchasers
provide for an operative term stated to commence on January 2, 2003 (when the
Power Contracts terminate) and extending until a date which is the later to
occur of (i) 30 days after the date on which the last of the financial
obligations of Maine Yankee which constitute elements of the purchase price
thereunder has been extinguished by Maine Yankee or (ii) 30 days after the
date on which Maine Yankee is finally relieved of any obligations under the
last of the licenses (operating and/or possessory) which it holds from, or
which may hereafter be issued to it by, the NRC with respect to the Unit under
applicable provisions of the Atomic Energy Act of 1954, as amended from time
to time (the "Act").
Pursuant to the Power Contract and the Additional Power Contract, the
Purchaser is entitled and obligated to take its entitlement percentage of the
capacity and net electrical output of the Unit during the service life of the
Unit and is obligated to pay therefor monthly its entitlement percentage of
Maine Yankee's cost of service, including decommissioning costs, whether or
not the Unit is operated or whether or not net electrical output is delivered.
The Power Contracts and the Additional Power Contracts also provide, in the
event of their earlier cancellation, for the survival of the decommissioning
<PAGE>
cost obligation and for the applicable provisions thereof to remain in effect
to permit final billings of costs incurred prior to such cancellation.
On August 6, 1997, the board of directors of Maine Yankee, after
conducting a thorough review of the economics of continued operation of the
Unit for the remainder of the term of the Facility Operating License for the
Unit in light of other alternatives available to Maine Yankee and the
Purchasers, determined that the Unit should be permanently shut down effective
August 6, 1997. The Purchaser concurs in that decision.
As a consequence of the shutdown decision, Maine Yankee and the
Purchaser propose at this time to amend the Power Contract and the Additional
Power Contract in various respects in order to clarify and confirm provisions
for the recovery under said contracts of the full costs previously incurred by
Maine Yankee in providing power from the Unit during its useful life and of
all costs of decommissioning the Unit, including the costs of maintaining the
Unit in a safe condition following the shutdown and prior to its
decontamination and dismantlement.
Maine Yankee and each of the other Purchasers are entering into
agreements which are identical to this Agreement except for necessary changes
in the names of the parties.
2. Parties' Contractual Commitments
Maine Yankee reconfirms its existing contractual obligations to protect
the Unit, to maintain in effect certain insurance and to prepare for and
implement the decommissioning of the Unit in accordance with applicable laws
and regulations. Consistent with public safety, Maine Yankee shall use its
best efforts to accomplish the shutdown of the Unit, the protection and any
necessary maintenance of the Unit after shutdown and the decommissioning of
the Unit in a cost-effective manner and in compliance with the regulations of
the NRC and other agencies having jurisdiction, and shall use its best efforts
to ensure that any required storage and disposal of the nuclear fuel remaining
in the reactor at shutdown and all spent nuclear fuel or other radioactive
materials resulting from operating of the Unit are accomplished consistent
with public health and safety considerations and at the lowest practicable
cost. The Purchaser reconfirms its obligations under the Power Contract and
Additional Power Contract to pay its entitlement percentage of Maine Yankee's
costs as deferred payment in connection with the capacity and net electrical
output of the Unit previously delivered by Maine Yankee and agrees that the
decision to shut down the Unit described in Section 1 hereof does not give
rise to any cancellation right under Section 9 of the Power Contract or
Section 10 of the Additional Power Contract.
Except as expressly modified by this Agreement, the provisions of the
Power Contract and the Additional Power Contract remain in full force and
effect, recognizing that the mutually accepted decision to shut down the Unit
renders moot those provisions which by their terms relate solely to continuing
operation of the Unit.
3. Amendment of Provisions of the Power Contract and the Additional Power
Contract
A. Section 2 of the Additional Power Contract is hereby amended to
delete the first two paragraphs thereof and to insert in lieu thereof the
following:
<PAGE>
This contract shall become effective on such date as may be
authorized by the FERC after receipt by the Purchaser of notice
that Maine Yankee has entered into Additional Power Contracts, as
contemplated by Section 1 above, with each of the other sponsors.
The operative term of this contract shall commence on the earlier
of (a) the termination, cancellation or expiration of the Power
Contract or (b) January 2, 2003, notwithstanding the fact that the
useful service life of the Unit terminated prior to that date and
shall terminate on the date (the "End of Term Date") which is the
later to occur of (i) 30 days after the date on which the last of
the financial obligations of Maine Yankee which constitute
elements of the purchase price calculated pursuant to Section 7 of
this contract has been satisfied in its entirety by Maine Yankee,
or (ii) 30 days after the date on which Maine Yankee is finally
relieved of any obligations under the last of any licenses
(operating and/or possessory) which it now holds from, or which
may hereafter be issued to it by, the NRC with respect to the Unit
under applicable provisions of the Atomic Energy Act of 1954, as
amended from time to time (the "Act").
B. The first paragraph of Section 7 of the Additional Power Contract
is amended to read as follows:
With respect to each month commencing on or after the commencement
of the operative term of this contract, whether or not this
contract continues fully or partially in effect, the Purchaser
will pay Maine Yankee as further deferred payment for the capacity
and output of the Unit provided to the Purchaser by Maine Yankee
prior to the permanent shutdown of the Unit on August 6, 1997, an
amount equal to the Purchaser's entitlement percentage of the sum
of (a) Maine Yankee's total fuel costs for the month with respect
to the Unit, (b) the Total Decommissioning Costs for the month
with respect to the Unit, plus (c) Maine Yankee's total operating
expenses (as hereinafter defined) for the month with respect to
the Unit, plus (d) an amount equal to one-twelfth of the composite
percentage for such month of the net Unit investment as most
recently determined in accordance with this Section 7.
C. The eighth paragraph of Section 7 of the Power Contract and the
eighth paragraph of Section 7 of the Additional Power Contract are each
amended by (a) inserting before the semicolon in the first sentence thereof
the following:
, but including for purposes of this contract:
(i) with respect to each month until the commencement of
decommissioning of the Unit, the Purchaser's entitlement
percentage of all expenses related to the storage or
disposal of nuclear fuel or other radioactive materials, and
all expenses related to protection and maintenance of the
Unit during such period, including to the extent applicable
all of the various sorts of expenses included in the
definition of "Decommissioning Expenses", to the extent
incurred during the period prior to the commencement of
decommissioning;
<PAGE>
(ii) with respect to each month until the amount due from
Maine Yankee to the U.S. Department of Energy ("DOE")
for disposal of pre-April 7, 1983 spent nuclear fuel
and associated high level radioactive material has
been paid in full, the Purchaser's entitlement
percentage of one-third (1/3) of the interest due to
DOE during that calendar quarter on such obligation;
and
(iii) with respect to each month until End of License Term,
the Purchaser's entitlement percentage of the monthly
amortization of (a) the amount of any unamortized
deferred expenses, as permitted from time to time by
the Federal Energy Regulatory Commission or its
successor agency, plus (b) the remaining unamortized
amount of Maine Yankee's investment in plant, nuclear
fuel and materials and supplies and other assets, such
amortization to be accrued at a rate sufficient to
amortize fully such unamortized deferred expenses and
Maine Yankee's investments in plant, nuclear fuel and
materials and supplies or other assets (the "total
investment") over a period extending to October 21,
2008; [provided, that if during any calendar month
ending on or before May 1, 2008 either of the
following events shall occur: (a) Maine Yankee shall
become insolvent or (b) Maine Yankee shall be unable,
from available cash or other sources, to meet when due
during such month its obligations to pay principal,
interest, premium (if any) or other fees with respect
to any indebtedness for money borrowed, then Maine
Yankee may adjust upward the accrual for amortization
of unrecovered total investment for such month to an
amount not exceeding the applicable maximum level
specified in Appendix A hereto, provided that
concurrently therewith the total investment shall be
reduced by an amount equal to the amount of such
adjustment, it being understood that at the time of
such event, Maine Yankee will furnish the Purchaser
with a schedule setting forth the amount of such
adjustment;] /1/
and (b) by adding at the end thereof the following:
As used herein, "End of License Term" means October 21, 2008
or such later date as may be fixed, by amendment to the
Facility Operating License for the Unit, as the end of the
term of the Facility Operating License.
____________________
/1/ Bracketed language would be inserted only if satisfactory work-out
is reached with lender banks and insurance companies.
<PAGE>
D. The definitions in Section 7 of the Power Contract and in Section 7
of the Additional Power Contract of "Total Decommissioning Costs" and
"Decommissioning Expenses" are hereby amended to read as follows:
"Total Decommissioning Costs" for any month shall mean the sum of
(x) an amount equal to all accruals in such month to any reserve,
as from time to time established by Maine Yankee and approved by
its board of directors, to provide for the ultimate payment of the
Decommissioning Expenses of the Unit, plus (y), during the
Decommissioning Period, the Decommissioning Expenses for the
month, to the extent such Decommissioning Expenses are not paid
with funds from such reserve, plus (z) Decommissioning Tax
Liability for such month. It is understood (i) that funds
received pursuant to clause (x) may be held by Maine Yankee or by
an independent trust or other separate fund, as determined by said
board of directors, (ii) that, upon compliance with applicable
regulatory requirements, the amount, custody and/or timing of such
accruals may from time to time during the term hereof be modified
by said board of directors in its discretion or to comply with
applicable statutory or regulatory requirements or to reflect
changes in the amount, custody or timing of anticipated
Decommissioning Expenses, and (iii) that the use of the term "to
decommission" herein encompasses compliance with all requirements
of the NRC, as in effect from time to time, for permanent
cessation of operation of a nuclear facility and any other
activities reasonably related thereto, including provision for
disposal of low level waste and the interim storage of spent
nuclear fuel.
"Decommissioning Expenses" shall include all expenses of
decommissioning the Unit, and all expenses relating to ownership
and protection of the Unit during the Decommissioning Period, and
shall also include the following:
(1) All costs and expenses of any NRC-approved method of
removing the Unit from service, including without
limitation: dismantling, mothballing and entombment of the
Unit; removing nuclear fuel and other radioactive material
to temporary and/or permanent storage sites; construction,
operation, maintenance and dismantling of a spent fuel
storage facility; decontaminating, restoring and supervising
the site; and any costs and expenses incurred in connection
with proceedings before governmental authorities relating to
any authorization to decommission the Unit or remove the
Unit from service;
(2) All costs of labor and services, whether directly or
indirectly incurred, including without limitation, services
of foremen, inspectors, supervisors, surveyors, engineers,
security personnel, counsel and accountants, performed or
rendered in connection with the decommissioning of the Unit
and the removal of the Unit from service, and all costs of
materials, supplies, machinery, construction equipment and
apparatus acquired or used (including rental charges for
machinery, equipment or apparatus hired) for or in
connection with the decommissioning of the Unit and the
<PAGE>
removal of the Unit from service, and all administrative
costs, including services of counsel and financial advisers
of any applicable independent trust or other separate fund;
it being understood that any amount, exclusive of proceeds
of insurance, realized by Maine Yankee as salvage on any
machinery, construction equipment and apparatus, the cost of
which was charged to Decommissioning Expense, shall be
treated as a reduction of the amounts otherwise chargeable
on account of the costs of decommissioning of the Unit; and
(3) All overhead costs applicable to the Unit during the
Decommissioning Period, or accrued during such period,
including without limiting the generality of the foregoing,
taxes (other than taxes on or in respect of income),
charges, license fees, excises and assessments, casualties,
health care costs, pension benefits and other employee
benefits, surety bond premiums and insurance premiums.
E. Section 7 of the Power Contract and Section 7 of the Additional
Power Contract are each hereby amended by adding the following new paragraph
after the definition of "Decommissioning Tax Liability":
"Decommissioning Period" shall mean the period commencing with the
notification by Maine Yankee to the NRC of the decision of the
board of directors of Maine Yankee to cease permanently the
operation of the Unit for the purpose of producing electric energy
and ending with the date when Maine Yankee has completed the
decommissioning of the Unit and the restoration of the site and
has been relieved of all its obligations under the last of any
licenses issued to it by the NRC.
F. Section 8 of the Additional Power Contract is hereby amended to
change the figure "1%" to "2%".
G. Section 9 of the Power Contract and Section 10 of the Additional
Power Contract are each amended to read as follows:
10. Cancellation of Contract.
If either
(i) the Unit is damaged to the extent of being
completely or substantially completely destroyed, or
(ii) the Unit is taken by exercise of the right of
eminent domain or a similar right or power,
then and in any such case, the Purchaser may cancel the provisions
of this contract, except that in all cases other than those
described in clause (ii) above, the Purchaser shall be obligated
to continue to make the payments of Total Decommissioning Costs
and the other payments required by Section 7 hereof and the
provisions of said Section 7 and the related provisions of this
contract shall remain in full force and effect, it being
recognized that the costs which Purchaser is required to pay
pursuant to Section 7 represent deferred payments in connection
<PAGE>
with power heretofore delivered by Maine Yankee under its
contractual commitments to the Purchaser. Such cancellation shall
be effected by written notice given by the Purchaser to Maine
Yankee. In the event of such cancellation, all continuing
obligations of the parties hereunder as to subsequently incurred
costs of Maine Yankee other than the obligations of the Purchaser
to continue to make the payments required by Section 7 shall cease
forthwith (it being understood that the continuing accrual of
depreciation of net Unit investment and of fees, interest and
other payments under pre-existing contracts subsequent to such
cancellation shall not be deemed to be "subsequently incurred
costs" for purposes of this sentence). Notwithstanding the
preceding sentence, the applicable provisions of this contract
shall continue in effect after the cancellation hereof to the
extent necessary to permit final billings and adjustments
hereunder with respect to obligations incurred through the date of
cancellation and the collection thereof. Any dispute as to the
Purchaser's right to cancel this contract pursuant to the
foregoing provisions shall be referred to arbitration in
accordance with the provisions of this contract.
Notwithstanding anything in this contract elsewhere
contained, the Purchaser may cancel this contract or be relieved
of its obligations to make payments hereunder only as provided in
the next preceding paragraph of this Section.
5. Effective Date
This 1997 Amendatory Agreement shall become effective upon receipt by
the Purchaser of notice that Maine Yankee has entered into 1997 Amendatory
Agreements, as contemplated by Section 1 hereof, with each of the other
Purchasers and receipt of requisite authorization from the FERC.
6. Interpretation
The interpretation and performance of this 1997 Amendatory Agreement
shall be in accordance with and controlled by the laws of the State of Maine.
7. Addresses
Except as the parties may otherwise agree, any notice, request, bill or
other communication from one party to the other relating to this 1997
Amendatory Agreement, or the rights, obligations or performance of the parties
hereunder, shall be in writing and shall be effective upon delivery to the
other party. Any such communication shall be considered as duly delivered
when mailed to the respective post office address of the other party shown
following the signatures of such other party hereto, or such other post office
address as may be designated by written notice given in the manner as provided
in this Section.
8. Corporate Obligations
This 1997 Amendatory Agreement is the corporate act and obligation of
the parties hereto.
<PAGE>
9. Counterparts
This 1997 Amendatory Agreement may be executed in any number of
counterparts and each executed counterpart shall have the same force and
effect as an original instrument and as if all the parties to all of the
counterparts had signed the same instrument. Any signature page of this 1997
Amendatory Agreement may be detached from any counterpart without impairing
the legal effect of any signatures thereon, and may be attached to another
counterpart of this 1997 Amendatory Agreement identical in form hereto but
having attached to it one or more signature pages.
IN WITNESS WHEREOF, the parties have executed this 1997 Amendatory
Agreement by their respective duly authorized officers as of the day and year
first named above.
MAINE YANKEE ATOMIC POWER COMPANY
By______________________________
Its
Address: 329 Bath Road
Brunswick, ME 04011
NEW ENGLAND POWER COMPANY
By______________________________
Its
Address: 25 Research Drive
Westborough, MA 01582
<PAGE>
Appendix A to
1997 Amendatory Agreement
-------------------------
MAXIMUM AMORTIZATION SCHEDULE
------------------------------
If the event occurs during the calendar year: Maximum Amortization
Accrual: /1/
1998 $__________________
1999 $__________________
2000 $__________________
2001 $__________________
2002 $__________________
2003 $__________________
2004 $__________________
2005 $__________________
2006 $__________________
2007 $__________________
2008 $__________________
___________________
/1/ This column will reflect the maximum amount scheduled to be
outstanding during the applicable period, and will be completed as part of the
satisfactory work-out with lender banks and insurance companies.
<PAGE>
THIRTY-FOURTH AGREEMENT
AMENDING NEW ENGLAND POWER POOL AGREEMENT
THIS THIRTY-FOURTH AGREEMENT, dated as of September 1, 1997, is entered
into by the signatory Participants for the amendment by them of the New
England Power Pool Agreement dated as of September 1, 1971 (the "NEPOOL
Agreement"), as previously amended or proposed to be amended by thirty-one
amendments, the most recent of which was dated as of December 31, 1996 (the
"Thirty-Third Agreement"), and as further amended by one or more supplements.
WHEREAS, on December 31, 1996, the New England Power Pool ("NEPOOL")
Executive Committee, on behalf of the NEPOOL Participants, filed with the
Federal Energy Regulatory Commission (the "Commission") a comprehensive
proposal to restructure NEPOOL and the New England wholesale electric power
market and to form an independent system operator that would have
responsibility for the operation of the NEPOOL Control Area and Control
Center, as well as the administration of the NEPOOL Agreement and the NEPOOL
open access transmission tariff ("Tariff"), which is an exhibit thereto.
WHEREAS, on June 25, 1997, the Commission issued an order conditionally
approving the creation of an independent system operator for NEPOOL (the
"ISO"), New England Power Pool, Docket No. EC97-35-000, Order Conditionally
Authorizing Establishment of an Independent System Operator and Disposition of
Control over Jurisdictional Facilities (June 25, 1997) (the "Order");
WHEREAS, certain of the conditions contained in the Order require
amendments to the NEPOOL Agreement, as restated by the Thirty-Third
Agreement, and as amended by supplements dated, respectively, as of February
7, 1997 and June 1, 1997 (the "Restated NEPOOL Agreement"); and
WHEREAS, the signatory Participants desire to amend the Restated NEPOOL
Agreement and the Tariff to comply with the requirements of the Order.
NOW THEREFORE, the signatory Participants hereby agree as follows:
SECTION I
AMENDMENTS TO RESTATED NEPOOL AGREEMENT
1. Clause (b) of Section 1.12 of the Restated NEPOOL Agreement is amended
to delete the words "on its system" so that the clause, as amended,
reads as follows:
(bc) kilowatthours of use by such Participant, plus
2. Section 1.16 of the Restated NEPOOL Agreement is amended in its entirety
to read as follows:
"Entity" is any person or organization whether the
United States of America or Canada or a state or
province or a political subdivision thereof or a duly
established agency of any of them, a private
corporation, a partnership, an individual, an electric
cooperative or any other person or organization
recognized in law as capable of owning property and
contracting with respect thereto that is either:
(a) engaged in the electric power business (the generation
and/or transmission and/or distribution of electricity
for consumption by the public or the purchase, as a
principal or broker, of Installed Capability, Operable
Capability, Energy, Operating Reserve, and/or AGC for
resale); or
<PAGE>
(b) an end user of electricity that is taking or eligible
to take unbundled transmission service pursuant to a
state requirement that the Participant that is the
Transmission Provider with which that end user is
directly interconnected offer the transmission
service, or pursuant to a voluntary offer of unbundled
transmission service to that end user by the
Participant that is the Transmission Provider with
which that end user is directly interconnected.
3. Section 1.18 of the Restated NEPOOL Agreement is amended to delete the
words "wholesale" and "for resale," so that the Section, as amended,
reads as follows:
"Firm Contract" is any contract, other than a Unit
Contract, for the purchase of Installed Capability,
Operable Capability, Energy, Operating Reserves,
and/or AGC, pursuant to which the purchaser's right to
receive such Installed Capability, Operable
Capability, Energy, Operating Reserves, and/or AGC is
subject only to the supplier's inability to make
deliveries thereunder as the result of events beyond
the supplier's reasonable control.
4. Clause (c) of Section 1.44 of the Restated NEPOOL Agreement is amended
in its entirety to read as follows:
(c) kilowatthours of use by such Participant,
exclusive of use by such Participant for the
operation and maintenance of its generating unit
or units, plus
5. Section 1.74 of the Restated NEPOOL Agreement is amended by changing
"more than 50%" to "10% or more," so that the Section, as amended, reads
as follows:
"Related Person" of a Participant is either (i) a
corporation, partnership, business trust or other
business organization 10% or more of the stock or
equity interest in which is owned directly or
indirectly by, or is under common control with, the
Participant, or (ii) a corporation, partnership,
business trust or other business organization which
owns directly or indirectly 10% or more of the stock
or other equity interest in the Participant, or (iii)
a corporation, partnership, business trust or other
business organization 10% or more of the stock or
other equity interest in which is owned directly or
indirectly by a corporation, partnership, business
trust or other business organization which also owns
10% or more of the stock or other equity interest in
the Participant.
6. Section 1.79 of the Restated NEPOOL Agreement is amended to delete the
words "wholesale" and "for resale," so that the Section, as amended,
reads as follows:
"System Contract" is any contract for the purchase of
Installed Capability, Operable Capability, Energy,
Operating Reserves and/or AGC, other than a Unit
Contract or Firm Contract, pursuant to which the
purchaser is entitled to a specifically determined or
determinable amount of such Installed Capability,
Operable Capability, Energy, Operating Reserves,
and/or AGC.
<PAGE>
7. Section 1.84 of the Restated NEPOOL Agreement is amended to delete the
word "wholesale," so that the Section, as amended, reads as follows:
"Unit Contract" is a purchase contract pursuant to
which the purchaser is in effect currently entitled
either (i) to a specifically determined or
determinable portion of the Installed Capability of a
specific electric generating unit or units, or (ii) to
a specifically determined or determinable amount of
Operable Capability, Energy, Operating Reserves,
and/or AGC if, or to the extent that, a specific
electric generating unit or units is or can be
operated.
8. The introductory clause of Section 1.92 of the Restated NEPOOL Agreement
is amended to delete the words "for resale," so that the introductory
clause, as amended, reads in its entirety as follows:
Definitions marked by an asterisk (*) are modified as
follows when a Participant purchases a portion of its
requirements of electricity from another Participant
pursuant to a Firm Contract:
and the introductory clause of subsection 1.92(b) is amended to replace
"the electric needs of its customers" with "its electric needs," so that
the introductory clause of that subsection, as amended, reads in its
entirety as follows:
If the Firm Contract does not limit deliveries to a
specifically stated number of Kilowatts, but entitles the
Participant to receive such amounts of electricity as it may
require to supply its electric needs (thus placing the
responsibility for meeting additional demands on the
supplying Participant):
9. The second paragraph of Section 3.1 of the Restated NEPOOL Agreement is
amended to delete the requirement that an Entity engage or propose to
engage in business in New England, so that the paragraph, as amended,
reads in its entirety as follows:
Any other Entity may, upon compliance with such reasonable
conditions as the Management Committee may prescribe, become
a Participant by depositing a counterpart of this Agreement
as theretofore amended, duly executed by it, with the
Secretary of the Management Committee, accompanied by a
certified copy of a vote of its board of directors, or such
other body or bodies as may be appropriate, duly authorizing
its execution and performance of this Agreement, and a check
in payment of the application fee described below.
SECTION II
AMENDMENTS TO TARIFF
--------------------
Section 1.13 of the Tariff, as amended by the Second Supplement to the
Thirty-Third Agreement, dated as of June 1, 1997, is amended in its entirety
to read as follows:
"Eligible Customer": (i) Any Participant that is engaged, or proposes
to engage, in the wholesale or retail electric power business is an
Eligible Customer under the Tariff. (ii) Any electric utility
(including any power marketer), Federal power marketing agency, or any
other entity generating electric energy for sale or for resale is an
Eligible Customer under the Tariff; provided that electric energy sold
or produced by such entity is electric energy produced in the United
States, Canada or Mexico; and provided further, however, with respect to
<PAGE>
transmission service that the Commission is prohibited from ordering by
Section 212(h) of the Federal Power Act, such entity is eligible only if
the service is provided pursuant to a state requirement that the
Transmission Provider with which that entity is directly interconnected
offer the transmission service, or pursuant to a voluntary offer of such
service by the Transmission Provider with which that entity is directly
interconnected. (iii) Any end user of electricity which is taking or
eligible to take unbundled transmission service pursuant to a state
requirement that the Transmission Provider with which that end user is
directly interconnected offer the transmission service, or pursuant to a
voluntary offer of unbundled transmission service by the Transmission
Provider with which that end user is directly interconnected, is an
Eligible Customer under the Tariff.
SECTION III
INTERIM END USER PROVISIONS
---------------------------
Portions of the Prior Agreement with respect to Capability
Responsibilities, central dispatch and interchange transactions continue in
effect and will not be fully superseded by the Restated NEPOOL Agreement until
the Second Effective Date. In view of the difficulty of making these Prior
Agreement provisions applicable to end users prior to the Second Effective
Date, the provisions of the Prior Agreement that continue in effect shall not
be applicable to Participants that qualify as Entities solely under Section
1.16(b) of the Restated NEPOOL Agreement. Until the Second Effective Date, or
such date established by the Management Committee or pursuant to an order of
the Commission: (i) the Load, Capability Responsibility, and obligations for
and rights to energy and operating reserve of the Participants shall be
calculated by the System Operator as if the Participants that qualify as
Entities solely under Section 1.16(b) were not Participants; (ii) the Voting
Shares of Participants that qualify as Entities solely under Section 1.16(b)
shall be determined as if such Participants did not have any Load, Generation
Ownership Shares, Transmission Ownership Shares, Annual Transmission Revenue
Requirements, or Energy Entitlements; and (iii) Participants that qualify as
Entities solely under Section 1.16(b) shall limit their electric power
arrangements within the NEPOOL Control Area to suppliers that: (A) qualify as
Entities under Section 1.16(a) and (B) are either Participants or have entered
into contractual arrangements with a Participant to assure that such suppliers
have adequate power supply resources to meet their electric power requirements
and their share of the NEPOOL required operating reserves.
If the Second Effective Date has not occurred on or before October 1,
1998, the provisions of this Section shall be of no further effect; provided,
however, that such provisions shall continue in effect after October 1, 1998
if (i) the Commission so orders pursuant to a request by the ISO, or (ii) the
Management Committee so establishes pursuant to a request by the ISO;
provided, further, that the Management Committee may not extend the
effectiveness of this Section beyond December 31, 1998.
SECTION IV
EFFECTIVENESS OF AGREEMENT
--------------------------
Following its execution by the requisite number of Participants, this
Thirty-Fourth Agreement, and the amendments provided for above, shall become
effective on November 1, 1997, or on such later date as the Commission shall
provide that such amendments shall become effective; provided that such
amendments shall not become effective if the requisite number of Participants
give notice in accordance with Section 21.11 of the Restated NEPOOL Agreement
that they object to the amendments.
<PAGE>
SECTION V
USAGE OF DEFINED TERMS
----------------------
The usage in this Thirty-Fourth Agreement of terms which are defined in
the NEPOOL Agreement shall be deemed to be in accordance with the definitions
thereof.
SECTION VI
COUNTERPARTS
------------
This Thirty-Fourth Agreement may be executed in any number of
counterparts and each executed counterpart shall have the same force and
effect as an original instrument as if all the parties to all the counterparts
had signed the same instrument. Any signature page of this Thirty-Fourth
Agreement may be detached from any counterpart of this Thirty-Fourth Agreement
without impairing the legal effect of any signatures thereof, and may be
attached to another counterpart of this Thirty-Fourth Agreement identical in
form thereto but having attached to it one or more signature pages.
IN WITNESS WHEREOF, each of the signatories has caused a counterpart
signature page to be executed by its duly authorized representative, as of
September 1, 1997.
<PAGE>
THIRTY-FIFTH AGREEMENT AMENDING
NEW ENGLAND POWER POOL AGREEMENT
THIS THIRTY-FIFTH AGREEMENT AMENDING NEW ENGLAND POWER POOL AGREEMENT,
dated as of November 15, 1997, ("Thirty-Fifth Agreement") is entered into by
the signatory Participants to amend the New England Power Pool Agreement (the
"NEPOOL Agreement"), as amended.
WHEREAS, the NEPOOL Agreement as in effect on December 1, 1996 ("Prior
NEPOOL Agreement") was amended and restated by the Thirty-Third Agreement
Amending New England Power Pool Agreement dated as of December 1, 1996 (the
"Thirty-Third Agreement") in the form of the Restated New England Power Pool
Agreement ("Restated NEPOOL Agreement") attached to the Thirty-Third Agreement
as Exhibit A thereto, but certain portions of the Prior NEPOOL Agreement,
including Section 9 thereof, have been continued in effect pending the
occurrence of the Second Effective Date; and
WHEREAS, the first supplement to the Thirty-Third Agreement ("First
Supplement") dated as of February 7, 1997, among other things, corrected
various provisions of the Restated NEPOOL Agreement and the NEPOOL Open Access
Transmission Tariff ("Tariff") which is Attachment B to the Restated NEPOOL
Agreement; and
WHEREAS, the second supplement to the Thirty-Third Agreement ("Second
Supplement") dated as of June 1, 1997, effected various changes in the
Restated NEPOOL Agreement and the Tariff, and proposed that the Installed
Capability provisions of Section 12 of the Restated NEPOOL Agreement supersede
Section 9 of the Prior NEPOOL Agreement on November 1, 1997, in advance of the
Second Effective Date; and
WHEREAS, the third supplement to the Thirty-Third Agreement ("Third
Supplement") dated as of September 1, 1997, provided for an extension of a
standstill agreement with respect to the use of the transmission
interconnections between the NEPOOL Control Area and New York or New Brunswick
("Ties");
WHEREAS, the Thirty-Fourth Agreement Amending New England Power Pool
Agreement dated as of September 1, 1997 (the "Thirty-Fourth Agreement")
further amended the Restated NEPOOL Agreement and the Tariff to comply with
requirements imposed by the Federal Energy Regulatory Commission
("Commission") in its Order issued June 25, 1997 in Docket No. EC97-35-000;
and
WHEREAS, the fourth supplement to the Thirty-Third Agreement ("Fourth
Supplement") dated as of November 1, 1997, will amend the Restated NEPOOL
Agreement and the Tariff (i) to provide an interim treatment of congestion
costs, (ii) to add a new Part IIIA to the Tariff to specify additional rules
governing use of the Ties, and (iii) to make the other changes and corrections
specified therein; and
WHEREAS, the Commission's Order issued October 29, 1997 (the "Order")
with respect to the Second and Third Supplements has suspended until April 1,
1998 the effectiveness of the Installed Capability provisions of Section 12 of
the Restated NEPOOL Agreement, but permitted effectiveness in the interim of a
change, from 16 months to one month, in the time period over which changes in
load are recognized in pool billings for installed capability obligations; and
<PAGE>
WHEREAS, the signatories hereto desire to implement the Order through a
compliance filing that amends the continuing Capability Responsibility
provisions of the Prior NEPOOL Agreement, which are to continue in effect
until April 1, 1998 and then be superseded by the Installed Capability
provisions of Section 12 of the Restated NEPOOL Agreement, by modifying the
time period over which changes in load are recognized, and to make related
changes.
NOW, THEREFORE, the signatory Participants agree as follows:
SECTION 1
AMENDMENT TO PRIOR NEPOOL AGREEMENT
1.1 Amendment to Section 9.2(a). Section 9.2(a) of the Prior NEPOOL
Agreement is amended to read as follows:
(a) At the conclusion of each month commencing with November,
1997, the Operations Committee shall determine for each
Participant a fraction P in accordance with the following
formula:
P = B
-
C
P is the Participant's fraction for such month for
use under Section 9.2(b).
B is the Participant's Adjusted Monthly Peak for
such month.
C is the aggregate for the month of the Adjusted
Monthly Peaks for all Participants.
1.2 Amendment of Section 9.2(b)(1). The definitions of "Q" and "S" in
Section 9.2(b)(1) are amended to read as follows:
Q for each month commencing with November, 1997,
is the value of the Participant's fraction for
the month as determined in accordance with
Section 9.2(a).
S for each month commencing with November, 1997,
is equal to 1.00.
1.3 Amendment of Section 9.4(a). Section 9.4(a) is amended by
inserting the following additional paragraph at the end:
Upon application by a Participant to the Management Committee, the
Management Committee shall, if it finds that such Participant's
deficiency for the month of November, 1997 was due in whole or in
part to causes beyond the Participant's reasonable control, excuse
the Participant from all or a specified portion of the Capability
Responsibility adjustment charge for the month of November, 1997.
1.4 Amendment of Section 15.7. The definition of "Capability Period"
in Section 15.7 is amended to read as follows:
<PAGE>
15.7 "Capability Period" is a period of six months commencing
either on November 1 or May 1; provided that if any
computation to be made for purposes of Section 9 is to be
made with respect to a period which is shorter than six
months, "Capability Period" shall mean such shorter period
for purposes of such computation.
SECTION 2
MISCELLANEOUS
2.1 Following execution by the requisite number of Participants in
accordance with the Restated NEPOOL Agreement, this Thirty-Fifth
Agreement shall become effective as of November 1, 1997 with
respect to the computation of Capability Responsibilities for
November, 1997 and subsequent months to and including March, 1998,
or on such other date as the Commission shall provide that the
amendments provided for in this Thirty-Fifth Agreement shall
become effective; provided that such amendments shall not become
effective if Participants having the requisite number of Voting
Shares give notice in accordance with Section 21.11 of the
Restated NEPOOL Agreement that they object to the amendments.
2.2. Terms used in this Thirty-Fifth Agreement that are not defined
herein shall have the meanings ascribed to them in the Thirty-
Third Agreement.
2.3. This Thirty-Fifth Agreement may be executed in any number of
counterparts and each executed counterpart shall have the same
force and effect as an original instrument and as if all the
parties to all the counterparts had signed the same instrument.
Any signature page of this Thirty-Fifth Agreement may be detached
from any counterpart of this Thirty-Fifth Agreement without
impairing the legal effect of any signatures thereof, and may be
attached to another counterpart of this Thirty-Fifth Agreement
identical in form thereto but having attached to it one or more
signature pages.
IN WITNESS WHEREOF, each of the signatories has caused a counterpart
signature page for this Thirty-Fifth Agreement to be executed by its duly
authorized representative as of November 15, 1997.
<PAGE>
ALLENERGY MARKETING COMPANY, L.L.C.
AMENDMENT NO. 1 TO LIMITED LIABILITY COMPANY AGREEMENT
AMENDMENT NO. 1 TO LIMITED LIABILITY COMPANY AGREEMENT dated as of
December 3, 1997, by and among AllEnergy Marketing Company, Inc., a
Massachusetts corporation (hereinafter called the "Assignor"), NEES Energy,
Inc., a Massachusetts corporation ("NEI") and NEES Global Transmission, Inc.,
a Massachusetts corporation ("Global" and, together with NEI, the
"Assignees").
WHEREAS, the Assignor has agreed to assign and convey all of its
interest (the "Interest") in AllEnergy Marketing Company, L.L.C., a limited
liability company organized under the laws of the Commonwealth of
Massachusetts (hereinafter called the "LLC"), to the Assignees in accordance
with the provisions of a Purchase and Sale Agreement of even date herewith;
and
WHEREAS, the Assignor holds its interest in the LLC pursuant to the
terms of the Limited Liability Company Agreement dated as of September 18,
1996 (hereinafter called the "LLC Agreement"), by and between the Assignor and
NEI; and
WHEREAS, the parties hereto wish to amend the LLC Agreement to reflect
the assignment of the Interest by the Assignor to the Assignees and the
admission of Global as a Member of the LLC (as defined in the LLC Agreement).
NOW, THEREFORE, in consideration of the mutual agreements and covenants
contained herein, and other good and valuable consideration, the receipt,
adequacy and sufficiency of which is hereby acknowledged, the Assignor and the
Assignees agree as follows:
1. WITHDRAWAL OF ASSIGNOR AND ADMISSION OF GLOBAL AS A MEMBER OF THE
LLC. Immediately upon the assignment of the Interest to the Assignees, AMCI
shall cease to be a Member of the LLC and Global shall become a Member of the
LLC for all purposes.
2. AMENDMENTS TO THE LLC AGREEMENT.
2.1 Section 2.7 of the LLC Agreement is hereby amended by
striking "L. William Law, Jr." from the first sentence and replacing it with
"Kirk L. Ramsauer."
2.2 Section 3.1 of the LLC Agreement is hereby amended by
deleting the section in its entirety and replacing it with the following:
"3.1 MEMBERS. The members of the Company are NEI and
Global."
2.3 Section 3.3 of the LLC Agreement is hereby amended by
deleting the section in its entirety and replacing it with the following:
"3.3 PERCENTAGE INTERESTS. The percentage interests of
each Member in the profits of the Company (each a
"Percentage Interest") shall initially be as follows:
NEI 99%
Global 1%
The Percentage Interests of the Members shall be subject to
adjustment as provided in Section 3.6 and 3.7.4."
2.4 Section 5.14 of the LLC Agreement is hereby amended by
deleting the reference to "L. William Law, Jr." as Secretary and replacing it
with Kirk L. Ramsauer.
<PAGE>
2.5 Section 9.4 of the LLC Agreement is hereby amended by
deleting the reference to "Eastern."
2.6 Section 9.8 of the LLC Agreement is hereby amended by
deleting the section in its entirety.
2.7 Section 16.4 of the LLC Agreement is hereby amended by
deleting clause (a) of the last sentence and replacing it with the following:
"(a) if to Global, at 25 Research Drive, Westborough,
Massachusetts 01582."
2.8 The signature page of the LLC Agreement is hereby amended by
striking "ALLENERGY MARKETING COMPANY, INC." and replacing it with "NEES
GLOBAL TRANSMISSION, INC."
2.9 The definition of "Required Members" is hereby amended to
read as follows:
"Required Members" means NEI and Global.
3. RATIFICATION. Except for the foregoing amendments, all of terms
and conditions of the LLC Agreement are hereby ratified, confirmed and
approved in all respects.
4. CHOICE OF LAW. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as a sealed instrument as of the date first above written.
ASSIGNOR:
AllEnergy Marketing Company, Inc.
s/ Walter J. Flaherty
By:
Name: Walter J. Flaherty
Title: Vice President
ASSIGNEES:
NEES Energy, Inc.
s/ Alfred D. Houston
By:
Name: Alfred D. Houston
Title: Vice President
NEES Global Transmission, Inc.
s/ John G. Cochrane
By:
Name: John G. Cochrane
Title: Treasurer
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made and entered into as of the 11th day of March,
1998, by and between New England Power Service Company, herein referred to as
the "Company" and Robert L. McCabe herein referred to as "Mr. McCabe."
WHEREAS, the Company and Mr. McCabe mutually desire to change the terms
of Mr. McCabe's employment relationship with the Company and to agree as to
certain benefits of said employment.
NOW THEREFORE in consideration of the mutual rights and obligations of
the parties, the parties hereby agree as follows:
1.0 Term
1.1 In accord with Mr. McCabe's desire and subject to the provisions
of this Agreement, the Company agrees to employ Mr. McCabe and Mr. McCabe
agrees to be employed by the Company as Chairman, Retail Electric Companies,
for a period commencing October 1, 1997 and ending no later than May 31, 1999.
1.2 The parties agree that Mr. McCabe is under no obligation to remain
with the Company for any designated period of time. However, if Mr. McCabe
chooses to remain with the Company and is still in the employ of the Company
as of December 31, 1998, Mr. McCabe will be eligible for a voluntary early
retirement benefit set forth in Section 3.3 below. If Mr. McCabe chooses to
retire, the Company will hire Mr. McCabe as a consultant for a period of one
year at $1,000.00 per day with a 50 day minimum, which may be extended, at the
sole discretion of the Company, for one year, under the same terms.
2.0 Position and Duties
2.1 Mr. McCabe shall be employed as Chairman, Retail Electric
Companies and will have such duties, authority, rights, and obligations
inherent in such corporate position.
2.2 As Chairman, Retail Electric Companies, Mr. McCabe shall
diligently and conscientiously perform his duties and conduct, operate,
manage, and use his utmost endeavor to promote the business of the Company.
3.0 Compensation and Benefits.
3.1 During the term of his employment as Chairman, Retail Electric
Companies, the Company shall continue to compensate Mr. McCabe according to
the compensation plans and policies in effect for employees in ICP IB, in
accordance with the Company's payroll practices for salaried employees.
3.2 Mr. McCabe shall continue to be entitled to participate in all
employee benefit programs made available to employees during the term of his
employment as Chairman, Retail Electric Companies, in accordance with the
terms and conditions of said programs. Mr. McCabe shall be deemed a
participant in the ICP I bonus program for purposes of a partial pro rata
payment of the 1999 ICP I bonus and incentive share match, if he remains in
the employ of the Company for any portion of 1999 regardless of whether he is
employed through July 1, 1999.
3.3 If Mr. McCabe remains in the employ of the Company through
December 31, 1998, Mr. McCabe shall be entitled to elect a voluntary early
retirement package (Package), effective on the first of the month following
his retirement date, said retirement date to be mutually agreed upon by the
parties and to be effective no earlier than January 1, 1999, and no later than
June 1, 1999. Said package shall consist of 5 years age credit and 5 years
service credit (5 + 5) added to his pension plus a lump sum payment of
$225,000 or an equivalent annuity. This lump sum payment shall be made at the
same time the Package becomes effective. Notwithstanding the foregoing, if
Mr. McCabe elects to accept the Special Voluntary Early Retirement Offer
(Offer) which he received on or about January 5, 1998, he will be entitled to
receive the benefits included in the Package, except to the extent these
<PAGE>
benefits are duplicative of the benefits he receives under the Offer. Said
duplicative benefits include but are not limited to, an additional (5 + 5) and
the lump sum value of the $900 supplemental benefit.
3.4 Mr. McCabe agrees that in order to be eligible to receive the
benefits under the Package that (1) he sign this Agreement, return it to the
Company within 21 days and allow it to become effective by not revoking it
within 7 days of signing and (2) he sign and return a second agreement and
release within 21 days of his electing the Package.
3.5 Notwithstanding any other provision of this Agreement, in the
event that any payment or benefit or portion thereof (Total Payments) received
or to be received by Mr. McCabe in connection with this Employment Agreement,
Special Voluntary Early Retirement offer, a Change in Control as used in
Section 280G of the Internal Revenue Code or the termination of Mr. McCabe's
employment, whether pursuant to this Agreement or any other plan, arrangement
or agreement with the Company, including but not limited to the Agreement
between New England Electric System and Robert L. McCabe dated February 25,
1997 or the Special Severance Plan, is subject, in whole or part, to the
Excise Tax under Section 280G of the Internal Revenue Code, then the Company
shall reduce the Total Payment, as the Company deems appropriate, to the
extent necessary, so that no portion of the Total Payment is subject to the
Excise Tax. Said reduction in Total Payment shall be applicable regardless of
whether Mr. McCabe becomes entitled to portions of the Total Payment at
different times or as a result of differing circumstances if the IRS would
subject said payments to the Excise Tax.
3.6 In consideration of the benefits provided by the Company herein,
which Mr. McCabe agrees he would not otherwise be entitled to receive, Mr.
McCabe agrees, to the extent permitted by law, to the terms of the following
release of liability.
I, Robert L. McCabe fully and voluntarily forever release, waive, and
discharge the Company, including all past, present and future subsidiaries,
parents, affiliated companies, successors and assigns, and all past, present
and future fiduciaries, trustees, directors, officers, agents, and employees
of any such companies ("the Company and their Related Persons") from all
claims, demands, causes of action, suits and liabilities of any kind and
nature, known or unknown, asserted or unasserted, up to the date of the
signing of this Agreement, including but not limited to, all such claims
arising out of or related to this Agreement, or my employment with or
termination of employment from the Company, including any claim for wrongful
discharge, breach of contract or other common law claims and all claims under
the Age Discrimination in Employment Act of 1967, as amended, Title VII of the
Civil Rights Act of 1964, as amended, the Americans with Disabilities Act of
1990, Chapter 151B of the Massachusetts General Laws, as amended, and all
other state or Federal laws and regulations.
I, Robert L. McCabe, further covenant and represent that I have not
filed any complaints, charges, or claims for relief and will not seek personal
recovery or relief against the Company and its Related Persons arising out of
the matters released, waived, or discharged under this Agreement.
I give this Release individually and on behalf of any heirs and assigns
and anyone else claiming by or through me.
4.0 Restrictive Covenants
4.1 Mr. McCabe acknowledges that the Company's business, financial and
customer information constitutes a valuable asset of the Company which the
Company has the right to protect and secure. Mr. McCabe therefore agrees to
abide by the terms and conditions of the most recent version in effect of the
Standards of Conduct for NEES Companies signed by Mr. McCabe. Mr. McCabe also
acknowledges that if he accepts employment with a competitor without the prior
written permission of New England Electric System's Chief Executive Officer,
he will forfeit his benefit entitlement under the New England Electric System
Companies' Executive Supplemental Retirement Plan.
<PAGE>
4.2 Mr. McCabe recognizes and agrees that his obligations under this
Article 4.0 are ongoing obligations which shall survive the expiration and/or
termination of this Agreement.
5.0 Termination of Employment
5.1 If during the term of this Agreement, a Change in Control occurs,
as defined in the Agreement between New England Electric System and Robert L.
McCabe dated February 25, 1997, the Company shall provide Mr. McCabe with the
benefits set forth in said agreement, and this agreement shall be null and
void.
6.0 Death
6.1 Except as defined in compensation plans, benefits and policies to
which Mr. McCabe is otherwise entitled outside of this Agreement, if Mr.
McCabe dies during the term of this Agreement, the Company shall pay to the
estate of Mr. McCabe the compensation [including any bonuses due Mr. McCabe as
determined by an officer of the Company] which would otherwise be payable to
Mr. McCabe up to the end of the month in which Mr. McCabe's death occurs.
7.0 Assignment
7.1 The Company shall have the right to assign this Agreement to an
affiliate or its successors and/or assigns; and all covenants and agreements
hereunder shall inure to the benefit of and shall be binding upon said
successors and assigns of the Company.
7.2 Mr. McCabe acknowledges that the services to be rendered by him
are unique and personal. Accordingly, Mr. McCabe may not delegate any of his
duties under this Agreement. Mr. McCabe's obligations under Articles 3.0,
4.0, and 8.0 shall be binding upon his heirs, executives, administrators, and
legal representatives.
8.0 Confidentiality
8.1 Mr. McCabe agrees, whether during the term of this Agreement or
after, that he will keep the fact, terms and amount of this Agreement
completely confidential unless waived in writing by the President of the
Company or unless such disclosure is required in a legal proceeding to enforce
its terms or as a defense to any claim or as otherwise required by law. Mr.
McCabe agrees to notify the Company upon receipt of a subpoena and prior to
disclosing such information. Notwithstanding the foregoing, Mr. McCabe may
disclose the terms of this Agreement to his financial and/or tax advisor,
attorney and family; provided said individuals agree to keep the terms of this
Agreement confidential.
8.2 The Company agrees to handle this Agreement in a confidential
manner. It will not disclose the terms or amount of this Agreement to anyone
outside of the Company except to those who need to know to develop or
effectuate the Agreement or except in a legal proceeding to enforce its terms,
as a defense to any claim or as otherwise required by law. In addition, the
Company will not disclose the terms or amount of this Agreement to anyone
inside the Company except on a need to know basis.
9.0 Waiver and Election of Remedies
9.1 Waiver by the Company of any term, condition or provision of this
Agreement shall not be considered a waiver of that term, condition or
provision in the future or of any other term, condition, or provision. Any
waiver by the Company of the rights listed in this Agreement shall be in
writing and signed by a Company officer in order to be binding.
10.0 Severability
<PAGE>
10.1 In the event that any portion or part of this Agreement is deemed
invalid, against public policy, void or otherwise unenforceable by a court of
law, the parties shall negotiate an equitable adjustment in the affected
provision of this Agreement; however, the validity and enforceability of the
remaining portions hereof shall otherwise be fully enforceable.
11.0 Notice
11.1 Any notice required or desired to be given hereunder shall be
sufficient if in writing and if delivered by hand or mailed, postage prepaid
to:
For Employee For the Company
Robert L. McCabe David C. Kennedy
126 Naugler Avenue 25 Research Drive
Marlborough, MA 01752 Westborough, MA 01582
12.0 Captions and Paragraph Headings
12.1 The captions and paragraph headings used in this Agreement are for
convenience only and are not to be construed as a part of this Agreement.
13.0 Applicable Law
13.1 To the extent not preempted by Federal law, this Agreement shall
be governed by and construed in accordance with the laws of the Commonwealth
of Massachusetts. Mr. McCabe agrees to submit to the personal jurisdiction of
the Massachusetts courts in respect to any matter or dispute arising out of
this Agreement.
14.0 Entire Agreement
14.1 This Agreement constitutes the entire Agreement between the
Company and Mr. McCabe and all previous representations or agreements, whether
written or oral are hereby annulled and superseded. No change, modification
or alteration of any of the provisions of this Agreement shall be binding
unless such change, modification or alteration shall have been approved in
writing by a Company officer.
Mr. McCabe acknowledges that he has read this Agreement and fully
understands and agrees to its term; that he has had ample opportunity to
discuss and consider the terms of this Agreement; that he has been advised to
consult with an attorney; that he has been given a period of up to 21 days to
consider this Agreement; and that he has voluntarily chosen to sign this
Agreement. He understands that he has the right to revoke this Agreement
within 7 days of the date he signs it.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
executed by its duly authorized representatives on the day and year set forth
below.
________________________________ _______________________________________
Employee Company
By:____________________________________
Title:___________________________________
Witness:_________________________ Date:___________________________________
Date:
<PAGE>
1997 Annual Report
[FOLLOWING TEXT VERTICALLY PLACED TO LEFT OF COVER PHOTO]
New England Electric System
[COVER PHOTO]
[NEES LOGO]
<PAGE>
On the Cover
Caretakers of our wires include
Thomas Boyle, Massachusetts
Electric crew leader.
[PHOTO OF NEES BUCKET TRUCK IN SNOWSTORM WITH
LINEMAN WORKING ON LINES]
[SIX MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM PHOTO
THROUGH APRIL TO FOCUS ON WIRES TEXT]
JANUARY FEBRUARY MARCH APRIL MAY JUNE
Focus on Wires Business
An April storm knocked out power
to more than 130,000 customers. Our line crews
responded with speed and precision, restoring
most of those customers to service
within 24 hours.
<PAGE>
[1997 IN GHOSTED PRINT ALONG RIGHT SIDE OF REPORT]
The events of 1997
transformed our company
and greatly increased the
security of your investment
in NEES. At the same time,
our employees kept their
focus on their first priorities:
keeping the lights on and
the revenues flowing.
[PHOTO OF GOVERNOR CELLUCCI
SIGNING NEW LEGISLATION INTO LAW]
Generation Sales Agreement
We reached an agreement to sell
our fossil-fueled and hydroelectric generation
business, an action that will dramatically
reduce our stranded investment.
[SIX MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM
GENERATION SALES AGREEMENT TEXT THROUGH AUGUST
AND FROM PHOTO THROUGH NOVEMBER TO MASSACHUSETTS LAW TEXT]
JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER
Massachusetts Law
New legislation in Massachusetts
[PHOTO OF POWER PLANT] opened electricity wires to competitive
power suppliers while treating
utilities fairly.
<PAGE>
To Our Shareholders
New England Electric System (NEES) celebrated its fiftieth
anniversary in 1997, amid events that both transformed our
company and greatly increased the security of your investment in
NEES. We have become one of the first utilities in the nation to
open our wires to competitive power suppliers and guarantee
savings to customers. We have done so while providing for
recovery of generating plant and power purchase commitments that
might otherwise be forfeited, or "stranded," when access is given
to our wires. Since these stranded investments could have
exceeded our total equity, their recovery has been our first
priority.
[PHOTO OF RICHARD P. SERGEL APPEARS HERE]
Richard P. Sergel, President and Chief Executive Officer
- - We implemented the Rhode Island Utility Restructuring Act so
that on January 1, 1998, Rhode Island became the first state in
the nation where all customers can choose their power supplier,
just as they can choose their long-distance telephone carrier.
Customers in Rhode Island have also received rate decreases
averaging nearly 8 percent off of standard rates.
- - We helped secure the passage of legislation in Massachusetts
that made it the second state in the U.S. to fully open
electricity wires to competitive power suppliers.
- - We became the first utility in the country to reach an
agreement to sell its fossil-fueled and hydroelectric generation
business, an action that will halve our stranded investment and
increase the safety of our right to recover the remainder.
We believe that this national leadership in dealing with the
onset of competition has served you well during a most difficult
period.
1997 operating results
Meanwhile, our employees have kept their focus on their first
priorities: keeping the lights on and the revenues flowing. Their
hard work produced our ninth consecutive year of solid financial
performance and a dramatic list of service and operating
improvements. Earnings per average common share in 1997 were
$3.39, compared with $3.22 in 1996. Return on common equity was
12.8 percent, which placed us in the top quarter of both our
region's and nation's electric utilities. Our average cost per
kilowatthour was the second lowest among major New England
utilities. In sum, 1997 was an excellent year for both
shareholders and customers.
[SIX MONTH EMPTY TIME LINE ACROSS PAGE]
<PAGE>
[FOLLOWING TEXT APPEARS AT BOTTOM OF PAGE]
New England Electric System (NEES) is a public utility holding company
headquartered in Westborough, Massachusetts. Its subsidiaries are engaged
in the transmission, distribution, sale, and generation of electricity,
and the marketing of energy commodities and services. The electricity
delivery companies serve 1.3 million customers in Massachusetts, Rhode
Island, and New Hampshire. Other business activities include independent
transmission projects and telecommunications project management. NEES has
entered into an agreement to sell its fossil-fueled and hydroelectric
generation business.
Vision and goals
At our April 1997 annual shareholders meeting, we introduced
NEES 2000, a set of five business goals that are aimed at
preserving and enhancing your investment in our company. These
goals continue to drive the efforts of our management team and
our employees.
The first goal is to get our stranded investment back, as this
is absolutely vital to our financial health, the security of your
investment, and NEES' constitutionally protected rights. In 1997,
we built on our past progress through regulatory orders in
Massachusetts and Rhode Island and at the Federal Energy
Regulatory Commission (FERC), and through the Massachusetts
Electric Utility Industry Restructuring Act signed into law in
November by Governor Paul Cellucci.
The Massachusetts Act permits customers to choose their
electricity supplier beginning March 1, 1998. It opens our
distribution and transmission systems to competitive suppliers,
and calls for an immediate 10 percent reduction in electricity
rates, plus an additional 5 percent by September 1, 1999. Our
system does 75 percent of its electricity delivery business in
Massachusetts.
As with the statute passed the previous year in Rhode Island,
the Massachusetts Act recognizes the right of our company and
other utilities to recover stranded costs. In spite of the
consensus that supported the Massachusetts legislation, certain
opponents initiated a referendum for its repeal which will appear
on the November 1998 ballot.
Quick, effective implementation of the Rhode Island statute
and Massachusetts Act will be possible through settlements
approved by the FERC and supported by regulators in those two
states. The Rhode Island Public Utilities Commission and
Massachusetts Department of Telecommunications and Energy have
also approved our company's implementation plans.
<PAGE>
We reached an agreement in February 1998 with New Hampshire
Governor Jeanne Shaheen, key state legislators, and several
consumer, business, and environmental groups on a plan to bring
choice of power supplier to Granite State Electric's 36,000
customers no later than July 1, 1998. The agreement, which
requires state and federal approvals, calls for 10 percent
savings to customers, additional savings after our generation
sale is completed, and recovery of our stranded costs.
[PHOTO OF JOAN T. BOK APPEARS HERE]
Joan T. Bok, Chairman of the Board
[TEXT IN SHADED BOX IN CENTER COLUMN LEFT OF JOAN BOK PHOTO]
In April 1998, Joan T. Bok will retire as chairman of the NEES
board, a position she has held with distinction since 1984. She
has provided wise counsel sparked by a keen intellect. Her many
contributions include co-authoring the original NEESPLAN, setting
NEES on its path of national leadership in resource planning. She
will remain a member of the board.
Generation sale
The second goal we put forth at our April 1997 annual meeting
was to get as much money as possible for our generating business.
Reaching a sales agreement required an immense undertaking by our
generation and administrative employees during an intense, six-
month stretch. Their effort was without precedent. No other U.S.
utility had sold its entire fossil-fueled and hydroelectric
generation fleet and operations.
[SIX MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM
DECEMBER TO GRAPH]
December
[GRAPH APPEARS HERE, FINANCIAL RESULTS]
<PAGE>
USGen New England, Inc., a subsidiary of PG&E Corporation, was
the winning bidder with an offer of $1.59 billion, and, in
August, signed a purchase and sales agreement with our company.
The price was approximately 45 percent over the book value of the
generation being sold. We expect the sale to close later this
year, subject to receipt of regulatory approvals.
We are delighted to report that the purchase price will
effectively recover our investments not only in our fossil and
hydro plants, but in nuclear plants as well. The proceeds will
reduce NEES' potential stranded costs by roughly 50 percent. This
in turn will reduce, by about half, the related transition charge
that customers will pay on their electric bills. We expect
average rate reductions to exceed 15 percent in both Rhode Island
and Massachusetts.
In addition to reducing stranded costs, the sale will provide
NEES with a substantial amount of cash that will require
reinvestment. After paying taxes and other sale-related
transaction costs, retiring debt, and repurchasing up to five
million shares, that net amount will be approximately $500
million. This money will give us the flexibility to combine with
other energy delivery companies, increase our investments in
unregulated businesses, repurchase additional NEES shares, or
complete a combination of these actions. We are carefully
studying the options to determine the use of this money that will
contribute the most to shareholder value.
While a financial success, the sale hastens the day in which
some of our most valued people - many with decades of experience
in NEES' generation activities - will leave for employment with
USGen or to seek opportunities with other firms. With additional
reductions through early retirements and severances during 1998,
we expect that our workforce for the reshaped NEES will be
significantly reduced.
In September, Senior Vice President Jeffrey Tranen left NEES
to become president and chief executive officer of the California
Independent System Operator, which manages the electricity
transmission system in that state. We are pleased that Jeff's
talents have been recognized by others, and believe this will be
the case with many of the wonderful people who run the region's
best generation fleet.
Meanwhile, our generation employees turned in a record year,
with only one lost-time accident and perfect environmental
compliance at all 18 power plants; the highest total energy
production on record from our Brayton Point and Salem Harbor coal
units; and, at Manchester Street Station, the best thermal
efficiency among New England's fossil-fueled plants.
[NEES YEAR 2000 LOGO APPEARS UNDER COLUMNS ONE AND TWO]
<PAGE>
[SIX-MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM NEES 2000
LOGO THROUGH APRIL TO NEES 2000 BUSINESS GOALS TO PHOTO ON NEXT
PAGE]
APRIL
[TEXT AND GOALS NUMBER 1 AND 2 ON BOTTOM QUARTER OF PAGE]
Introduced in April 1997, the NEES 2000
Business goals guide the day-to-day activities of our
management team and employees.
1 Get our stranded investment back
2 Get as much as possible for the generation business
[PHOTO OF MANCHESTER STREET STATION SPANNING TWO COLUMNS
APPEARS HERE]
Reviewing operations at Manchester Street Station in Providence
are USGen's Carl Cimino (top left) and New England Power's Bill
Freddo, plant manager.
Wires business
Our third goal is to run the best wires business in the
Northeast. In our region, storms provide the acid test of such
aspirations. Once again, our people passed with honors. A
snowstorm on April 1, 1997 dropped more than 25 inches of snow
throughout our service area and knocked out power to about
135,000 of our customers. Our crews worked day and night to
restore power to more than 100,000 of those customers within 24
hours. We matched our excellent service restoration record of
other recent major storms, and exceeded the restoration
performance of our neighboring utilities. Our customer service
staffs in Northborough, Mass. and Providence, R.I. responded to
more than 75,000 phone calls on outages and repair activities,
and our automated phone system handled an additional 72,000
messages.
The low cost and reliability of our performance, during
emergencies and in day-to-day service, show that our wires
operation is already one of the best in our region. Technology is
enhancing the value of that business, and is helping our people
do their jobs with even greater efficiency. For example, we are
merging aerial photos and data from various departments to
produce a computer-based map of all of our equipment, including
poles, wires, and transformers. Having this information in one
place will help our engineers and crews respond more quickly to
customers' requests for new electrical service, information, or
repairs.
[EMPTY SIX-MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM PHOTO
TO NEES 2000 BUSINESS GOALS ON PREVIOUS PAGE]
[NEES GOALS NUMBER 3 THROUGH 5 ON BOTTOM QUARTER OF PAGE]
3 Run the best wires business in the Northeast
4 Increase the size of our energy delivery business
5 Profit from growth in unregulated ventures
<PAGE>
As a convenience to our customers, we have introduced an
interactive feature on our Internet web site that allows
customers to view their payment, billing, and energy usage
history, using their home or office computer.
Our popular energy efficiency programs marked their tenth
anniversary in 1997. During the year, these programs helped more
than 200,000 customers use energy more efficiently and
contributed approximately seven cents per share to our bottom
line.
[PHOTO OF SYSTEM CONTROL CENTER IN WESTBOROUGH SPANNING TWO
COLUMNS APPEARS HERE]
The System Control Center in Westborough, Massachusetts is the
hub for dispatching power throughout the NEES companies' network
of transmission lines and substations
Expansion
Know-how, technology, customer focus... all are important
ingredients as we build the best wires business. But scale
matters, too, and our fourth goal is to increase the size of our
energy delivery business. Two years ago, we began serving
Nantucket Island's 9,700 customers by acquiring Nantucket
Electric Company. Now, with the industry restructuring effort
just about complete in two states and the generation sale process
coming to an end, we can turn more of our attention to mergers
and acquisitions, and are seeking the most promising
possibilities, both in electricity and natural gas. Our low-cost
position among electric utilities in the Northeast should prove
an important element in forging potential combinations and for
winning support from regulators, customers, and shareholders.
While the cash from the generation sale gives us important
capabilities for such expansion, we intend to use it
conservatively. An expansion is only worthwhile to us if we can
make it pay for you.
[EMPTY SIX-MONTH TIME LINE ACROSS PAGE - DOTTED LINE FROM SYSTEM
CONTROL CENTER PHOTO TO PHOTO OF JESSE LYONS]
[PHOTO OF JESSE LYON APPEARS HERE WITH FOLLOWING TEXT TO ITS
LEFT]
The professionalism of our line workers, including Granite
State Electric's Jesse Lyons, was of great benefit to utilities in New
Hampshire, Maine, Vermont, and Canada, where
our people helped local crews restore power
following a devastating ice storm in January 1998.
<PAGE>
Building new businesses
Our final NEES 2000 goal is to profit from growth in
unregulated ventures. We are making carefully considered
investments in ventures that are closely aligned with our core
abilities.
One such opportunity is represented by our purchase in
December of Eastern Enterprises' 50 percent interest in our joint
venture, AllEnergy Marketing Company, L.L.C., which offers energy
commodities (electricity, gas, propane, oil) and related value-
added services to customers in New England, New Jersey, and New
York. With this purchase, AllEnergy became a wholly owned
subsidiary of NEES. We are committed to making AllEnergy a
regional leader in the emerging competitive energy marketplace.
We are optimistic that the decision to increase our ownership,
while costly in the short term, will yield value over the long
term.
Our subsidiary NEES Global Transmission, Inc. has teamed up
with the Connecticut-based utility United Illuminating and
Swedish equipment manufacturer ABB Power Systems AB in a proposal
to build a cable under Long Island Sound. The cable would allow
the transfer of competitively priced energy between New England
and Long Island, New York.
Our subsidiary NEES Communications, Inc. is exploring
opportunities in the telecommunications industry, building on our
successful experience with fiber optic cable projects in the
Providence, R.I., Westborough, Mass., Nantucket, Mass., and
Wilder, Vt., regions. NEES Communications' services include
engineering, constructing, owning, and leasing fiber optic cable.
[PHOTO OF CARMEN BERNAZAR APPEARS HERE]
"The strength of our service to customers
is our ability to understand their needs, provide
reliable and accurate information, and go the
extra mile to find solutions to their problems."
Carmen Bernazar, Senior Customer Service Representative
[EMPTY SIX-MONTH TIME LINE ACROSS PAGE]
[JANUARY 1998 DOTTED LINE TO PHOTO ON PREVIOUS PAGE]
January 1998
<PAGE>
[PHOTO OF TIM BERTSCHMANN AND DAVID MCCAUGHEY SPANNING TWO
COLUMNS APPEARS HERE]
AllEnergy's Tim Bertschmann (left) and David McCaughey,
facilities manager for the Brooks Pharmacy chain, discuss gas
heating needs at the Pawcatuck, Connecticut location.
Business opportunities are being created from our experience
in industry restructuring. We've gleaned important lessons from
our successful customer-choice pilot programs and our
constructive record of collaboration and negotiation in electric
industry restructuring. We have developed several marketable
products and services related to this expertise, and have been
engaged by utilities in a dozen states and in Alberta, Canada, to
assist them with their transition to a competitive electricity
industry.
Commitment
Although the restructuring of the electricity industry
provides new opportunities such as those just described, it will
reduce NEES earnings beginning in 1998. The reasons include
limits on return on equity for our generation and electricity
delivery businesses, and the eventual sale of the generation
business, historically our most profitable enterprise. These
measures were agreed to in order to assure recovery of our
stranded costs and a fair opportunity to compete and thrive in
the future. Our unregulated ventures will be under early pressure
to perform against formidable competition.
NEES has consistently overcome challenges - from the oil
embargoes and inflation of the 1970s, to a severe recession in
the early 1990s - to provide competitive financial performance
for our shareholders. We are confident that, despite the new
challenges of a restructured industry, NEES will remain a solid
investment.
One of the most compelling reasons for this confidence is that
the employees of the NEES companies have a vital self-interest in
performance for shareholders. Collectively, through various
investment programs, our employees are our single largest
shareholder, holding some 8 percent of all shares. From 12 to 46
percent of each employee's total pay (depending on position)
hinges on NEES meeting annual targets for financial performance.
We have agreements with labor unions that base part of union
employees' pay on the company's financial performance for
shareholders. Each executive has minimum shareholding
requirements. In short, we succeed only when we succeed for you.
[EMPTY SIX-MONTH TIME LINE ACROSS PAGE]
[FOLLOWING TEXT ON LOWER QUARTER OF PAGE DOTTED LINE TO PHOTO OF
CHRISTINE KEIGHER ON NEXT PAGE]
"AllEnergy offers customized energy solutions to help our customers
compete. We have the personnel, financial resources, and experience
to offer the reliability and service our customers demand."
Christine Keigher, Director of Marketing, AllEnergy
<PAGE>
Executive changes
In February 1998, John W. Rowe resigned his position as NEES
president and chief executive officer to become chairman,
president, and chief executive officer of Chicago-based Unicom
Corporation and its subsidiary Commonwealth Edison. In light of
Mr. Rowe's departure, the NEES board of directors in February
1998 approved changes to the management team. Richard P. Sergel,
senior vice president, was elected NEES president and chief
executive officer and a member of the board of directors
effective February 6, 1998, succeeding Mr. Rowe. Alfred D.
Houston, executive vice president, was elected to the board of
directors effective February 6, 1998. The board announced its
intention to elect Mr. Houston NEES chairman when Joan Bok
retires as chairman of the board in April 1998.
[PHOTO OF JOHN ROWE APPEARS HERE UNDER FIRST COLUMN]
John W. Rowe, former President and Chief Executive Officer of
NEES
We thank those people who helped make 1997 an historic and
successful year: our employees in the generation business and
other areas of our company, for their steadfastness during a time
of change; John Rowe, for his bold leadership through the arduous
process of industry restructuring which positioned NEES well to
succeed in the future; our customers, for their business and for
their help in encouraging workable restructuring legislation that
will deliver the price and performance that are important to
them; and our regulators and government officials, particularly
the leaders of the state legislatures in Massachusetts and Rhode
Island, for their willingness to shape restructuring legislation
in which all stakeholders win.
We believe that during the past few years our company has done
more than any utility in the region - and has few peers in the
nation - in preserving shareholder value in the midst of dramatic
industry change. We thank you, fellow shareholders, for
recognizing our efforts through your continued confidence in NEES
and the employees of our companies.
S/Joan T. Bok
Chairman of the Board
S/Richard P. Sergel
President and Chief Executive Officer
March 2, 1998
[EMPTY SIX-MONTH TIME LINE ACROSS PAGE]
[PHOTO OF CHRISTINE KEIGHER DOTTED LINE TO TEXT ON PREVIOUS PAGE
APPEARS ON BOTTOM OF PAGE]
<PAGE>
Financial Review
Overview of Financial Results
Earnings were $3.39 per share in 1997 compared with $3.22 and
$3.15 per share in 1996 and 1995, respectively. The return on
common equity was 12.8 percent in 1997, 12.6 percent in 1996, and
12.8 percent in 1995. The market price of New England Electric
System (NEES) common shares was 42 3/4 per share at the end of
1997 compared with 34 7/8 per share and 39 5/8 per share at the
end of 1996 and 1995, respectively.
The increase in 1997 earnings reflects increased revenues from
a 2.0 percent increase in kilowatthour (kWh) deliveries as well
as rate increases and reversals of prior period refund accruals.
Also contributing to the higher earnings was a decrease in the
nonfuel component of purchased power expense. Partially
offsetting the higher earnings were increased operation and
maintenance expenses, increased expenses associated with NEES'
unregulated ventures, and costs incurred to repurchase a portion
of the preferred stock of NEES subsidiaries.
The increase in 1996 earnings reflects retail rate increases
and higher kWh deliveries as well as decreased purchased power
costs, partially offset by a decreased allowance for funds used
during construction (AFDC) and increased property tax expense.
[GRAPH APPEARS HERE, EARNINGS PER AVERAGE SHARE ($)]
Outlook
Starting in 1998, NEES earnings will be reduced by the
restructuring of the electric utility business in the states
served by the NEES companies. During the first quarter of 1998,
customers in Massachusetts and Rhode Island, representing
approximately 95 percent of the NEES companies' revenues from the
sale of electricity, will have the ability to choose their power
supplier. Upon the introduction of consumer choice, settlement
agreements related to recovery of stranded costs will limit the
return on equity earned on the NEES companies' generating
business to approximately 9.4 percent, before mitigation
incentives, which is significantly lower than earned by the
generating business in recent years. (The settlement agreements
also will cap earnings for the majority of NEES' distribution
business at 11.75 percent.) Following completion of the sale of
the NEES companies' nonnuclear generating business, which is
discussed in more detail below, NEES earnings will be affected by
the return on the reinvestment of the sale proceeds, whether
through retirement of debt, the repurchase of NEES shares,
investments in new ventures, or otherwise. This reinvestment
return is expected, at least in the near term, to be considerably
less than the return historically earned in the generating
business.
This report contains statements that may be considered forward
looking under the securities laws. Actual results may differ
materially for the reasons discussed in this Financial Review.
<PAGE>
Industry Restructuring
Historically, electric utilities have provided their customers
bundled electric service within exclusive franchise service
territories. As the result of a number of trends, including a
disparity in electric rates among regions of the country and new
regulations and legislation intended to foster competition,
distribution customers are being allowed to choose their power
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution systems.
Because of legislation enacted in the states served by the NEES
companies, most customers served by the NEES companies will have
the ability to choose their power supplier during the first
quarter of 1998.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments incurred to supply
customers under a regulated structure. The amounts by which such
costs exceed market prices are commonly referred to as "stranded
costs." As described below, the NEES companies have reached
settlement agreements with parties representing all of their
distribution customers. In each case, these settlements provide
for recovery of stranded costs. Agreements have not yet been
reached with certain wholesale customers that represent less than
2 percent of the NEES companies' stranded cost exposure; however,
these customers continue to pay their share of NEES' generation
and transmission subsidiary's, New England Power Company (NEP),
costs through their wholesale rates.
Massachusetts Legislation and Settlement Agreement
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1,
1998. The legislation requires electric companies to provide
customers who do not choose a power supplier with a transition
rate (or "standard offer generation service") which results in a
10 percent rate reduction, with the discount increasing to 15
percent on or before September 1, 1999. The legislation also
provides a mechanism for the recovery of stranded costs resulting
from the introduction of customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) found that a settlement
agreement (the Massachusetts Settlement) previously reached among
the NEES companies' Massachusetts subsidiaries (NEP,
Massachusetts Electric Company (Massachusetts Electric), and
Nantucket Electric Company (Nantucket Electric)) and various
governmental agencies and other interested parties substantially
complies with or is consistent with the Massachusetts statute.
The Massachusetts Settlement was also conditionally approved by
the Federal Energy Regulatory Commission (FERC) in November 1997,
subject to a compliance filing to clarify the impact of the
settlement on nonsettling parties.
<PAGE>
In accordance with the Massachusetts Settlement, NEP's
wholesale contracts with Massachusetts Electric and Nantucket
Electric have been amended effective March 1, 1998. The
Massachusetts Settlement provides that Massachusetts Electric's
and Nantucket Electric's share of NEP's stranded costs will be
recovered from distribution customers through a transition access
charge, which will be collected by these distribution companies.
Under the Massachusetts Settlement, the recovery of NEP's
stranded costs is divided into several categories. Unrecovered
costs associated with generating plants and regulatory assets
would be recovered over 12 years and would earn a return on
equity of 9.4 percent. The above-market component of purchased
power contracts and nuclear decommissioning costs would be
recovered as incurred over the life of those obligations, a
period expected to extend beyond 12 years. Initially, the
transition access charge would be set at 2.8 cents per kWh and
would be reduced upon completion of the sale of NEP's generating
business, as described below. As the transition access charge
declines, NEP would earn incentives based on successful
mitigation of its stranded costs. These incentives would
supplement NEP's return on equity.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the
NEES companies to divest their nonnuclear generating business. In
August 1997, NEP and NEES' Rhode Island subsidiary, The
Narragansett Electric Company (Narragansett Electric), entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation (PG&E). See
"Divestiture of Generating Business" below. The net proceeds from
the sale of the nonnuclear generating business to USGen will be
used to reduce the transition access charge from 2.8 cents per
kWh to approximately 1.5 cents per kWh. In addition, the FERC
accepted the NEES companies' proposal in conjunction with their
divestiture filing that the recovery of the remaining above-
market nuclear generating plant investment and regulatory assets
be completed by the end of the year 2000.
A referendum question which asks voters to repeal the
Massachusetts statute is expected to be on the ballot in November
1998. The NEES companies are unable to predict the outcome. While
by itself, repeal of the statute is not expected to materially
impair the effectiveness of the previously approved Massachusetts
Settlement, the potential exists that following repeal, there
could be legislative or regulatory actions which could be
materially adverse to the NEES companies.
[GRAPH APPEARS HERE, DIVIDENDS DECLARED PER SHARE/ANNUAL
RATE ($)]
<PAGE>
Rhode Island Legislation and Settlement Agreement
In August 1996, the state of Rhode Island enacted legislation
that allows customers in that state the opportunity to choose
their power supplier. Under the Rhode Island statute, state
accounts, certain new customers, and the largest manufacturing
customers were able to choose their power supplier beginning on
July 1, 1997. The balance of Rhode Island customers gained the
ability to choose their power supplier on January 1, 1998. The
Rhode Island statute also provided utilities with the ability to
recover stranded costs.
In November 1997, the FERC conditionally approved a settlement
agreement (the Rhode Island Settlement) among NEP, Narragansett
Electric, the Rhode Island Public Utilities Commission and the
Rhode Island Division of Public Utilities and Carriers to
implement the stranded cost recovery provisions of the Rhode
Island statute, subject to a compliance filing to clarify the
impact of the settlement on nonsettling parties. The terms of the
Rhode Island Settlement are substantially the same as the
Massachusetts Settlement.
[GRAPH APPEARS HERE, DIVESTITURE REDUCES NEES' STRANDED COSTS]
New Hampshire Legislation and Settlement Agreement
On February 3, 1998, NEES' New Hampshire subsidiary, Granite
State Electric Company (Granite State Electric), and NEP reached
a comprehensive settlement agreement with the Governor's office
of the State of New Hampshire and a number of other interested
parties on a plan to provide choice of power supplier to its
customers by no later than July 1, 1998. This settlement
agreement was reached in response to a previously enacted New
Hampshire statute which requires customer choice of power
supplier. The principle terms of the New Hampshire settlement
agreement, which require approval by state and federal
regulators, are substantially similar to the Massachusetts
Settlement and Rhode Island Settlement, including rate reductions
for customers and the ability to recover stranded costs.
Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
Electric (collectively, the Sellers) reached an agreement to sell
their nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
megawatts (MW) of capacity, as well as NEES' 100 percent interest
in Narragansett Energy Resources Company (NERC), a 20 percent
general partner in the Ocean State Power project, all of which
has a book value of $1.1 billion. USGen will pay the Sellers
$1.59 billion in cash, of which $225 million will be contingent
upon the introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. USGen will also
reimburse the NEES companies for $85 million of costs associated
with early retirement and special severance programs for
<PAGE>
employees affected by industry restructuring. USGen will assume
responsibility for environmental conditions at the Sellers'
nonnuclear generating stations. USGen will also assume the
Sellers' obligations under long-term fuel and fuel transportation
contracts and certain collective bargaining agreements.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale on
various grounds, including allegations that following the sale,
USGen would be able to exercise unlawful levels of market power.
On February 25, 1998, the FERC issued an order that rejected the
market power allegations, approved the sale, and conditionally
approved most supporting filings. While the timing of receipt of
final regulatory approvals is uncertain, receipt of all approvals
is unlikely before mid-1998. Closing is contingent upon all
regulatory approvals being obtained by February 1999.
In order to meet the terms of NEP's mortgage indenture, NEP
will be required, prior to the consummation of the sale, to
either defease or call approximately $278 million of its mortgage
bonds. Any defeasance of bonds would be by deposit of cash
representing principal and interest to the maturity date, or
interest, principal, and general redemption premium to an earlier
redemption date. In addition, NEP will retire approximately $372
million of mortgage bonds securing the issuance of a like amount
of pollution control revenue bonds (PCRBs) by various public
agencies. However, NEP expects that substantially all of the
underlying PCRBs will remain outstanding as unsecured obligations
of NEP. In addition, the long-term debt of NERC will be retired
prior to the closing.
As part of the divestiture plan, in February 1998, New England
Energy Incorporated (NEEI) (a wholly owned subsidiary of NEES)
sold its oil and gas properties for approximately $50 million.
NEEI's loss on the sale of approximately $120 million, before
tax, has been reimbursed by NEP. See the "Liquidity and Capital
Resources" section of Financial Review for information on NEEI
debt retirements.
At the divestiture date, any gain or loss from the divestiture
of nonnuclear generating assets and oil and gas assets will be
recorded as a regulatory asset or liability to be recovered as
part of NEP's stranded costs, through the ongoing transition
access charge, consistent with the settlement agreements. NEP may
be required to record a liability for the monthly fixed
contribution towards the above-market cost of purchased power. In
such an event, NEP would also record a regulatory asset
consistent with the settlement agreements.
<PAGE>
In addition, NEP will endeavor to sell, or otherwise transfer,
its minority interest in three nuclear power plants and a 60 MW
interest in a fossil-fueled generating station in Maine to
nonaffiliates. Until such time as the nuclear interests are
divested, NEP will share with customers 80 percent of the
revenues and operating costs related to the units, with
shareholders retaining the balance. In the event that NEP
determines that it has an impairment of its nuclear plant
balances under Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (FAS 121), it will record any
such impairment as a regulatory asset.
Impact of Restructuring on Distribution Business
The Massachusetts Settlement also establishes distribution
rates for Massachusetts Electric. On March 1, 1998, Massachusetts
Electric's distribution rates will be set at a level
approximately $45 million above the level embedded in its
previously bundled rates, with such rates then frozen through the
year 2000. This increase reflects changes to the distribution
cost of service that include an $11 million increase in annual
depreciation expense, a $3 million annual contribution to a storm
fund, and increased amortization of unfunded deferred income
taxes of approximately $1 million over six years. The
Massachusetts restructuring legislation also expanded the
eligibility for certain rate discount programs, the cost of which
is uncertain at this time. From 1998 through 2000, Massachusetts
Electric's return on equity will be subject to a floor of 6
percent and a ceiling of 11 percent. Earnings over the ceiling
will be shared equally between customers and shareholders up to a
maximum of 12.5 percent. This sharing results in an effective cap
on Massachusetts Electric's return on equity of 11.75 percent,
excluding certain limited incentive opportunities. To the extent
that earnings fall below the floor, Massachusetts Electric will
be authorized to surcharge customers for the shortfall.
[GRAPH APPEARS HERE, DIVESTITURE REDUCES NEES' TRANSITION ACCESS
CHARGE]
The Massachusetts Settlement also eliminated Massachusetts
Electric's and Nantucket Electric's purchased power cost
adjustment (PPCA) mechanisms as of July 31, 1996. These
mechanisms allowed Massachusetts Electric and Nantucket Electric
to recover purchased power rate changes from NEP and the effects
of NEP's seasonal rates. The Massachusetts Settlement required
that Massachusetts Electric's net $18 million PPCA refund
liability balance at July 31, 1996 be transferred on its books to
establish a storm contingency fund account of $3 million
initially, with the remainder applied to reduce regulatory assets
for hazardous waste costs.
Under the Rhode Island statute, Narragansett Electric
increased distribution rates by approximately $11 million in 1997
and another $7 million in 1998. The statute also provides that
Narragansett Electric may request increased distribution rates
which would take effect no earlier than 1999.
<PAGE>
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions beginning in 1998 as a result of industry
restructuring and the sale of the nonnuclear generating business.
The NEES companies are in the process of offering early
retirement programs to their union and non-union employees,
contingent upon the closing of the sale of the nonnuclear
generating business to USGen. In addition, the NEES companies
intend to offer enhanced severance benefits to affected
employees. As previously described, the costs of the early
retirement and severance programs are expected to be
substantially recovered from the proceeds of the sale of the
nonnuclear generating business. Since the early retirement
program is contingent upon the divestiture, its cost will not be
accrued until that time.
[GRAPH APPEARS HERE, ANTICIPATED USE OF DIVESTITURE PROCEEDS]
Risk Factors
While the NEES companies believe that the previously described
settlements and legislation and the sale agreement with USGen and
other developments constitute substantial progress in reducing
the impacts associated with industry restructuring, significant
risks remain. These include, but are not limited to: (i) the
potential that ultimately the settlements will not be implemented
in the manner anticipated by NEES, (ii) the possibility that a
voter referendum in November 1998 could overturn the
Massachusetts legislation, followed by materially adverse
legislative or regulatory actions, (iii) the possibility of
federal legislation that would increase the risks to shareholders
above those contained in the settlements and the Massachusetts
and Rhode Island statutes, (iv) the potential for adverse
stranded cost recovery decisions involving wholesale customers
with whom settlements have not yet been reached, and (v) the
failure to complete the sale of the nonnuclear generating
business to USGen.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the NEES companies had approximately
$600 million in regulatory assets in compliance with FAS 71, of
which approximately $60 million relate to the transmission and
distribution business.
<PAGE>
In response to concerns expressed by the staff of the
Securities and Exchange Commission, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board took
under consideration how FAS 71 should be applied in light of
recent changes within the regulated utility industry. In July
1997, the EITF concluded that a utility whose ongoing generation
operations would not permit the application of FAS 71, but had
otherwise received approval to recover stranded costs through
regulated transmission and distribution rates, would be permitted
to continue to apply FAS 71 to the recovery of the stranded
costs.
The restructuring settlements and statutes each provide for
recovery of stranded costs of generating assets and oil and gas
related assets (including regulatory assets) not recoverable from
the proceeds of the divestiture of NEP's generating business. The
cost of these assets would be recovered as part of a cost-based
transition access charge imposed on all distribution customers.
Additionally, FERC Order No. 888 enables transmission companies
to recover their specific costs of providing transmission
service. Therefore, after the proposed divestiture, substantially
all of NEP's business, including the recovery of its stranded
costs, would remain under cost-based rate regulation. NEES
further believes the restructuring settlements and statutes will
enable the NEES distribution companies to recover through rates
their specific costs of providing ongoing distribution services.
NEES believes these factors and the EITF conclusion will allow
its principal utility subsidiaries to continue to apply FAS 71.
As a result of the FERC approval of the restructuring settlements
in November 1997, NEP was required to cease to apply FAS 71 to 20
percent of its ongoing nuclear operations, as described under
"Divestiture of Generation Business," the impact of which is
expected to be immaterial.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations. In addition, write-downs of
plant assets under FAS 121 could be required, including a write-
off of any gain or loss from the divestiture of the generating
business.
Operating Revenue
Operating revenue increased $152 million in 1997 and reflects
higher kWh deliveries, rate increases, increased revenues related
to rate adjustment mechanisms, and increased fuel revenues.
In 1997, kWh deliveries to ultimate customers increased 2.0
percent, reflecting the effects of an improving regional economy.
Rate increases include a Narragansett Electric $11 million
increase in distribution rates that became effective in January
1997, and a transmission rate increase that went into effect in
mid-1996.
<PAGE>
Rate adjustment mechanisms referred to above include
Massachusetts Electric's and Nantucket Electric's PPCA
mechanisms, which, upon approval of the Massachusetts Settlement
in November 1997, eliminated the mechanisms as of July 31, 1996.
Pending final approval of the settlement, Massachusetts Electric
and Nantucket Electric had accrued refund reserves of $9 million
for the last five months of 1996 and an additional $9 million in
the first nine months of 1997. Upon final approval of the
settlement, these refund reserves were reversed in the fourth
quarter of 1997, thereby increasing revenue. Massachusetts
Electric also accrued refund reserves of $17 million during the
first seven months of 1996, which were part of the net $18
million PPCA balance at July 31, 1996 discussed in "Impact of
Restructuring on Distribution Business."
[GRAPH APPEARS HERE, 1997 DISTRIBUTION OF REVENUE (%)]
Operating revenue increased $79 million in 1996 and reflected
growth in kWh deliveries and Massachusetts Electric and
Narragansett Electric base rate increases in the fourth quarter
of 1995. These increases were partially offset by decreases in
revenues under rate adjustment mechanisms due to the accrued
refund reserves booked in Massachusetts Electric related to the
PPCA mechanism as discussed above.
KWh deliveries to ultimate customers increased 1.7 percent in
1996. The increase was primarily due to an improving regional
economy and the acquisition of Nantucket Electric, partially
offset by the effects of milder weather in the last half of 1996.
The distribution companies (Massachusetts Electric, Nantucket
Electric, Narragansett Electric, and Granite State Electric)
received approval from their respective regulatory agencies to
recover demand-side management (DSM) program expenditures in
rates on a current basis through 1997. These expenditures were
$63 million, $59 million, and $64 million in 1997, 1996, and
1995, respectively. Narragansett Electric and Granite State
Electric have received approvals from their respective state
regulatory agencies to recover substantially all of their 1998
DSM program expenditures. The Massachusetts Settlement and
statute provide for recovery of DSM-related costs. Massachusetts
Electric and Nantucket Electric have filed DSM program
expenditure recovery plans with the MDTE for the period 1998
through 2002, and are currently awaiting MDTE approval. Since
1990, the distribution companies have been allowed to earn
incentives based on the results of their DSM programs and have
recorded before-tax incentives of $7.6 million, $6.0 million, and
$5.7 million in 1997, 1996, and 1995, respectively.
[GRAPH APPEARS HERE, GROWTH IN KILOWATTHOUR DELIVERIES TO
ULTIMATE CUSTOMERS (%)]
<PAGE>
Operating Expenses
Operating expenses increased $133 million in 1997. This
increase reflects increased fuel costs, including the fuel
component of purchased power expense, and increased operation and
maintenance expenses, partially offset by decreased depreciation
and amortization expense. The increase in the fuel component of
purchased power expense was partially offset by a reduction in
the nonfuel component.
Fuel costs, including the fuel component of purchased power
expense, increased in 1997 primarily due to increased wholesale
sales to other utilities and increased replacement power costs
due to the reduced generation from partially owned nuclear units.
See the "Nuclear Units" section.
In 1997, the increase in operation and maintenance expenses
reflects increased costs of partially owned nuclear plants,
transmission wheeling costs, start-up costs associated with the
new regional transmission control organization, increased
distribution system related costs, and the NEES companies' share
of costs associated with the restoration to service of previously
idled generating facilities throughout New England, in response
to a tightening regional power supply. The increase also reflects
increased general and administrative costs, including the
accelerated amortization, in accordance with a 1995 NEP rate
agreement, of previously deferred costs associated with
postretirement benefits other than pensions (PBOPs), as discussed
below.
The decrease in the nonfuel component of purchased power
expense, which amounted to $6 million in 1997, reflects reduced
charges from the Connecticut Yankee nuclear power plant which was
permanently shut down in late 1996 and the expiration of certain
purchased power contracts, partially offset by increased charges
from the Maine Yankee nuclear power plant which was permanently
shut down in mid-1997.
The decrease in depreciation and amortization expense reflects
the completion of the amortization of NEP's pre-1988 investment
in the Seabrook 1 nuclear unit and NEP's investment in the
canceled Seabrook 2 nuclear unit. In accordance with a FERC 1995
settlement agreement, upon completion of the amortization of
Seabrook 1 and Seabrook 2, NEP agreed to accelerate its
amortization of previously deferred costs associated with PBOPs.
Upon completion of the PBOP amortization, which occurred in July
1997, NEP was required to accelerate its depreciation of its
investment in the Millstone 3 nuclear unit. This accelerated
depreciation is recorded as a regulatory liability.
Total operating expenses increased $54 million in 1996
compared with 1995, reflecting increased fuel costs and increased
taxes, partially offset by decreased maintenance expense, lower
purchased power costs, and decreased depreciation and
amortization expense.
<PAGE>
Fuel costs increased in 1996, reflecting increased generation
due to growth in sales to ultimate customers and other utilities
and fixed pipeline demand charges related to the Manchester
Street plant that had been partially deferred until the
completion of the plant in the second half of 1995.
The nonfuel component of purchased power costs decreased in
1996 by $28 million as a result of the expiration of certain
purchased power contracts and higher 1995 costs related to NEP's
share of costs for repairs at the Maine Yankee nuclear power
plant.
The 1996 decrease in maintenance expense reflected reduced
thermal and hydro generating plant overhaul activity, partially
offset by costs to correct deficiencies at Millstone 3.
Depreciation and amortization expense decreased in 1996,
reflecting a decrease in oil and gas amortization expense as well
as the completion in 1995 of the amortization of a portion of
Seabrook 1 costs and Salem Harbor coal conversion costs,
partially offset by increased depreciation of other plant assets,
including the Manchester Street plant.
Taxes other than income taxes increased in 1996 primarily as a
result of increased taxes on the Manchester Street plant.
Other Income
The decrease in other income in 1997 reflects expenses
associated with NEES' unregulated ventures. These costs are
expected to be higher in 1998 due to NEES' increased involvement
in such unregulated ventures.
In the fourth quarter of 1997, AllEnergy Marketing Company,
L.L.C. (AllEnergy) became a wholly owned indirect subsidiary of
NEES. NEES previously owned a 50 percent interest. AllEnergy is
an energy marketing company which offers energy commodities
(electricity, gas, propane, and oil) and related value-added
services to customers in the emerging competitive energy markets
in the Northeast. The results of AllEnergy's operations are
expected to negatively impact NEES' earnings in 1998.
Allowance for Funds Used During Construction (AFDC)
The decrease in AFDC in 1996 is due to the completion of the
Manchester Street plant repowering project.
[GRAPH APPEARS HERE, CUSTOMERS SERVED PER EMPLOYEE]
Nuclear Units
Nuclear Units Permanently Shut Down
Three of the four regional nuclear generating companies in
which NEP has a minority interest own nuclear generating units
which have been permanently shut down. These three units are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Future
Estimated
NEP's Billings
Investment Date To NEP
Unit % $(millions) Retired $(millions)
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 7 Feb 1992 44
Connecticut Yankee 15 17 Dec 1996 92
Maine Yankee 20 16 Aug 1997 164
</TABLE>
In the case of each of these units, NEP has recorded an
estimate of the total future payment obligation as a liability
and an offsetting regulatory asset, reflecting estimated future
billings from the companies. In a 1993 decision, the FERC allowed
Yankee Atomic to recover its undepreciated investment in the
plant as well as unfunded nuclear decommissioning costs and other
costs. Connecticut Yankee and Maine Yankee have both filed
similar requests with the FERC. Several parties have intervened
in opposition to both filings. NEP's stranded cost settlements
allow NEP to recover all costs that the FERC allows the Yankee
companies to bill to NEP.
In October 1997, the Citizen's Awareness Network and Nuclear
Information and Resource Service filed a petition with the
Nuclear Regulatory Commission (NRC) that would require formal NRC
approval of a decommissioning plan for the Connecticut Yankee and
Maine Yankee plants. In 1998, the petitioners indicated their
intention to file a request with the NRC designed to overturn a
current NRC rule on decommissioning. NEP cannot predict what
impact, if any, these activities will have on the cost of
decommissioning the plants.
[GRAPH APPEARS HERE, NEES' RETURN ON COMMON EQUITY (%)]
At Maine Yankee, the NRC has identified numerous apparent
violations of its regulations, which may result in the assessment
of significant civil penalties.
In the 1970s, NEP and several other shareholders (Sponsors) of
Maine Yankee entered into 27 contracts (Secondary Purchase
Agreements) under which they sold portions of their entitlement
to Maine Yankee power output through 2002 to various entities,
primarily municipal and cooperative systems in New England
(Secondary Purchasers). Virtually all of the Secondary Purchasers
have ceased making payments under the Secondary Purchase
Agreements and have demanded arbitration, claiming that such
agreements excuse further payments upon plant shutdown. NEP has
notified the Secondary Purchasers that the shutdown does not
relieve them of their obligation to make payments under the
Secondary Purchase Agreements and that they are in default of
such agreements. NEP has asked the FERC to enforce NEP's rights
<PAGE>
under the agreements. In the event that no further payments are
forthcoming from Secondary Purchasers, NEP, as a primary obligor
to Maine Yankee, would be required to pay an additional $9
million of future shutdown costs. These costs are not included in
the $164 million estimate disclosed in the table above. Shutdown
costs are recoverable from customers under the stranded cost
settlements.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for
the plant decommissioning, the owners of Maine Yankee are jointly
and severally liable for the shortfall.
Operating Nuclear Units
NEP has minority interests in three other nuclear generating
units, Vermont Yankee, Millstone 3, and Seabrook 1. In October
1996, the NRC issued letters to operators of nuclear power plants
requiring them to document that the plants are operated and
maintained within their design and licensing bases, and that any
deviations are reconciled in a timely manner. The Seabrook 1 and
Vermont Yankee nuclear power plants responded to the NRC letters
in February 1997. Millstone 3 is currently shut down and has been
placed on the NRC "Watch List," signifying that its safety
performance exhibits sufficient weakness to warrant increased NRC
attention. Millstone 3 may not restart without NRC approval.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service
lives, availability, and costs. These uncertainties stem from a
combination of factors, including the acceleration of competitive
pressures in the power generation industry and increased NRC
scrutiny. NEP performs periodic economic viability reviews of
operating nuclear units in which it holds ownership interests.
Millstone 3
In April 1996, the NRC ordered Millstone 3, which has
experienced numerous technical and nontechnical problems, to
remain shut down pending verification that the unit's operations
are in accordance with NRC regulations and the unit's operating
license. Millstone 3 is operated by a subsidiary of Northeast
Utilities (NU). NEP is not an owner of the Millstone 1 and 2
nuclear generating units, which are also shut down under NRC
orders.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
an NRC assessment concluding a safety conscious work environment
exists, public meetings, and a vote of the NRC Commissioners. NEP
cannot predict when Millstone 3 will be allowed by the NRC to
restart, but believes restart of the unit is unlikely prior to
the summer of 1998.
<PAGE>
Since April 1996, NEP has incurred an estimated $35 million in
incremental replacement power costs, which it has been recovering
from customers through its fuel clause. During the outage, NEP is
incurring incremental replacement power costs of approximately $2
million per month.
Several criminal investigations related to Millstone 3 are
ongoing. In December 1997, the NRC assessed civil penalties
totaling $2.1 million for numerous violations at the three
Millstone units. NEP's share of this fine was less than $100,000.
The Connecticut Department of Environmental Protection and
Connecticut Attorney General have filed suit against NU for
alleged wastewater discharge violations at the Millstone units,
which may result in the assessment of substantial civil
penalties.
In August 1997, NEP filed suit against NU in Massachusetts
Superior Court for damages resulting from the tortious conduct of
NU relating to Millstone 3. NEP is seeking compensation for the
losses it has suffered, including the costs of lost power and
costs necessary to assure that Millstone 3 can safely return to
operation. NEP also seeks punitive damages. NU has filed for
dismissal of the suit and sought to consolidate it with suits
filed by other joint owners in Massachusetts Superior Court.
NEP also sent a demand for arbitration to Connecticut Light &
Power Company and Western Massachusetts Electric Company, both
subsidiaries of NU, seeking damages resulting from their breach
of obligations under an agreement with NEP and others regarding
the operation and ownership of Millstone 3.
Brayton Point
In October 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to determine whether to
modify or revoke and reissue NEP's water discharge permit for its
Brayton Point 1,576 MW power plant. This action came two years
before the permit expiration date. The EPA stated it took this
step in response to a request from the Rhode Island Department of
Environmental Management (RIDEM). A RIDEM report asserted a
statistical correlation between the decline in the fish
population in Mount Hope Bay and a change in operations at
Brayton Point that occurred in the mid-1980s.
In April 1997, NEP signed a memorandum of agreement negotiated
with the various federal and state environmental agencies under
which NEP will voluntarily operate under more stringent
conditions than under its existing permit. The agreement was in
lieu of any immediate action on the permit, and will remain in
effect until a renewal permit is issued. On January 16, 1998, NEP
applied for a new water discharge permit with both the EPA and
the Massachusetts Department of Environmental Protection. NEP
cannot predict at this time what permit changes will be required
or the impact on Brayton Point's operations and economics.
However, permit changes may substantially impact the plant's
capacity and ability to produce energy and/or require substantial
capital expenditures to construct equipment to address the
concerns raised by the environmental agencies.
<PAGE>
Hazardous Waste
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The most prevalent types of hazardous
waste sites with which NEES and its subsidiaries have been
associated are manufactured gas locations. (Until the early
1970s, NEES was a combined electric and gas holding company
system.) NEES is aware of approximately 40 such manufactured gas
locations, including 10 for which the NEES companies have been
identified by either federal or state environmental regulatory
agencies as potentially responsible parties, mostly located in
Massachusetts. NEES has reported the existence of all
manufactured gas locations of which it is aware to state
environmental regulatory agencies. NEES is engaged in various
phases of investigation and remediation work at approximately 20
of the manufactured gas locations. NEES and its subsidiaries are
currently aware of other possible hazardous waste sites, and may
in the future become aware of additional sites, that they may be
held responsible for remediating.
In 1993, the Massachusetts Department of Public Utilities
approved a settlement agreement that provides for rate recovery
of remediation costs of former manufactured gas sites and certain
other hazardous waste sites in Massachusetts. A more detailed
discussion of this settlement agreement and of potential
hazardous waste liabilities is contained in Note D-4 of the Notes
to the Financial Statements. Predicting the potential costs to
investigate and remediate hazardous waste sites continues to be
difficult. At December 31, 1997, NEES had total reserves of $44
million. NEES believes that hazardous waste liabilities for all
sites of which it is aware, and which are not covered by a rate
agreement, are not material to its financial position.
Year 2000 Computer Issues
In the next two years, most large companies will face a
potentially serious information systems (computer) problem
because most software applications and operational programs
written in the past will not properly recognize calendar dates
beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The NEES companies
began the process of identifying the changes required to their
computer programs and hardware during 1996. The necessary
modifications to the NEES companies' centralized financial,
customer, and operational information systems are expected to be
completed by the end of 1998. Noncentralized systems are also
being reviewed for Year 2000 problems. The NEES companies believe
total costs associated with making the necessary modifications to
all centralized and noncentralized systems will be approximately
$25 million, of which approximately $8 million has been incurred
as of December 31, 1997. Most of the remaining costs are expected
to be incurred prior to December 31, 1998.
New Accounting Standards
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
<PAGE>
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. NEES is
currently evaluating the impact that these new accounting
standards will have on its future reporting requirements.
Liquidity and Capital Resources
Capital requirements for 1997 and projections for 1998 are shown below:
<TABLE>
<CAPTION>
Year ended December 31 (millions of dollars) 1997 1998
---- ----
<S> <C> <C>
Cash expenditures for utility plant $203 $200
Oil and gas exploration and development* 13 -
---- ----
Total capital expenditures 216 200
Maturing debt and prepayment requirements 80 90
---- ----
Total capital requirements $296 $290
---- ----
Cash from utility operations after
payment of dividends $244 $200
Cash from oil and gas operations* 29 -
---- ----
Total cash from operations after
the payment of dividends $273 $200
---- ----
<FN>
*NEEI oil and gas assets sold as of February 5, 1998.
</FN>
</TABLE>
The long-term debt financing activities of the NEES
subsidiaries for 1997 and the projected long-term debt financings
for 1998 are summarized as follows:
<TABLE>
<CAPTION> 1997 Actual 1998 Projected
(millions of dollars) Issues Retirements Issues Retirements
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
NEP* $ - $ 38 $ - $ 50
Massachusetts Electric 15 30 55 40
Narragansett Electric 10 33 5 5
Granite State Electric - - 5 -
Nantucket Electric - 1 - 1
Hydro-Transmission companies - 11 - 12
NERC** - 2 - 2
NEEI*** - 27 - 122
------ ----------- ------ ---------
$25 $142 $65 $232
<FN>
* See"Divestiture of Generating Business"in Financial Review for
information on potential NEP bond defeasance.
** $29 million of NERC debt will be retired in 1998 contingent upon
completion of the sale of the nonnuclear generating business to USGen.
*** NEEI debt retired on February 5, 1998.
</FN>
</TABLE>
<PAGE>
The interest rate on the long-term debt issued in 1997 is 7.39
percent.
In August 1997, the NEES Board of Directors authorized the
repurchase of up to five million NEES common shares through open
market purchases. Through December 31, 1997, NEES purchased
283,000 shares under the repurchase program.
On December 19, 1997, NEES purchased, pursuant to a tender
offer, preferred stock of its subsidiaries with an aggregate par
value of $87 million. These purchases resulted in an after-tax
charge to net income of approximately $5 million.
At December 31, 1997, NEES and its consolidated subsidiaries
had lines of credit and standby bond purchase facilities with
banks totaling $1.2 billion. These lines and facilities were used
at December 31, 1997 for liquidity support for $252 million of
commercial paper borrowing and $372 million of NEP mortgage bonds
in tax-exempt commercial paper mode. Fees are paid on the lines
and facilities in lieu of compensating balances.
<PAGE>
New England Electric System and Subsidiaries
Selected Financial Data
Year ended December 31 (dollar amounts expressed in millions, except per share
data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenue:
Electric sales (excluding
fuel cost recovery) $1,592 $1,531 $1,521 $1,518 $1,488
Fuel cost recovery 708 662 600 568 582
Other revenue 162 125 121 117 117
Oil and gas sales 41 33 30 40 47
------- ------- ------- ------- -------
Total operating revenue $2,503 $2,351 $2,272 $2,243 $2,234
Net income $ 220 $ 209 $ 205 $ 199 $ 190
Average common shares (000's)
Basic 64,899 64,960 64,970 64,970 64,970
Diluted 64,952 64,986 64,986 64,988 64,985
Per share data:
Net income-Basic and Diluted $ 3.39 $ 3.22 $ 3.15 $ 3.07 $ 2.93
Dividends declared $ 2.36 $ 2.36 $2.345 $2.285 $ 2.22
Return on average common equity 12.8% 12.6% 12.8% 12.7% 12.6%
Total assets $5,312 $5,223 $5,191 $5,085 $4,796
Capitalization:
Common share equity $1,744 $1,685 $1,632 $1,581 $1,530
Minority interests 43 46 49 55 56
Cumulative preferred stock 39 126 147 147 147
Long-term debt 1,488 1,615 1,675 1,520 1,512
------- ------- ------- ------- -------
Total capitalization $3,314 $3,472 $3,503 $3,303 $3,245
Deliveries to ultimate
customers (millions of kWh) 22,097 21,674 21,311 21,155 20,832
Cost per kWh sold to ultimate
customers (cents) 9.88 9.51 9.54 9.29 9.50
System maximum
demand (MW) 4,326 4,091 4,381 4,385 4,081
Electric capability
(net MW)-year end 5,093 5,276 5,482 5,533 5,362
Number of employees 4,665 4,787 4,832 4,990 4,969
Number of ultimate customers
(in thousands) 1,349 1,333 1,314 1,300 1,288
------- ------- ------ ------- -------
</TABLE>
<PAGE>
New England Electric System and Subsidiaries
Statements of Consolidated Income
Year ended December 31 (thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenue $2,502,591 $2,350,698 $2,271,712
---------- ---------- ----------
Operating expenses:
Fuel for generation 372,461 334,994 237,498
Purchased electric energy 528,229 509,400 548,370
Other operation 556,658 501,090 500,721
Maintenance 143,372 127,785 136,058
Depreciation and amortization 236,492 246,379 264,666
Taxes, other than income taxes 146,494 143,733 132,631
Income taxes 152,024 139,199 128,340
---------- ---------- ----------
Total operating expenses 2,135,730 2,002,580 1,948,284
---------- ---------- ----------
Operating income 366,861 348,118 323,428
Other income:
Allowance for equity funds used
during construction - - 7,852
Equity in income of generating companies 10,240 10,334 10,552
Other income (expense), net (15,755) (8,166) (6,306)
---------- ---------- ----------
Operating and other income 361,346 350,286 335,526
---------- ---------- ----------
Interest:
Interest on long-term debt 107,311 110,479 108,365
Other interest 16,939 19,527 19,826
Allowance for borrowed funds
used during construction (1,908) (2,246) (14,016)
---------- ---------- ----------
Total interest 122,342 127,760 114,175
---------- ---------- ----------
Income after interest 239,004 222,526 221,351
Preferred dividends and net gain/loss
on reacquisition of preferred
stock of subsidiaries 12,319 6,463 8,690
Minority interests 6,647 7,127 7,904
---------- ---------- ----------
Net income $ 220,038 $ 208,936 $ 204,757
---------- ---------- ----------
Average common shares - Basic 64,899,322 64,960,496 64,969,652
Average common shares - Diluted 64,952,185 64,986,136 64,985,697
Per share data:
Net income - Basic and Diluted $ 3.39 $ 3.22 $ 3.15
Dividends declared $ 2.36 $ 2.36 $ 2.345
---------- ---------- ----------
</TABLE>
Statements of Consolidated Retained Earnings
Year ended December 31 (thousands of dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Retained earnings at beginning of year $ 887,292 $ 831,529 $ 779,045
Net income 220,038 208,936 204,757
Dividends declared on common shares (152,812) (153,173) (152,273)
---------- ---------- ----------
Retained earnings at end of year $ 954,518 $ 887,292 $ 831,529
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Electric System and Subsidiaries
Consolidated Balance Sheets
At December 31 (thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Assets
Utility plant, at original cost $5,860,101 $5,692,956
Less accumulated provisions for depreciation
and amortization 1,995,017 1,853,003
---------- ----------
3,865,084 3,839,953
Construction work in progress 48,708 56,652
---------- ----------
Net utility plant 3,913,792 3,896,605
---------- ----------
Oil and gas properties, at full cost (Note A) 1,299,817 1,286,661
Less accumulated provision for amortization 1,128,659 1,081,940
---------- ----------
Net oil and gas properties 171,158 204,721
---------- ----------
Investments:
Nuclear power companies, at equity (Note D) 49,825 47,902
Other subsidiaries, at equity 37,418 40,124
Other investments 117,645 96,399
---------- ----------
Total investments 204,888 184,425
---------- ----------
Current assets:
Cash 14,264 8,477
Accounts receivable, less reserves
of $17,834 and $18,702 257,185 262,103
Unbilled revenues 71,260 59,093
Fuel, materials, and supplies, at average cost 66,509 74,111
Prepaid and other current assets 64,265 85,096
---------- ----------
Total current assets 473,483 488,880
---------- ----------
Accrued Yankee nuclear plant costs (Note D) 299,564 166,413
Deferred charges and other assets (Note B) 248,762 282,207
---------- ----------
$5,311,647 $5,223,251
---------- ----------
Capitalization and liabilities
Capitalization (see accompanying statements):
Common share equity $1,744,442 $1,685,417
Minority interests in consolidated subsidiaries 43,062 46,293
Cumulative preferred stock of subsidiaries 39,113 126,166
Long-term debt 1,487,481 1,614,578
---------- ----------
Total capitalization 3,314,098 3,472,454
---------- ----------
Current liabilities:
Long-term debt due within one year 89,910 79,705
Short-term debt 251,950 145,050
Accounts payable 136,218 148,592
Accrued taxes 14,831 14,911
Accrued interest 24,969 27,494
Dividends payable 36,162 37,276
Other current liabilities (Note G) 120,002 109,582
---------- ----------
Total current liabilities 674,042 562,610
---------- ----------
Deferred federal and state income taxes 720,375 750,929
Unamortized investment tax credits 90,018 91,936
Accrued Yankee nuclear plant costs (Note D) 299,564 166,413
Other reserves and deferred credits 213,550 178,909
Commitments and contingencies (Note D)
---------- ----------
$5,311,647 $5,223,251
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Electric System and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31 (thousands of dollars)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income $220,038 $208,936 $204,757
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 239,654 250,508 270,292
Deferred income taxes and
investment tax credits, net (31,178) (30,328) 24,056
Allowance for funds used during
construction (1,908) (2,246) (21,868)
Amortization of unbilled revenues - - (8,209)
Minority interests 6,647 7,127 7,904
Decrease (increase) in accounts
receivable, net and unbilled revenues 4,217 30,770 1,194
Decrease (increase) in fuel,
materials, and supplies 10,664 126 20,707
Decrease (increase) in prepaid
and other current assets 24,729 (7,209) (955)
Increase (decrease) in accounts payable (15,710) (9,568) (11,451)
Increase (decrease) in other current
liabilities (2,718) 33,999 (4,784)
Other, net 66,678 40,455 (11,790)
-------- -------- --------
Net cash provided by operating
activities $521,113 $522,570 $469,853
-------- -------- --------
Investing activities
Plant expenditures, excluding allowance
for funds used during construction $(203,095) $(234,409) $(329,385)
Oil and gas exploration and development (13,156) (20,371) (17,947)
Other investing activities (22,669) (10,309) (32,460)
--------- --------- ---------
Net cash used in investing activities $(238,920) $(265,089) $(379,792)
--------- --------- ---------
Financing activities
Dividends paid to minority interests $ (6,809) $ (8,878) $ (12,159)
Dividends paid on NEES common shares (152,763) (153,759) (151,335)
Short-term debt 105,900 (59,862) (30,720)
Long-term debt - issues 25,000 97,850 425,000
Long-term debt - retirements (142,205) (106,811) (311,920)
Preferred stock - redemptions (87,221) (20,900) -
Premium on reacquisition of long-term debt (2,163) - (2,003)
Return of capital to minority interests
and related premium (3,348) (1,633) (1,364)
Repurchase of common shares (12,797) (2,075) (1,543)
--------- --------- ---------
Net cash provided by (used in)
financing activities $(276,406) $(256,068) $ (86,044)
--------- --------- ---------
Net increase in cash and cash equivalents $ 5,787 $ 1,413 $ 4,017
Cash and cash equivalents at beginning
of year 8,477 7,064 3,047
--------- --------- ---------
Cash and cash equivalents at end of year $ 14,264 $ 8,477 $ 7,064
--------- --------- ---------
Supplementary information
Interest paid less amounts capitalized $ 115,545 $ 119,710 $ 105,459
--------- --------- ---------
Federal and state income taxes paid $ 174,000 $ 168,255 $ 68,312
--------- --------- ---------
Dividends received from investments
at equity $ 10,802 $ 12,987 $ 14,748
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Electric System and Subsidiaries
Consolidated Statements of Capitalization
At December 31 (thousands of dollars)
<TABLE>
<CAPTION>
Common share equity 1997 1996
---------- ----------
<S> <C> <C>
Common shares, par value $1 per share
Authorized - 150,000,000 shares
Issued - 64,969,652 shares $ 64,970 $ 64,970
Paid-in capital 736,605 736,773
Retained earnings 954,518 887,292
Treasury stock - 431,875 and 102,957 shares,
respectively (16,415) (3,618)
Unrealized gain on securities, net 4,764 -
---------- ----------
Total common share equity $1,744,442 $1,685,417
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Shares outstanding
Cumulative preferred stock of
subsidiaries 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
$100 Par value
4.44% to 4.76% 106,400 371,640 $10,640 $ 37,164
6.00% to 6.99% 108,690 375,020 10,869 37,502
$50 Par value
4.50% to 6.95% 256,000 730,000 12,800 36,500
$25 Par value
6.84% 192,160 600,000 4,804 15,000
-------- -------- -------- --------
Total cumulative preferred stock
of subsidiaries (annual dividend
requirement of $2,284 for 1997
and $7,332 for 1996) 663,250 2,076,660 $39,113 $126,166
-------- --------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Long-term debt (Note H) Maturity Rate 1997 1996
----------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Mortgage bonds - New England
Power Company 1997 through 1999 6.040%-8.280%$ 60,000 $ 63,000
2000 through 2004 6.580%-8.330% 90,000 90,000
2015 through 2024 7.250%-8.530% 178,000 213,500
2018 through 2022 Variable 371,850 371,850
Mortgage bonds - All other
NEES subsidiaries 1997 through 1999 5.700%-7.810% 48,000 110,500
2000 through 2004 6.240%-8.520% 153,500 153,500
2005 through 2014 6.110%-8.450% 94,000 94,000
2015 through 2026 7.050%-9.125% 254,200 229,200
Notes
Granite State Electric Company 1997 through 2025 7.370%-9.440% 15,000 15,000
Nantucket Electric Company 1997 through 2016 4.100%-8.500% 30,735 31,500
New England Energy Incorporated 1998 through 2002 Variable 122,000 149,000
Hydro-Transmission companies 2001 through 2015 8.820%-9.410% 136,490 148,010
Narragansett Energy Resources
Company 2010 7.250% 28,640 30,560
Unamortized discounts and premiums, net (5,024) (5,337)
--------------------
Total long-term debt 1,577,391 1,694,283
--------------------
Long-term debt due in one year (89,910) (79,705)
--------------------
$1,487,481$1,614,578
--------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
New England Electric System and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Significant Accounting Policies
1. Nature of operations
New England Electric System (NEES) is a public utility holding
company headquartered in Westborough, Massachusetts. Its
subsidiaries are engaged in the transmission, distribution, sale,
and generation of electricity, and the marketing of energy
commodities and services. NEES' electricity delivery subsidiaries
serve 1.3 million customers in Massachusetts, Rhode Island, and
New Hampshire. Other business activities include independent
transmission projects and telecommunications project management.
The NEES system provides electric service to distribution
customers through separate distribution subsidiaries,
Massachusetts Electric Company (Massachusetts Electric) and
Nantucket Electric Company (Nantucket Electric), which operate in
Massachusetts; The Narragansett Electric Company (Narragansett
Electric), which operates in Rhode Island; and Granite State
Electric Company (Granite State Electric), which operates in New
Hampshire. Each of the distribution subsidiaries purchased
electricity on behalf of its customers under wholesale all-
requirements contracts with NEES' generation and transmission
subsidiary, New England Power Company (NEP). See Note B for a
discussion of industry restructuring and Note C for a discussion
of NEP and Narragansett Electric's planned divestiture of their
nonnuclear generating business.
2. Basis of consolidation and financial statement presentation
The consolidated financial statements include the accounts of
NEES and all subsidiaries except New England Electric
Transmission Corporation, which is recorded under the equity
method. Presentation of this subsidiary on the equity basis is
not material to the consolidated financial statements. NEP has a
minority interest in four regional nuclear generating companies
(Yankees). Narragansett Energy Resources Company (NERC) has a 20
percent general partnership interest in the Ocean State Power
(OSP) generating facility. NEP and NERC account for these
ownership interests under the equity method. During 1997, NEES
increased its ownership from 50 percent to 100 percent of
AllEnergy Marketing Company, L.L.C. (AllEnergy), an energy
marketing enterprise.
NEES owns 50.4 percent of the outstanding common stock of both
New England Hydro-Transmission Electric Company, Inc. and New
England Hydro-Transmission Corporation (Hydro-Transmission
companies). The consolidated financial statements include 100
percent of the assets, liabilities, and earnings of the Hydro-
Transmission companies. Minority interests, which represent the
minority stockholders' proportionate share of the equity and
income of the Hydro-Transmission companies, have been separately
disclosed on the NEES consolidated balance sheets and income
statements.
<PAGE>
NEP is also a 12 percent and 10 percent joint owner,
respectively, of the Millstone 3 and Seabrook 1 nuclear
generating units, each 1,150 megawatts (MW). NEP's net
investments in Millstone 3 and Seabrook 1 at December 31, 1997,
included in "Net utility plant," were approximately $366 million
and $54 million, respectively. NEP's share of the related
expenses for these units is included in "Operating expenses." In
addition, in a 1995 rate agreement, a provision was made for the
accelerated recovery of NEP's investment in Millstone 3. This
accumulated accelerated amortization at December 31, 1997
amounted to approximately $17 million and was included as a
regulatory liability in "Other reserves and deferred credits"
(see Note A-5 and Note B).
NEES, through its wholly owned indirect subsidiary, AllEnergy,
uses derivative instruments to manage exposure in fluctuations in
commodity prices. At this time, AllEnergy has only held exchange-
traded futures contracts to manage risks associated with natural
gas, propane, and heating oil price risks. Hedge criteria used
and accounting for hedge transactions are in accordance with
Statement of Financial Accounting Standards No. 80, Accounting
for Futures Contracts (FAS 80). FAS 80 states that in order to
qualify as a hedge, price movements in commodity derivatives must
be highly correlated with the underlying hedged commodity and
must reduce exposure to market fluctuations throughout the hedged
period. Any gain or loss on a derivative which qualifies as a
hedge under FAS 80 is deferred until recognized in the income
statement in the same period as the hedged item is recognized in
the income statement. As of December 31, 1997, all of AllEnergy's
existing futures contracts qualified as hedges.
The accounts of NEES and its utility subsidiaries are
maintained in accordance with the Uniform System of Accounts
prescribed by regulatory bodies having jurisdiction. All
significant intercompany transactions between consolidated
subsidiaries have been eliminated.
In preparing the financial statements, management is required
to make estimates that affect the reported amounts of assets and
liabilities and disclosures of asset recovery and contingent
liabilities as of the date of the balance sheets, and revenues
and expenses for the period. These estimates may differ from
actual amounts if future circumstances cause a change in the
assumptions used to calculate these estimates.
3. Electric sales revenue
All of NEES' subsidiaries accrue revenues for electricity
delivered but not yet billed (unbilled revenues), with the
exception of Granite State Electric. Included in income is $8
million in 1995 which represents amortization of the initial
effect of recording unbilled revenues, in accordance with the
retail rate agreements. Accrued revenues are also recorded in
accordance with rate adjustment mechanisms which include
Massachusetts Electric's and Nantucket Electric's purchased power
cost adjustment (PPCA) mechanisms. Upon approval of the
Massachusetts Settlement in November 1997, the PPCA mechanisms
were eliminated as of July 31, 1996. Pending final approval of
<PAGE>
the settlement, Massachusetts Electric and Nantucket Electric had
accrued refund reserves of $9 million for the last five months of
1996 and an additional $9 million in the first nine months of
1997. Upon final approval of the settlement, these refund
reserves were reversed in the fourth quarter of 1997, thereby
increasing revenue.
4. Allowance for funds used during construction (AFDC)
The utility subsidiaries capitalize AFDC as part of
construction costs. AFDC represents the composite interest and
equity costs of capital funds used to finance that portion of
construction costs not yet eligible for inclusion in rate base.
AFDC is capitalized in "Utility plant" with offsetting noncash
credits to "Other income" and "Interest." This method is in
accordance with an established rate-making practice under which a
utility is permitted a return on, and the recovery of, prudently
incurred capital costs through their ultimate inclusion in rate
base and in the provision for depreciation. The composite AFDC
rates were 5.9 percent, 5.6 percent, and 7.3 percent, in 1997,
1996, and 1995, respectively.
5. Depreciation and amortization
The depreciation and amortization expense included in the
statements of consolidated income is composed of the following:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Depreciation $172,010 $171,193 $159,510
Nuclear decommissioning costs (see Note D-5) 2,638 2,629 2,629
Amortization:
Oil and gas properties (see Note A-6) 46,718 49,163 68,708
Investment in Seabrook 1
pursuant to rate settlement - 15,210 23,073
Oil Conservation Adjustment (OCA) - - 4,467
Seabrook 2 property losses 113 6,280 6,279
Millstone 3 additional amortization,
pursuant to rate settlement 15,013 1,904 -
-------- -------- --------
Total depreciation and amortization
expense $236,492 $246,379 $264,666
-------- -------- --------
</TABLE>
Depreciation is provided annually on a straight-line basis.
The provision for depreciation as a percentage of weighted
average depreciable property was 3.1 percent in 1997, 3.2 percent
in 1996, and 3.3 percent in 1995. Revenues from the OCA were used
to accelerate the amortization of expenditures for coal
conversion facilities at NEP's Salem Harbor Station. In addition,
Seabrook 1 costs under the 1988 rate settlement were fully
amortized at December 31, 1996. Property losses associated with
NEP's investment in the canceled Seabrook 2 nuclear unit were
fully amortized by March 31, 1997. In 1996, New England Energy
Incorporated (NEEI), a wholly owned subsidiary of NEES, reduced
amortization expense of its oil and gas properties by $13 million
to correct amounts recorded in the years 1990 through 1996.
<PAGE>
6. Oil and gas investments
NEEI participated in a rate-regulated domestic oil and gas
exploration, development, and production program through a
partnership with a nonaffiliated oil company. Losses from this
program, calculated under the full cost method of accounting,
have been charged to NEP, and ultimately to distribution
customers, in accordance with Securities and Exchange Commission
(SEC) and Federal Energy Regulatory Commission (FERC) approvals.
Such losses were $11 million, $22 million, and $44 million in
1997, 1996, and 1995, respectively. In February 1998, after a
competitive bidding process, NEEI sold all of its remaining oil
and gas properties held as of December 31, 1997 to its partner
for $50 million. The loss on such disposition, approximately $120
million, before tax, has been charged to NEP. The settlements
provide for the recovery of the NEEI loss as part of NEP's
stranded costs. See Note B for a discussion of industry
restructuring and Note C for a discussion of NEP's planned
divestiture of its nonnuclear generating business.
7. Cash
NEES and its subsidiaries classify short-term investments with
an original maturity of 90 days or less as cash.
8. Average common shares
The following table summarizes the reconciling amounts between
basic and diluted earnings per share (EPS) computations, in
compliance with Statement of Financial Accounting Standards No.
128, Earnings per Share, which became effective during 1997, and
requires restatement for all prior-period EPS data presented.
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income after interest and
minority interest (000's) $232,357 $215,399 $213,447
Less: preferred stock dividends and
net gain/loss on reacquisition of
preferred stock of subsidiaries (000's) $ 12,319 $ 6,463 $ 8,690
Income available to common
shareholders (000's) $220,038 $208,936 $204,757
Basic EPS $ 3.39 $ 3.22 $ 3.15
Diluted EPS $ 3.39 $ 3.22 $ 3.15
-------- -------- --------
Average common shares outstanding for
Basic EPS 64,899,322 64,960,496 64,969,652
Effect of Dilutive Securities
Average potential common shares related
to share-based compensation plans 52,863 25,640 16,045
---------- ---------- ----------
Average common shares outstanding for
Diluted EPS 64,952,185 64,986,136 64,985,697
---------- ---------- ----------
</TABLE>
<PAGE>
9. New accounting standards
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. NEES is
currently evaluating the impact that these new accounting
standards will have on its future reporting requirements.
Note B - Industry Restructuring
As the result of legislation enacted in the states served by
the NEES companies, most customers served by the NEES companies
will have the ability to choose their power supplier during the
first quarter of 1998. When customers are allowed to choose their
power supplier, utilities face the risk that market prices may
not be sufficient to recover the costs of the commitments
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs." As described below, the NEES
companies have reached settlement agreements with parties
representing all of their distribution customers. In each case,
these settlements provide for recovery of stranded costs. See the
"Industry Restructuring" section of Financial Review for a more
in-depth discussion of current developments in this area.
The settlements generally provide for the following:
- - introduction of choice of power supplier in Rhode Island,
Massachusetts, and New Hampshire by January 1, 1998, March 1,
1998, and July 1, 1998, respectively;
- - a transition rate, or "standard offer generation service," for
customers who do not choose an alternative power supplier,
resulting in rate reductions of approximately 10 percent at
the date of commencement of retail choice;
- - termination of all-requirements contracts between NEP and
NEES' distribution companies on terms that allow NEP to
recover its stranded costs through a transition access charge,
which the distribution companies will collect from customers;
- - adjustments to stranded cost recovery to reflect the market
value of fossil-fueled and hydroelectric generating assets,
determined through divestiture of such assets.
Under the various settlements, the recovery of NEP's stranded
costs is divided into several categories. Unrecovered costs
associated with generating plants and regulatory assets would be
recovered over 12 years and would earn a return on equity of 9.4
percent. The above-market component of purchased power contracts
and nuclear decommissioning costs would be recovered as incurred
over the life of those obligations, a period expected to extend
<PAGE>
beyond 12 years. Initially, the transition access charge would be
set at 2.8 cents per kilowatthour (kWh) and would be reduced upon
completion of the sale of NEP's generating business, as described
below. As the transition access charge declines, NEP would earn
incentives based on successful mitigation of its stranded costs.
These incentives would supplement NEP's return on equity. The
Massachusetts and Rhode Island settlements were conditionally
approved by the FERC in November 1997, subject to a compliance
filing to clarify the impact of the settlements on nonsettling
parties. The Massachusetts Settlement was also found by the
Massachusetts Department of Telecommunications and Energy to be
in substantial compliance with or consistent with the
Massachusetts restructuring statute. The New Hampshire settlement
is pending before the New Hampshire Public Utilities Commission
and the FERC.
In August 1997, NEP and Narragansett Electric entered into an
agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation (PG&E). The
net proceeds from the sale of its nonnuclear generating business
to USGen will be used to reduce the transition access charge from
2.8 cents per kWh to approximately 1.5 cents per kWh. In
addition, the FERC accepted the NEES companies' proposal in
conjunction with their divestiture filing that the recovery of
the remaining above-market nuclear generating plant investment
and regulatory assets be fully recovered by the end of the year
2000 (see Note C for a discussion of NEP and Narragansett
Electric's planned divestiture of their nonnuclear generating
business)
Accounting implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates.
In response to concerns expressed by the staff of the SEC, the
Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board took under consideration how FAS 71 should be
applied in light of recent changes within the regulated utility
industry. In July 1997, the EITF concluded that a utility whose
ongoing generation operations would not permit the application of
FAS 71, but had otherwise received approval to recover stranded
costs through regulated transmission and distribution rates,
would be permitted to continue to apply FAS 71 to the recovery of
the stranded costs.
<PAGE>
The restructuring settlements and statutes each provide for
recovery of stranded costs of generating assets and oil and gas
related assets (including regulatory assets) not recoverable from
the proceeds of the divestiture of NEP's generating business. The
cost of these assets would be recovered as part of a cost-based
transition access charge imposed on all distribution customers.
Additionally, FERC Order No. 888 enables transmission companies
to recover their specific costs of providing transmission
service. Therefore, after the proposed divestiture, substantially
all of NEP's business, including the recovery of its stranded
costs, would remain under cost-based rate regulation. NEES
further believes the restructuring settlements and statutes will
enable the NEES distribution companies to recover through rates
their specific costs of providing ongoing distribution services.
NEES believes these factors and the EITF conclusion will allow
its principal utility subsidiaries to continue to apply FAS 71.
As a result of the FERC approval of the restructuring settlements
in November 1997, NEP was required to cease to apply FAS 71 to 20
percent of its ongoing nuclear operations, as described in Note
C, the impact of which is expected to be immaterial.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations. In addition, write-downs of
plant assets under Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of (FAS 121) could be
required, including a write-off of any gain or loss from the
divestiture of the generating business. At December 31, 1997, the
NEES companies had approximately $600 million in regulatory
assets in compliance with FAS 71, as detailed in the table below,
of which approximately $60 million relate to the transmission and
distribution business.
<PAGE>
<TABLE>
<CAPTION>
The components of regulatory assets are as follows:
At December 31 (thousands of dollars) 1997 1996
<S> <C> <C>
-------- --------
Oil and gas properties:
in excess of market value (see Note A-6) $121,000 $149,100
-------- --------
Regulatory assets included in current
assets & liabilities:
Accrued NEEI losses (see Note A-6) 11,419 21,648
Rate adjustment mechanisms (see Note G) (15,306) (48,894)
-------- --------
(3,887) (27,246)
-------- --------
Regulatory assets included in deferred charges
and other reserves and deferred credits:
Accrued costs - Yankee nuclear plants
(see Note D-5) 299,564 166,413
Unamortized losses on reacquired debt 50,605 52,167
Deferred FAS No. 106 costs (see Note E-2) 9,191 29,839
Deferred FAS No. 109 costs (see Note F) 72,145 72,075
Purchased power contract termination costs 15,662 19,578
Deferred gas pipeline charges (see Note D-2) 52,570 59,733
Deferred storm costs 4,522 6,530
Environmental response costs (see Note D-4) (15,753) 18,265
Accelerated amortization - Millstone 3 (16,917) (1,904)
Other 9,459 8,383
-------- --------
481,048 431,079
-------- --------
$598,161 $552,933
-------- --------
</TABLE>
Note C - Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
Electric (collectively, the Sellers) reached an agreement to sell
their nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
MW of capacity, as well as NERC's partnership interest in OSP,
all of which has a book value of $1.1 billion. USGen will pay the
Sellers $1.59 billion in cash, of which $225 million will be
contingent upon the introduction of customer choice of power
supplier. Based on the enactment of the Massachusetts statute,
the NEES companies believe that the conditions for payment of the
full purchase price have been met. USGen will also reimburse the
NEES companies for $85 million of costs associated with early
retirement and special severance programs for employees affected
by industry restructuring. Since the early retirement program is
contingent upon the divestiture, its cost will not be accrued
until that time. USGen will assume responsibility for
environmental conditions at the Sellers' nonnuclear generating
stations. USGen will also assume the Sellers' obligations under
long-term fuel and fuel transportation contracts and certain
collective bargaining agreements.
<PAGE>
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale on
various grounds, including allegations that, following the sale,
USGen would be able to exercise unlawful levels of market power.
On February 25, 1998, the FERC issued an order that rejected the
market power allegations, approved the sale, and conditionally
approved most supporting filings. While the timing of receipt of
final regulatory approvals is uncertain, receipt of all approvals
is unlikely before mid-1998. Closing is contingent upon all
regulatory approvals being obtained by February 1999.
In order to meet the terms of NEP's mortgage indenture, NEP
will be required, prior to the consummation of the sale, to
either defease or call approximately $278 million of its mortgage
bonds. Any defeasance of bonds would be by deposit of cash
representing principal and interest to the maturity date, or
interest, principal, and general redemption premium to an earlier
redemption date. In addition, NEP will retire approximately $372
million of mortgage bonds securing the issuance of a like amount
of pollution control revenue bonds (PCRBs) by various public
agencies. However, NEP expects that substantially all of the
underlying PCRBs will remain outstanding as unsecured obligations
of NEP. In addition, the long-term debt of NERC will be retired
prior to the closing.
As part of the divestiture plan, in February 1998, NEEI sold
its oil and gas properties for approximately $50 million. NEEI's
loss on the sale of approximately $120 million, before tax, has
been reimbursed by NEP. See Note H for information on NEEI debt
retirements.
At the divestiture date, any gain or loss from the divestiture
of nonnuclear generating assets and oil and gas assets will be
recorded as a regulatory asset or liability to be recovered as
part of NEP's stranded costs, through the ongoing transition
access charge, consistent with the settlement agreements. NEP may
be required to record a liability for the monthly fixed
contribution towards the above-market cost of purchased power. In
such an event, NEP would also record a regulatory asset
consistent with the settlement agreements.
<PAGE>
In addition, NEP will endeavor to sell, or otherwise transfer,
its minority interest in three nuclear power plants and a 60 MW
interest in a fossil-fueled generating station in Maine to
nonaffiliates. Until such time as the nuclear interests are
divested, NEP will share with customers 80 percent of the
revenues and operating costs related to the units, with
shareholders retaining the balance. In the event that NEP
determines that it has an impairment of its nuclear plant
balances under FAS 121, it will record any such impairment as a
regulatory asset.
Note D - Commitments and Contingencies
1. Plant expenditures
The NEES subsidiaries' utility plant expenditures are
estimated to be $200 million in 1998. At December 31, 1997,
substantial commitments had been made relative to future planned
expenditures.
2. Natural gas pipeline capacity
In connection with serving NEP's gas-fueled electric
generation facilities, NEP has entered into several contracts for
natural gas pipeline capacity and gas supply. These agreements
require minimum fixed payments that are currently estimated to be
$59 million to $62 million per year from 1998 to 2002. Under
these agreements, remaining fixed payments from 2003 through 2014
total approximately $501 million.
In connection with managing its fuel supply, NEP uses a
portion of this pipeline capacity to sell natural gas. Proceeds
from the sale of natural gas and pipeline capacity of $41
million, $50 million, and $71 million in 1997, 1996, and 1995,
respectively, have been passed on to customers through NEP's fuel
clause. These proceeds have been reflected as an offset to the
related fuel expense in "Fuel for generation" in NEP's statements
of income. Natural gas sales decreased in 1996 as a result of the
Manchester Street plant entering commercial operation in the
second half of 1995.
See Note C for a discussion of NEP's planned divestiture of
its nonnuclear generating business.
3. Long-term contracts for the purchase of electricity
NEP purchases a portion of its electricity requirements
pursuant to long-term contracts with owners of various generating
units. These contracts expire in various years from 1998 to 2029.
Certain of these contracts require NEP to make minimum fixed
payments, even when the supplier is unable to deliver power, to
cover NEP's proportionate share of the capital and fixed
operating costs of these generating units. The fixed portion of
payments under these contracts totaled $114 million in 1997, $127
million in 1996, and $150 million in 1995, excluding contracts
with Yankee Atomic, Connecticut Yankee, and Maine Yankee (see
Note D-5) for all periods presented. These contracts have minimum
fixed payment requirements of $110 million annually from 1998
through 2001, $120 million in 2002, and approximately $950
<PAGE>
million thereafter. Approximately 97 percent of the payments
under these contracts are to Vermont Yankee and OSP, entities in
which NEES subsidiaries hold ownership interests.
NEP's other contracts, principally with nonutility generators,
require NEP to make payments only if power supply capacity and
energy are deliverable from such suppliers. NEP's payments under
these contracts amounted to $265 million in 1997, $230 million in
1996, and $245 million in 1995.
See Note C for a discussion of NEP's planned divestiture of
its nonnuclear generating business.
4. Hazardous waste
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous
substances. A number of states, including Massachusetts, have
enacted similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. NEES subsidiaries currently have in
place an internal environmental audit program and an external
waste disposal vendor audit and qualification program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
NEES and/or its subsidiaries have been named as potentially
responsible parties (PRPs) by either the United States
Environmental Protection Agency (EPA) or the Massachusetts
Department of Environmental Protection for 20 sites at which
hazardous waste is alleged to have been disposed. Private parties
have also contacted or initiated legal proceedings against NEES
and certain subsidiaries regarding hazardous waste cleanup. The
most prevalent types of hazardous waste sites with which NEES and
its subsidiaries have been associated are manufactured gas
locations. (Until the early 1970s, NEES was a combined electric
and gas holding company system.) NEES is aware of approximately
40 such manufactured gas locations, mostly located in
Massachusetts. The NEES companies have been identified as PRPs at
10 of these manufactured gas locations, which are included in the
20 PRP sites discussed above. NEES has reported the existence of
all manufactured gas locations of which it is aware to state
environmental regulatory agencies. NEES is engaged in various
phases of investigation and remediation work at approximately 20
of the manufactured gas locations. NEES and its subsidiaries are
currently aware of other possible hazardous waste sites, and may
in the future become aware of additional sites, that they may be
held responsible for remediating.
<PAGE>
In 1993, the Massachusetts Department of Public Utilities
approved a settlement agreement regarding the rate recovery of
remediation costs of former manufactured gas sites and certain
other hazardous waste sites located in Massachusetts. Under that
agreement, qualified costs related to these sites are paid out of
a special fund established on Massachusetts Electric's books.
Massachusetts Electric made an initial $30 million contribution
to the fund. Rate-recoverable contributions of $3 million,
adjusted since 1993 for inflation, are added annually to the fund
along with interest and any recoveries from insurance carriers.
At December 31, 1997, the fund had a balance of $45 million. NEES
had a regulatory liability of $16 million on its books at the end
of 1997, all of which is included in the fund. This regulatory
liability reflects $15 million, plus interest, transferred from
existing reserves for refunds under a 1996 Massachusetts industry
restructuring settlement, which is more fully described in Note
B.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by NEES or its
subsidiaries. The NEES companies have recovered amounts from
certain insurers, and, where appropriate, intend to seek recovery
from other insurers and from other PRPs, but it is uncertain
whether, and to what extent, such efforts will be successful. At
December 31, 1997, NEES had total reserves for environmental
response costs of $44 million. NEES believes that hazardous waste
liabilities for all sites of which it is aware, and which are not
covered by a rate agreement, are not material to its financial
position.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These new
rules did not have a material effect on NEES' financial position
or results of operations.
See Note C for a discussion of NEP's planned divestiture of
its nonnuclear generating business.
<PAGE>
5. Nuclear units
Nuclear Units Permanently Shut Down
Three of the four regional nuclear generating companies in
which NEP has a minority interest own nuclear generating units
which have been permanently shut down. These three units are as
follows:
<TABLE>
<CAPTION>
Future Estimated
NEP's Investment Billings to NEP
Unit % $(millions) Date Retired $(millions)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 7 February 1992 44
Connecticut Yankee 15 17 December 1996 92
Maine Yankee 20 16 August 1997 164
</TABLE>
In the case of each of these units, NEP has recorded an
estimate of the total future payment obligation as a liability
and an offsetting regulatory asset, reflecting estimated future
billings from the companies. In a 1993 decision, the FERC allowed
Yankee Atomic to recover its undepreciated investment in the
plant as well as unfunded nuclear decommissioning costs and other
costs. Connecticut Yankee and Maine Yankee have both filed
similar requests with the FERC. Several parties have intervened
in opposition to both filings. NEP's stranded cost settlements
allow NEP to recover all costs that the FERC allows the Yankee
companies to bill to NEP.
In October 1997, the Citizen's Awareness Network and Nuclear
Information and Resource Service filed a petition with the
Nuclear Regulatory Commission (NRC) that would require formal NRC
approval of a decommissioning plan for the Connecticut Yankee and
Maine Yankee plants. In 1998, the petitioners indicated their
intention to file a request with the NRC designed to overturn a
current NRC rule on decommissioning. NEP cannot predict what
impact, if any, these activities will have on the cost of
decommissioning the plants.
At Maine Yankee, the NRC has identified numerous apparent
violations of its regulations, which may result in the assessment
of significant civil penalties.
In the 1970s, NEP and several other shareholders (Sponsors) of
Maine Yankee entered into 27 contracts (Secondary Purchase
Agreements) under which they sold portions of their entitlement
to Maine Yankee power output through 2002 to various entities,
primarily municipal and cooperative systems in New England
(Secondary Purchasers). Virtually all of the Secondary Purchasers
have ceased making payments under the Secondary Purchase
Agreements and have demanded arbitration, claiming that such
agreements excuse further payments upon plant shutdown. NEP has
notified the Secondary Purchasers that the shutdown does not
relieve them of their obligation to make payments under the
Secondary Purchase Agreements and that they are in default of
<PAGE>
such agreements. NEP has further asked the FERC to enforce NEP's
rights under the agreements. In the event that no further
payments are forthcoming from Secondary Purchasers, NEP, as a
primary obligor to Maine Yankee, would be required to pay an
additional $9 million of future shutdown costs. These costs are
not included in the $164 million estimate disclosed in the table
above. Shutdown costs are recoverable from customers under the
stranded cost settlements.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for
the plant decommissioning, the owners of Maine Yankee are jointly
and severally liable for the shortfall.
Operating Nuclear Units
NEP has minority interests in three other nuclear generating
units, Vermont Yankee, Millstone 3, and Seabrook 1. In October
1996, the NRC issued letters to operators of nuclear power plants
requiring them to document that the plants are operated and
maintained within their design and licensing bases, and that any
deviations are reconciled in a timely manner. The Seabrook 1 and
Vermont Yankee nuclear power plants responded to the NRC letters
in February 1997. Millstone 3 is currently shut down and has been
placed on the NRC "Watch List," signifying that its safety
performance exhibits sufficient weakness to warrant increased NRC
attention. Millstone 3 may not restart without NRC approval.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service
lives, availability, and costs. These uncertainties stem from a
combination of factors, including the acceleration of competitive
pressures in the power generation industry and increased NRC
scrutiny. NEP performs periodic economic viability reviews of
operating nuclear units in which it holds ownership interests.
Millstone 3
In April 1996, the NRC ordered Millstone 3, which has
experienced numerous technical and nontechnical problems, to
remain shut down pending verification that the unit's operations
are in accordance with NRC regulations and the unit's operating
license. Millstone 3 is operated by a subsidiary of Northeast
Utilities (NU). NEP is not an owner of the Millstone 1 and 2
nuclear generating units, which are also shut down under NRC
orders.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
an NRC assessment concluding a safety conscious work environment
exists, public meetings, and a vote of the NRC Commissioners. NEP
cannot predict when Millstone 3 will be allowed by the NRC to
restart, but believes restart of the unit is not likely prior to
the summer of 1998.
<PAGE>
Since April 1996, NEP has incurred an estimated $35 million in
incremental replacement power costs, which it has been recovering
from customers through its fuel clause. During the outage, NEP is
incurring incremental replacement power costs of approximately $2
million per month.
Several criminal investigations related to Millstone 3 are
ongoing. In December 1997, the NRC assessed civil penalties
totaling $2.1 million for numerous violations at the three
Millstone units. NEP's share of this fine was less than $100,000.
The Connecticut Department of Environmental Protection and the
Connecticut Attorney General have filed suit against NU for
alleged wastewater discharge violations at the Millstone units,
which may result in the assessment of substantial civil
penalties.
In August 1997, NEP filed suit against NU in Massachusetts
Superior Court for damages resulting from the tortious conduct of
NU relating to Millstone 3. NEP is seeking compensation for the
losses it has suffered, including the costs of lost power and
costs necessary to assure that Millstone 3 can safely return to
operation. NEP also seeks punitive damages. NU has filed for
dismissal of the suit and sought to consolidate it with suits
filed by other joint owners in Massachusetts Superior Court.
NEP also sent a demand for arbitration to Connecticut Light &
Power Company and Western Massachusetts Electric Company, both
subsidiaries of NU, seeking damages resulting from their breach
of obligations under an agreement with NEP and others regarding
the operation and ownership of Millstone 3.
Decommissioning Trust Funds
Each nuclear unit in which NEP has an ownership interest has
established a decommissioning trust fund or escrow fund into
which payments are being made to meet the projected costs of
decommissioning. Listed below is information on each operating
nuclear plant in which NEP has an ownership interest.
NEP is liable for its share of decommissioning costs for
Millstone 3, Seabrook 1, and all of the Yankees. Decommissioning
costs include not only estimated costs to decontaminate the units
as required by the NRC, but also costs to dismantle the
uncontaminated portion of the units. NEP records decommissioning
costs on its books consistent with its rate recovery. NEP is
recovering its share of projected decommissioning costs for
Millstone 3 and Seabrook 1 through depreciation expense. In
addition, NEP is paying its portion of projected decommissioning
costs for all of the Yankees through purchased power expense.
Such costs reflect estimates of total decommissioning costs
approved by the FERC.
<PAGE>
<TABLE>
<CAPTION>
NEP's share of (millions of dollars)
--------------------------------------------------
Nep's Estimated Decommissioning
Ownership Net Decommissioning Fund License
Unit Interest (%) Plant Assets Cost (in 1997 $) Balances* Expiration
- ---- -------------------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Vermont Yankee 20 35 77 34 2012
Millstone 3 12 366 66 18** 2025
Seabrook 1*** 10 54 47 9** 2026
<FN>
* Certain additional amounts are anticipated to be available through tax deductions.
** Fund balances are included in "Other investments" on the balance sheets. Any
differences from market value are not material.
*** Proposed legislation in New Hampshire would make owners of Seabrook 1 proportional
guarantors for decommissioning costs in the event that an owner without a franchise
service territory fails to fund its share of decommissioning costs.
</FN>
</TABLE>
There is no assurance that decommissioning costs actually
incurred by Vermont Yankee, Millstone 3, or Seabrook 1 will not
substantially exceed these amounts. For example, decommissioning
cost estimates assume the availability of permanent repositories
for both low-level and high-level nuclear waste; those
repositories do not currently exist. If any of the units were
shut down prior to the end of their operating licenses, which NEP
believes is likely, the funds collected for decommissioning to
that point would be insufficient. Under the settlement agreements
discussed in Note B, NEP will recover decommissioning costs
through transition access charges.
The Nuclear Waste Policy Act of 1982 establishes that the
federal government (through the Department of Energy (DOE)) is
responsible for the disposal of spent nuclear fuel. The federal
government requires NEP to pay a fee based on its share of the
net generation from the Millstone 3 and Seabrook 1 nuclear units.
NEP is recovering this fee through its fuel clause. Similar costs
are incurred by the Vermont Yankee nuclear generating unit. These
costs are billed to NEP and also recovered from customers through
NEP's fuel clause. Ruling on a lawsuit brought against the DOE by
numerous utilities and state regulatory commissions, the Court of
Appeals for the District of Columbia (Court) held that the DOE is
obligated to begin disposing of utilities' spent nuclear fuel by
January 31, 1998. The DOE failed to meet this deadline. The
utilities, including the operators of the units in which NEP has
an obligation, are assessing their future options. In February
1998, Maine Yankee petitioned the Court to compel the DOE to
remove Maine Yankee's spent fuel from the plant site.
Nuclear Insurance
The Price-Anderson Act limits the amount of liability claims
that would have to be paid in the event of a single incident at a
nuclear plant to $8.9 billion (based upon 110 licensed reactors).
The maximum amount of commercially available insurance coverage
<PAGE>
to pay such claims is $200 million. The remaining $8.7 billion
would be provided by an assessment of up to $79.3 million per
incident levied on each of the participating nuclear units in the
United States, subject to a maximum assessment of $10 million per
incident per nuclear unit in any year. The maximum assessment,
which was most recently adjusted in 1993, is adjusted for
inflation at least every five years. NEP's current interest in
the Yankees (excluding Yankee Atomic), Millstone 3, and Seabrook
1 would subject NEP to a $58.0 million maximum assessment per
incident. NEP's payment of any such assessment would be limited
to a maximum of $7.3 million per incident per year. As a result
of the permanent cessation of power operation of the Yankee
Atomic plant, Yankee Atomic has received from the NRC a partial
exemption from obligations under the Price-Anderson Act. However,
Yankee Atomic must continue to maintain $100 million of
commercially available nuclear insurance coverage. Connecticut
Yankee and Maine Yankee have filed with the NRC for similar
exemptions.
Each of the nuclear units in which NEP has an ownership
interest also carries nuclear property insurance to cover the
costs of property damage, decontamination or premature
decommissioning, and workers' claims resulting from a nuclear
incident. These policies may require additional premium
assessments if losses relating to nuclear incidents at units
covered by this insurance occurring in a prior six-year period
exceed the accumulated funds available. NEP's maximum potential
exposure for these assessments, either directly, or indirectly
through purchased power payments to the Yankees, is approximately
$8 million per year.
6. Town of Norwood dispute
In April 1997, the Town of Norwood, Massachusetts filed a
lawsuit against NEP in the United States District Court for the
District of Massachusetts. NEP is a wholesale power supplier for
Norwood pursuant to rates approved by the FERC. Norwood alleges
that NEP's proposed divestiture of its power generation assets
would violate the terms of a 1983 power contract which settled an
antitrust lawsuit brought by Norwood against NEP. Norwood also
alleges that NEP's proposed divestiture plan and recovery of
stranded investment costs contravene federal antitrust laws.
Norwood seeks an injunction enjoining the divestiture and an
unspecified amount of treble damages (a specific claim for $450
million was withdrawn). Norwood's motion for a preliminary
injunction of the divestiture was denied on September 8, 1997. On
November 21, 1997, Norwood filed an amended complaint making new
allegations relating to the sale of NEP's generating assets and
naming as additional defendants, NEES, USGen and USGen's
affiliate, PG&E. NEP continues to believe that its divestiture
plan will promote competition in the wholesale power generation
market and that it has met and will continue to meet its
contractual commitments to Norwood. On January 9, 1998, the
defendants filed a motion to dismiss the lawsuit.
<PAGE>
7. Hydro-Quebec arbitration
In 1996, various New England utilities which are members of
the New England Power Pool, including NEP, submitted a dispute to
arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage
claim of approximately $37 million for past damages, of which
NEP's share would have been approximately $6 to $9 million. The
claims involved a dispute over the components of a pricing
formula and additional costs under the contract. With respect to
ongoing claims, NEP had been paying Hydro-Quebec the higher
amount (additional costs of approximately $3 million per year)
since July 1996 under protest and subject to refund. In October
1997, an arbitrator ruled in favor of the New England utilities
in all respects. NEP has made a demand for refund. Hydro-Quebec
has not yet refunded any monies and has appealed the decision. On
November 9, 1997, NEP and the other utilities began a second
arbitration to enforce the first decision. Refunds received from
Hydro-Quebec will be passed on to customers through NEP's fuel
clause.
Note E - Employee Benefits
1. Pension plans
The NEES companies' retirement plans are noncontributory
defined-benefit plans covering substantially all employees. The
plans provide pension benefits based on the employee's
compensation during the five years prior to retirement. The NEES
companies' funding policy is to contribute each year the net
periodic pension cost for that year. However, the contribution
for any year will not be less than the minimum contribution
required by federal law or greater than the maximum tax
deductible amount.
<PAGE>
Net pension cost for 1997, 1996, and 1995 included the following
components:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ 15,019 $ 14,918 $ 14,167
Plus (less):
Interest cost on projected benefit obligation 52,497 51,461 54,821
Return on plan assets at expected long-term
rate (55,606) (52,085) (49,691)
Amortization 1,580 2,887 5,589
-------- -------- --------
Net pension cost $ 13,490 $ 17,181 $ 24,886
-------- -------- --------
Actual return on plan assets $130,000 $ 91,571 $130,979
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Assumptions used to determine
pension cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Average rate of increase in future
compensation levels 4.13% 4.13% 4.13% 4.63%
Expected long-term rate of return
on assets 8.50% 8.50% 8.50% 8.75%
</TABLE>
The decrease in 1996 costs reflects additional amounts
recorded in the fourth quarter of 1995 related to certain
supplemental benefit changes.
<PAGE>
The following table sets forth the retirement plans' funded
status:
<TABLE>
<CAPTION>
At December 31 (millions of dollars) 1997 1996
-----------------------------------------------------
Regular Supplemental Regular Supplemental
Plans Plans Plans Plans
----- ----- ----- -----
<S> <C> <C> <C> <C>
Benefits earned
Actuarial present value
of accumulated benefit liability:
Vested $647 $ 51 $640 $ 47
Nonvested 18 2 19 1
---- ---- ---- ----
Total $665 $ 53 $659 $ 48
---- ---- ---- ----
Reconciliation of funded status
Actuarial present value of
projected benefit liability $757 $ 62 $753 $ 54
Unrecognized prior service costs (8) - (9) -
FAS No. 87 transition liability
not yet recognized (amortized) (1) (3) (1) (3)
Net gain (loss) not yet
recognized (amortized) 61 (9) 40 (3)
Additional minimum liability
recognized - 4 - 3
---- ---- ---- ----
809 54 783 51
---- ---- ---- ----
Pension fund assets at fair value 834 - 812 -
FAS No. 87 transition asset
not yet recognized (amortized) (8) - (10) -
---- ---- ---- ----
826 - 802 -
---- ---- ---- ----
Accrued pension/(prepaid)
payments recorded on books $(17) $ 54 $(19) $ 51
---- ---- ---- ----
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates from 1998 and 1997,
respectively, and the 1983 Group Annuity Mortality table.
Plan assets are composed primarily of corporate equity, debt
securities, and cash equivalents.
<PAGE>
In addition to its regular pension funds shown in the table
above, NEES and its subsidiaries have a separate trust fund,
commonly referred to as a Rabbi Trust, for certain supplemental
pensions and deferred compensation for key executives and
employees. The Rabbi Trust is currently invested in municipal
bonds, equities, and NEES shares, and was invested in short-term
investments and NEES shares in 1996. At December 31, 1997 and
1996, the Rabbi Trust held 148,875 and 102,957 NEES shares,
respectively, accounted for as treasury stock. At the end of 1997
and 1996, the difference between cost and the market value of
investments, other than NEES shares, in the Rabbi Trust was
approximately $4.8 million, after tax, and $0, respectively. The
market value of such external investments was $53 million and $45
million at December 31, 1997 and 1996, respectively.
2. Postretirement benefit plans other than pensions (PBOPs)
The NEES subsidiaries provide health care and life insurance
coverage to eligible retired employees. Eligibility is based on
certain age and length of service requirements and in some cases
retirees must contribute to the cost of their coverage.
The total cost of PBOPs for 1997, 1996, and 1995 included the
following components:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ 6,527 $ 6,794 $ 7,137
Plus (less):
Interest cost on accumulated benefit
obligation 24,249 24,667 29,377
Return on plan assets at expected
long-term rate (16,397) (12,958) (9,742)
Amortization 11,110 13,099 16,204
-------- -------- --------
Net postretirement benefit cost $ 25,489 $ 31,602 $ 42,976
-------- -------- --------
Actual return on plan assets $ 38,210 $ 24,881 $ 29,054
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Assumptions used to determine
postretirement benefit cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.50%
Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50%
Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50%
Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
</TABLE>
<PAGE>
The following table sets forth benefits earned and the plans' funded status:
<TABLE>
<CAPTION>
At December 31 (millions of dollars) 1997 1996
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 216 $ 236
Fully eligible active plan participants 28 24
Other active plan participants 104 109
------ ------
Total benefits earned 348 369
Unrecognized prior service costs (1) (1)
Unrecognized transition obligation (276) (294)
Net gain not yet recognized 153 101
------ ------
224 175
------ ------
Plan assets at fair value 239 202
------ ------
Prepaid postretirement benefit costs recorded on books $ 15 $ 27
------ ------
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates in effect for 1998 and 1997,
respectively.
The assumptions used in the health care cost trends have a
significant effect on the amounts reported. Increasing the
assumed rates by 1 percent in each year would increase the
accumulated postretirement benefit obligation as of December 31,
1997 by approximately $42 million and the net periodic cost for
1997 by approximately $5 million.
The NEES subsidiaries fund the annual tax-deductible
contributions. Plan assets are invested in equity and debt
securities and cash equivalents.
3. Stock-based compensation
At December 31, 1997, NEES has three stock-based compensation
plans and measures its compensation cost for those plans using
the method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. The compensation cost that has been
charged against income for these plans was $3.3 million, $3.7
million, and $1.6 million for 1997, 1996, and 1995, respectively.
If compensation cost for stock-based compensation had been
accounted for under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the 1997 cost
figures shown above would have been slightly smaller.
<PAGE>
Note F - Income Taxes
Total income taxes in the statements of consolidated income are as follows:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income taxes charged to operations $152,024 $139,199 $128,340
Income taxes charged to "Other income" (7,268) (3,018) 762
-------- -------- --------
Total income taxes $144,756 $136,181 $129,102
-------- -------- --------
</TABLE>
Total income taxes, as shown above, consist of the following components:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current income taxes $175,934 $166,509 $105,046
Deferred income taxes (29,260) (28,652) 25,578
Investment tax credits, net (1,918) (1,676) (1,522)
-------- -------- --------
Total income taxes $144,756 $136,181 $129,102
-------- -------- --------
</TABLE>
Total income taxes, as shown above, consist of federal and state components
as follows:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes $118,317 $111,573 $103,503
State income taxes 26,439 24,608 25,599
-------- -------- --------
Total income taxes $144,756 $136,181 $129,102
-------- -------- --------
</TABLE>
Investment tax credits of subsidiaries are deferred and
amortized over the estimated lives of the property giving rise to
the credits. Although investment tax credits were generally
eliminated by the 1986 tax legislation, additional carryforward
amounts continue to be recognized.
With regulatory approval, the subsidiaries have adopted
comprehensive interperiod tax allocation (normalization) for
temporary book/tax differences.
<PAGE>
Total income taxes differ from the amounts computed by
applying the federal statutory tax rates to income before taxes.
The reasons for the differences are as follows:
<TABLE>
<CAPTION>
Year ended December 31 (thousands of dollars) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Computed tax at statutory rate $131,989 $123,053 $119,892
Increases (reductions) in tax resulting from:
Reversal of deferred taxes recorded
at a higher rate (2,216) (2,175) (3,306)
Amortization of investment tax credits (4,469) (4,347) (4,443)
State income tax, net of federal income
tax benefit 17,185 15,995 16,639
All other differences 2,267 3,655 320
-------- -------- --------
Total income taxes $144,756 $136,181 $129,102
-------- -------- --------
</TABLE>
The following table identifies the major components of total deferred income
taxes:
<TABLE>
<CAPTION>
At December 31 (millions of dollars) 1997 1996
------ ------
<S> <C> <C>
Deferred tax asset:
Plant related $ 99 $ 110
Investment tax credits 39 37
All other 152 143
------ ------
290 290
------ ------
Deferred tax liability:
Plant related (821) (811)
Equity AFDC (51) (53)
All other (138) (177)
------ ------
(1,010) (1,041)
------ ------
Net deferred tax liability $ (720) $ (751)
------ ------
</TABLE>
There were no valuation allowances for deferred tax assets
deemed necessary.
Federal income tax returns for NEES and its subsidiaries have
been examined and reported on by the Internal Revenue Service
through 1993.
Note G - Short-Term Borrowings and Other Current Liabilities
At December 31, 1997, NEES and its consolidated subsidiaries
had lines of credit and standby bond purchase facilities with
banks totaling $1.2 billion. These lines and facilities were used
at December 31, 1997 for liquidity support for $252 million of
<PAGE>
commercial paper borrowings and $372 million of NEP mortgage
bonds in tax-exempt commercial paper mode (see Note H). Fees are
paid on the lines and facilities in lieu of compensating
balances. The weighted average rate on outstanding short-term
borrowings was 5.66 percent at December 31, 1997. The fair value
of the NEES subsidiaries' short-term debt equals carrying value.
The components of other current liabilities are as follows:
<TABLE>
<CAPTION>
At December 31 (thousands of dollars) 1997 1996
-------- --------
<S> <C> <C>
Accrued wages and benefits $ 58,281 $ 37,872
Rate adjustment mechanisms 27,152 50,614
Customer deposits 11,059 10,595
Other 23,510 10,501
-------- --------
$120,002 $109,582
-------- --------
</TABLE>
Note H - Long-Term Debt
Substantially all of the properties of NEP, Massachusetts
Electric, and Narragansett Electric are subject to the lien of
mortgage indentures under which mortgage bonds have been issued.
The aggregate payments to retire maturing long-term debt are as
follows:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1999 2000 2001 2002
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Maturing long-term debt:
NEP* $50,000 $10,000 $ 55,000 $ - $ -
Other NEES subsidiaries 26,470 24,480 37,485 6,495 41,500
Mandatory prepayments:
Hydro-Transmission companies 11,520 11,520 11,520 10,790 10,440
NEEI** - 17,000 30,000 30,000 45,000
NERC*** 1,920 2,280 2,280 2,280 2,280
------- ------- -------- ------- -------
Total $89,910 $65,280 $136,285 $49,565 $99,220
------- ------- -------- ------- -------
* See Note C for information on potential NEP bond defeasance.
** NEEI debt retired on February 5, 1998.
*** $29 million of NERC debt will be retired in 1998, upon completion of the sale of the
nonnuclear generating business to USGen.
</TABLE>
The terms of $372 million of variable rate PCRBs
collateralized by NEP mortgage bonds at December 31, 1997 require
NEP to reacquire the bonds under certain limited circumstances.
At December 31, 1997, interest rates on NEP's variable rate bonds
ranged from 3.70 percent to 4.85 percent. Also, at December 31,
<PAGE>
1997, interest rates on NEEI's debt ranged from 6.11 percent to
6.17 percent.
At December 31, 1997, the NEES subsidiaries' long-term debt
had a carrying value of approximately $1,577,000,000 and a fair
value of approximately $1,657,000,000. The fair value of debt
that reprices frequently at market rates approximates carrying
value. The fair market value of the NEES subsidiaries' long-term
debt was estimated based on the quoted prices for similar issues
or on the current rates offered to the NEES companies for debt of
the same remaining maturity.
Note I - Preferred Stock Tender Offer
On December 19, 1997, NEES purchased, pursuant to a tender
offer, preferred stock of its subsidiaries with an aggregate par
value of $87 million. These purchases resulted in an after-tax
charge to net income of approximately $5 million.
Note J - Supplementary Quarterly Financial Information
(unaudited)
<TABLE>
<CAPTION>
1997 Quarter ended Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
<S> <C> <C> <C. <C>
(thousands of dollars, except per share amounts)
Operating revenue $638,146 $577,625 $628,606 $658,214
Operating income $ 94,962 $ 66,583 $104,524 $100,792
Net income $ 61,820 $ 32,232 $ 67,746 $ 58,240
Net income per average common
share, basic and diluted $ .95 $ .50 $ 1.04 $ .90*
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1996 Quarter ended Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------
<S> <C> <C> <C. <C>
(thousands of dollars, except per share amounts)
Operating revenue $586,220 $551,110 $616,857 $596,511
Operating income $ 94,955 $ 69,133 $ 97,384 $ 86,646
Net income $ 61,496 $ 35,001 $ 64,375 $ 48,064
Net income per average common
share, basic and diluted $ .95 $ .54 $ .99 $ .74
-------- -------- -------- -------
<FN>
* See "Overview of Financial Results" and "Operating Revenue" sections of
Financial Review for a discussion of factors contributing to the fourth
quarter increase in net income over prior year.
</FN>
</TABLE>
<PAGE>
Report of Management
The management of New England Electric System is responsible
for the integrity of the consolidated financial statements
included in this Annual Report. The financial statements were
prepared in accordance with generally accepted accounting
principles using management's informed best estimates and
judgments where appropriate to fairly present the financial
condition of the NEES companies and their results of operations.
The information included elsewhere in this report is consistent
with the financial statements.
The NEES companies maintain an accounting system and system of
internal controls which are designed to provide reasonable
assurance as to the reliability of the financial records, the
protection of assets, and the prevention of any material
misstatement of the financial statements. The NEES companies'
accounting controls have been designed to provide reasonable
assurance that errors or irregularities, which could be material
to the financial statements, are prevented or detected by
employees within a timely period as they perform their assigned
functions. The NEES companies' internal auditing staff
independently assesses the effectiveness of internal controls and
recommends improvements where appropriate.
Coopers & Lybrand L.L.P., the NEES companies' independent
accountants, are engaged to audit and express their opinion on
the financial statements. Their audit includes a review of
internal controls to the extent required by generally accepted
auditing standards.
The Audit Committee, composed solely of outside directors,
meets periodically with management, the internal auditor, and the
independent accountants to ensure that each is carrying out its
responsibilities and to discuss auditing, internal accounting
control, and financial reporting matters. Both the internal
auditor and the independent accountants have free access to the
Audit Committee, without management present, to discuss the
results of their audit work.
s/ Richard P. Sergel s/ Michael E. Jesanis
Richard P. Sergel Michael E. Jesanis
President and Senior Vice President
Chief Executive Officer and Chief Financial Officer
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of New England
Electric System:
We have audited the accompanying consolidated balance sheets
and consolidated statements of capitalization of New England
Electric System and subsidiaries (the Company) as of December 31,
1997 and 1996 and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 1997 and
1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting
principles.
Boston, Massachusetts s/ Coopers & Lybrand L.L.P.
March 2, 1998
<PAGE>
Shareholder information
For shareholder information or assistance, write or call
Shareholder Services at:
New England Electric System
Shareholder Services
P.O. Box 770
Westborough, MA 01581
Toll-free number: 1-800-466-7215
Local number: (508) 389-4900
Fax: (508) 836-0276
E-mail: [email protected]
Dividend reinvestment
Shareholders of New England Electric System common shares who
hold their shares in registered form are eligible to participate
in the Dividend Reinvestment and Common Share Purchase Plan. The
Plan provides participants the opportunity to reinvest their
dividends and send in optional cash payments to purchase
additional common shares. These shares will be newly issued
shares or shares purchased in the open market. The Company will
pay all brokerage commissions and service charges associated with
the Plan. For more information on the Plan, please contact
Shareholder Services at our toll-free number listed above.
Direct deposit of dividends
Shareholders who hold New England Electric System common shares
in their own name may request to have their dividends directly
deposited into their checking or savings account. This service is
provided without fees. If you participate in Direct Deposit, you
will receive a credit advice for your records. To sign up for
this service, please call Shareholder Services on our toll-free
number to request an authorization form.
Change of address
Please contact Shareholder Services on our toll-free number to
notify us of your address change.
Form 10-K
Copies of the Annual Report on Form 10-K to the Securities and
Exchange Commission for 1997 are available upon request at no
charge by writing to the address at left.
Annual meeting
The annual meeting of New England Electric System will be held at
Mechanics Hall in Worcester, MA on April 28, 1998 at 10:30 a.m.
<PAGE>
Stock exchange listings
New England Electric System common shares are listed on the New
York Stock Exchange and the Boston Stock Exchange under the
symbol NES.
Transfer agent
Certificates for transfer should be mailed to our transfer agent
at:
Bank of Boston, c/o Boston EquiServe
P.O. Box 8040, Boston, MA 02266-8040
Note
NEES intends to transfer its record keeping and stock transfer
functions to Bank of New York in 1998. A notice will be sent to
all shareholders when the conversion date is determined.
<TABLE>
<CAPTION>
New England Electric System common shares
1997 1996
---- ----
Price Range ($) Price Range ($)
-------------- --------------
High Low Dividend High Low Dividend
Declared $ Declared $
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 35.625 33.375 .590 40.625 36.125 .590
Second Quarter 37.125 33.250 .590 38.875 32.875 .590
Third Quarter 39.6875 36.250 .590 36.375 31.125 .590
Fourth Quarter 43.3125 37.250 .590 35.625 31.000 .590
</TABLE>
The total number of shareholders at December 31, 1997 was 47,978.
<PAGE>
[MAP OF SERVICE AREAS]
NEES Subsidiaries
As of March 1, 1998
Massachusetts Electric Company
25 Research Drive, Westborough, Massachusetts 01582
The Narragansett Electric Company
280 Melrose Street, Providence, Rhode Island 02901
Granite State Electric Company
407 Miracle Mile, Suite 1, Lebanon, New Hampshire 03766
Nantucket Electric Company
25 Research Drive, Westborough, Massachusetts 01582
AllEnergy Marketing Company, L.L.C.
95 Sawyer Road, Waltham, Massachusetts 02154
Granite State Energy, Inc.
4 Park Street, Concord, New Hampshire 03301
NEES Energy, Inc.
25 Research Drive, Westborough, Massachusetts 01582
Narragansett Energy Resources Company
280 Melrose Street, Providence, Rhode Island 02901
New England Power Company
25 Research Drive, Westborough, Massachusetts 01582
NEES Communications, Inc.
25 Research Drive, Westborough, Massachusetts 01582
NEES Global Transmission, Inc.
25 Research Drive, Westborough, Massachusetts 01582
New England Electric Transmission Corporation
4 Park Street, Concord, New Hampshire 03301
New England Hydro-Transmission Corporation
407 Miracle Mile, Suite 1, Lebanon, New Hampshire 03766
New England Hydro-Transmission Electric Company, Inc.
25 Research Drive, Westborough, Massachusetts 01582
New England Power Service Company
25 Research Drive, Westborough, Massachusetts 01582
<PAGE>
[PHOTO OF EXECUTIVE TEAM]
NEES Officers
As of March 1, 1998
Richard P. Sergel
President and Chief Executive Officer
Alfred D. Houston*
Executive Vice President
Cheryl A. LaFleur
Senior Vice President, General Counsel, and Secretary
Michael E. Jesanis
Senior Vice President and Chief Financial Officer
David C. Kennedy
Vice President
John G. Cochrane
Treasurer
Executive Officers
Of Major Subsidiaries
Lawrence E. Bailey
President of New England Power Company
William H. Heil
Chairman and Chief Executive Officer of
AllEnergy Marketing Company, L.L.C.
Robert L. McCabe
Chairman of the electricity delivery subsidiaries (Massachusetts
Electric Company, Nantucket Electric Company, The Narragansett
Electric Company, and Granite State Electric Company)
Lawrence J. Reilly
President and Chief Executive Officer of the electricity delivery
subsidiaries
Executive Team Photo
1.Lawrence J. Reilly
2.Robert L. McCabe
3.Richard P. Sergel
4.John W. Rowe (resigned as president and CEO effective 2/6/98)
5.Alfred D. Houston
6.Michael E. Jesanis
7.William H. Heil
8.Cheryl A. LaFleur
9.Lawrence E. Bailey
Not pictured
John G. Cochrane, David C. Kennedy
<PAGE>
* The NEES board of directors has announced its intention to
elect Mr. Houston NEES chairman following the April 1998 annual
meeting.
NEES Directors
As of March 1, 1998
Joan T. Bok
Chairman of the Board, New England Electric System, Westborough,
Massachusetts
- - Corporate Responsibility Committee
- - Executive Committee
William M. Bulger
President, University of Massachusetts, Boston, Massachusetts
- - Audit Committee
Alfred D. Houston*
Executive Vice President, New England Electric System,
Westborough, Massachusetts
- - Executive Committee
Paul L. Joskow
Chairman of the Department of Economics, Massachusetts Institute
of Technology, Cambridge, Massachusetts
- - Audit Committee
- - Executive Committee
- - Nominating Committee
John M. Kucharski
Chairman, President, and Chief Executive Officer, EG&G, Inc.,
Wellesley, Massachusetts
- - Compensation Committee
Edward H. Ladd
Chairman, Standish, Ayer & Wood, Inc., investment counselors,
Boston, Massachusetts
- - Executive Committee
- - Nominating Committee
Joshua A. McClure
Former President, American Custom Kitchens, Inc., Providence,
Rhode Island
- - Corporate Responsibility Committee
George M. Sage
President and Treasurer, Bonanza Bus Lines, Inc., Providence,
Rhode Island
- - Compensation Committee
- - Executive Committee
- - Nominating Committee
Richard P. Sergel
President and Chief Executive Officer, New England Electric
System, Westborough, Massachusetts
- - Corporate Responsibility Committee
- - Executive Committee
<PAGE>
Charles E. Soule
Retired President and Chief Executive Officer, Paul Revere
Insurance Group, Worcester, Massachusetts
- - Audit Committee
Anne Wexler
Chairman, The Wexler Group, management consultants, Washington,
D.C.
- - Compensation Committee
- - Executive Committee
- - Nominating Committee
James Q. Wilson
Professor Emeritus, University of California at Los Angeles
- - Corporate Responsibility Committee
James R. Winoker
Chief Executive Officer, Belvoir Properties, Inc., Providence,
Rhode Island
- - Audit Committee
- - Corporate Responsibility Committee
The name "New England Electric System" means the trustee or
trustees for the time being (as trustee or trustees but not
personally) under an Agreement and Declaration of Trust dated
January 2, 1926, as amended, which is hereby referred to, and a
copy of which, as amended, has been filed with the Secretary of
the Commonwealth of Massachusetts. Any agreement, obligation, or
liability made, entered into, or incurred by or on behalf of New
England Electric System binds only its trust estate, and no
shareholder, director, trustee, officer, or agent thereof assumes
or shall be held to any liability therefor.
This report is not to be considered as an offer to sell or buy or
solicitation of an offer to sell or buy any security.
[PHOTO OF NEES DIRECTORS APPEARS AT BOTTOM OF INSIDE BACK COVER]
NEES directors shown in September 1997 photo are, left to right,
James R. Winoker, James Q. Wilson, George M. Sage, Anne Wexler,
Joshua A. McClure, John W. Rowe (resigned effective 2/6/98),
Edward H. Ladd, Joan T. Bok, Paul L. Joskow, William M. Bulger,
John M. Kucharski, and Charles E. Soule. (Current directors not
pictured are Alfred D. Houston and Richard P. Sergel.)
* See footnote of previous page.
<PAGE>
[NEES LOGO]
New England Electric System
25 Research Drive
Westborough, Massachusetts 01582
Telephone 508.389.2000
www.nees.com
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned directors of New England Electric System
(the "Company"), individually as a director of the Company, hereby
constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine
M. Zipser, individually, as attorney-in-fact to execute on behalf of the
undersigned the Company's annual report on Form 10-K for the year ended
December 31, 1997, to be filed with the Securities and Exchange
Commission, and to execute any appropriate amendment or amendments
thereto as may be required by law.
Dated this 24th day of February, 1998.
s/Joan T. Bok s/Joshua A. McClure
_________________________ _________________________
Joan T. Bok Joshua A. McClure
s/William M. Bulger s/George M. Sage
_________________________ _________________________
William M. Bulger George M. Sage
s/Alfred D. Houston s/Richard P. Sergel
_________________________ _________________________
Alfred D. Houston Richard P. Sergel
s/Paul L. Joskow s/Charles E. Soule
_________________________ _________________________
Paul L. Joskow Charles E. Soule
s/John M. Kucharski s/Anne Wexler
_________________________ _________________________
John M. Kucharski Anne Wexler
s/Edward H. Ladd s/James Q. Wilson
_________________________ _________________________
Edward H. Ladd James Q. Wilson
s/James R. Winoker
_________________________
James R. Winoker
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED
STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW
ENGLAND ELECTRIC SYSTEM, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000071297
<NAME> NEW ENGLAND ELECTRIC SYSTEM
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,913,792
<OTHER-PROPERTY-AND-INVEST> 376,046
<TOTAL-CURRENT-ASSETS> 473,483
<TOTAL-DEFERRED-CHARGES> 548,326 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,311,647
<COMMON> 64,970
<CAPITAL-SURPLUS-PAID-IN> 736,605
<RETAINED-EARNINGS> 954,518
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,744,442 <F3>
0
39,113 <F2>
<LONG-TERM-DEBT-NET> 1,487,481
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 251,950
<LONG-TERM-DEBT-CURRENT-PORT> 89,910
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,698,751
<TOT-CAPITALIZATION-AND-LIAB> 5,311,647
<GROSS-OPERATING-REVENUE> 2,502,591
<INCOME-TAX-EXPENSE> 152,024
<OTHER-OPERATING-EXPENSES> 1,983,706
<TOTAL-OPERATING-EXPENSES> 2,135,730
<OPERATING-INCOME-LOSS> 366,861
<OTHER-INCOME-NET> (5,515)
<INCOME-BEFORE-INTEREST-EXPEN> 361,346
<TOTAL-INTEREST-EXPENSE> 122,342
<NET-INCOME> 220,038
6,851 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 220,038
<COMMON-STOCK-DIVIDENDS> 152,812
<TOTAL-INTEREST-ON-BONDS> 107,311
<CASH-FLOW-OPERATIONS> 521,113
<EPS-PRIMARY> $3.39
<EPS-DILUTED> $3.39
<FN>
<F1> Total deferred charges includes other assets.
<F2> Preferred stock reflects preferred stock of subsidiaries. Preferred
stock dividends reflect preferred stock dividends of subsidiaries.
<F3> Total common stockholders equity includes treasury stock at cost and
unrealized gain on securities.
</FN>
<PAGE>
As amended December 12, 1997
BY-LAWS
OF
NEW ENGLAND POWER COMPANY
ARTICLE 1.
Classes of Capital Stock
The capital stock of the corporation shall consist of common
stock of the par value of $20 a share, and three classes of
preferred stock, 6% Cumulative Preferred Stock of the par value
of $100 a share, Dividend Series Preferred Stock of the par value
of $100 a share and Preferred Stock-Cumulative of the par value
of 425 a share, each having respective preferences, voting
rights, restrictions and qualifications as follows:
Section 1. 6% Cumulative Preferred Stock and Common
Stock. (Whenever in this Section 1 reference is made to
"preferred" or "preferred stock", it shall be deemed to be a
reference to the 6% Cumulative Preferred Stock unless expressly
provided otherwise.)
At every meeting of the stockholders every holder of shares
of stock, whether preferred or common, shall be entitled to one
vote either in person or by proxy for every such share registered
in his name. The holders of the preferred stock shall be
entitled to receive or to have set apart, out of the surplus or
net profits of the corporation, as and when declared by the board
of directors, a dividend at the rate of, but never exceeding, six
per centum per annum, cumulative, on all such preferred stock
outstanding at the time, which dividend shall be payable yearly,
half-yearly or quarterly as the board of directors may, from time
to time, fix and determine, and before any dividend shall be set
apart for or paid on the common stock. Whenever a dividend is
declared or paid on the preferred stock and all prior dividends
on the outstanding shares of such stock shall have been paid or
set apart, the board of directors may, if in its judgment, the
surplus or net profits, after deducting the amount of dividends
to accrue on the said outstanding preferred stock during the
current year, shall be sufficient for such purpose, then or
thereafter declare and pay dividends on the common stock payable
yearly, half-yearly or quarterly, and payable then or thereafter
out of any remaining surplus or net profits of the year then
current or last past and of any previous year in which full
dividends shall have been paid on the preferred stock. In case
of a liquidation or dissolution or winding up (whether voluntary
or involuntary) of the corporation, the holders of the preferred
stock shall receive cash to the amount of the par value of such
preferred stock, together with all accrued and unpaid dividends
thereon (but no more), before any payment is made to the holders
of the common stock, and the holders of the common stock shall be
solely entitled to the entire assets of the corporation or the
<PAGE>
proceeds thereof, remaining after the payment in full, at its par
value, of the preferred stock then outstanding, together with all
dividends thereon accrued and unpaid. But dividends shall not
cumulate upon any preferred shares for any period during which
the same were not outstanding preferred shares of the
corporation. If the corporation at any time increases its
capital stock, and the new or additional shares are required by
law to be offered proportionately to its stockholders, the
holders of all classes of preferred stock only shall be entitle
to subscribe for new or additional preferred stock of any class
and the holders of common stock only shall be entitled to
subscribe for new or additional common stock and notice of such
increase as required by law need be given and the new shares need
be offered proportionately only to the stockholders who are so
entitled to subscribe.
Section 2. Dividend Series Preferred Stock.
A. The shares of Dividend Series Preferred Stock may be
issued, as the board of directors may determine, in one or more
series designated "Cumulative Preferred Stock, % Series" or,
with respect to issues subsequent to July 1, 1975, "Cumulative
Preferred Stock, $100 Par Value, % Series" (inserting in
each case the amount of the annual dividend rate, as determined
by the board of directors for each such series) or, with respect
to issues with an adjustable dividend rate, "Cumulative Preferred
Stock, $100 Par Value, Adjustable Rate Series "
(inserting in each case an appropriate designation, as determined
by the board of directors for each such series). All shares of
Dividend Series Preferred Stock, irrespective of series, shall
constitute one and the same class of stock and shall be of equal
rank as to dividends and assets with each other and with the 6%
Cumulative Preferred Stock and the Preferred Stock-Cumulative.
The shares of Dividend Series Preferred Stock of different
series, subject to any applicable provisions of law, may vary, as
the board of directors may determine, as to the following rights
and preferences:
(1) the dividend rate, or method of calculation
thereof, and the date from which the dividends on shares
issued prior to the record date for the first dividend shall
be cumulative and the date for the first dividend;
(2) the redemption price or prices, or method of
calculation thereof, and any restriction on the exercise by
the corporation of its right to redeem such series;
(3) the amount or amounts payable upon any liquidation
or dissolution or winding up.
(4) the terms and amount of any sinking fund provided
for the purchase or redemption of shares; and
(5) the conversion, participation or other special
rights.
<PAGE>
B. Before any dividends on, or any distribution of assets
(by purchase of shares or otherwise) to holders of, the Common
Stock or any other stock ranking junior to the Dividend Series
Preferred Stock as to dividends (both hereinafter called "junior
stock") shall be paid or set apart for payment or otherwise
provided, the holders of the Dividend Series Preferred Stock
shall be entitled to receive, but only when and as declared by
the board of directors, out of any funds legally available for
the declaration of dividends, cumulative dividends at the annual
dividend rate per share fixed for the particular series payable
quarterly on the first days of January, April, July and October
in each year commencing on a date specified for the first
dividend date as herein provided to stockholders of record on the
respective dates, not exceeding forty-five (45) days preceding
such dividend payment dates fixed in advance for the purpose by
the board of directors prior to the payment of each particular
dividend. No dividends shall be declared on any series of the
Dividend Series Preferred Stock or of any other class of
preferred stock ranking on a parity therewith, as to dividends,
in respect of any quarter-yearly dividend period, unless there
shall likewise be declared on all shares of all series of the
Dividend Series Preferred Stock and of any other class of such
parity preferred stock at the time outstanding, like
proportionate dividends, ratably, in proportion to the respective
annual dividend rates fixed therefor, in respect of the same
quarter-yearly dividend period, to the extent that such share are
entitled to receive dividends for such quarter-yearly dividend
period. The dividends on shares of all series of the Dividend
Series Preferred Stock shall be cumulative. In the case of all
shares of each particular series, the dividends on shares of such
series shall be cumulative:
(1) on shares issued prior to the record date for the
first dividend on the shares of such series, from the date
for the particular series fixed therefor;
(2) on shares issued after a record date for a
dividend, but prior to the dividend payment date for such
dividend, from said dividend payment date; and
(3) otherwise from the quarter-yearly dividend payment
date next preceding the date of issue of such shares;
so that dividends accrued on all outstanding shares of Dividend
Series Preferred Stock to the last preceding quarterly dividend
payment date shall have been paid in full or declared and set
apart for payment before there shall be any distribution on, or
purchase of, junior stock. The holders of the Dividend Series
Preferred Stock shall not be entitled to receive any dividends
thereon other than the dividends referred to in this subsection B
and other than distributions provided in subsection D below. As
used in this Section 2, the expression "dividends accrued" shall
mean the sum of amounts with respect to all shares of Dividend
Series Preferred Stock then outstanding, which as to each share
shall be an amount computed at the rate per annum of the par
value thereof fixed for the particular series from the date from
<PAGE>
which dividends on such share become cumulative to the date with
reference to which the expression is used, irrespective of
whether such amount shall have been declared as dividends or
there shall have existed any funds legally available for the
payment thereof, less the aggregate of all dividends paid or
declared payable on or before said last mentioned date and set
aside for such payment on such share.
(1) on shares issued prior to the record date for the
first dividend on the shares of such series, from the date
for the particular series fixed therefor;
(2) on share issued after a record date for a dividend,
but prior to the dividend payment date for such dividend,
from said dividend payment date; and
(3) otherwise from the quarter-yearly dividend payment
date next preceding the date of issue of such shares;
so that dividends accrued on all outstanding shares of Dividend
Series Preferred Stock to the last preceding quarterly dividend
payment date shall have been paid in full or declared and set
apart for payment before there shall be any distribution on, or
purchase of, junior stock. The holders of the Dividend Series
Preferred Stock shall not be entitled to receive any dividends
thereon other than the dividends referred to in this subsection B
and other than distributions provided in subsection D below. As
used in this Section 2, the expression "dividends accrued" shall
mean the sum of amounts with respect to all shares of Dividend
Series Preferred Stock then outstanding, which as to each share
shall be an amount computed at the rate per annum of the par
value thereof fixed for the particular series from the date from
which dividends on such share become cumulative to the date with
reference to which the expression is used, irrespective of
whether such amount shall have been declared as dividends or
there shall have existed any funds legally available for the
payment thereof, less the aggregate of all dividends paid or
declared payable on or before said last mentioned date and set
aside for such payment on such share.
C. The corporation, pursuant to action of its board of
directors or as provided in subsection A(8) of Section 4 of this
Article I, may redeem the whole or any part of the series of the
Dividend Series Preferred Stock at the time outstanding, at any
time or from time to time, by paying in cash as herein provided
the redemption price of the shares of the particular series fixed
therefor, together with dividends accrued to the date fixed for
such redemption, and by mailing, postage prepaid, at least thirty
(30) days and not more than ninety (90) days prior to the date
fixed for said redemption a notice specifying said redemption
date to the holders of record of the Dividend Series Preferred
Stock to be redeemed, at their respective addresses as the same
shall appear on the books of the corporation; provided, however,
that the exercise by the corporation of its right to redeem
shares of any particular series may be subject to such
restrictions as are determined for said series. In case of the
<PAGE>
redemption of a part only of any series of the Dividend Series
Preferred Stock at the time outstanding, the corporation shall
select by lot in such manner as the board of directors
determines, the shares so to be redeemed. If such notice of
redemption shall have been so mailed, and if on or before the
redemption date specified in such notice all funds necessary for
such redemption shall have been set aside by the corporation, so
as to be and continue to be available therefor, then, on and
after said redemption date, notwithstanding that any certificate
for the shares of the Dividend Series Preferred Stock so called
for redemption shall not have been surrendered for cancellation,
the shares represented thereby shall no longer be deemed
outstanding, the right to receive dividends thereon shall cease
to accrue, and all rights of the holders thereof shall forthwith
cease and terminate, except only the right of the holders thereof
to receive the amount payable upon redemption thereof, but
without interest; provided, however, that if, after mailing said
notice as aforesaid and prior to the date of redemption specified
in such notice, said funds shall be set aside by deposit in
trust, for the account of the holders of the Dividend Series
Preferred Stock to be redeemed, with a bank or trust company in
good standing, organized under the laws of the United States of
America or of The Commonwealth of Massachusetts, having a
capital, undivided profits and surplus aggregating at least
$5,000,000, thereupon all shares of the Dividend Series Preferred
Stock with respect to which such deposit shall have been made
shall no longer be deemed to be outstanding, and all rights with
respect to such shares of Dividend Series Preferred Stock shall
forthwith upon such deposit in trusts cease and terminate, except
only the right of the holders thereof to receive from such
deposit the amount payable upon the redemption but without
interest. In case the holders of the Dividend Series Preferred
Stock which shall have been redeemed shall not within four years
of the date of redemption thereof claim any amount so deposited
in trust for the redemption of such shares, such bank or trust
company shall, upon demand, pay over to the corporation any such
unclaimed amount so deposited with it and shall thereupon be
relieved of all responsibility in respect thereof, and the
corporation shall not be required to hold the amount so paid over
to it separate and apart from its other funds, and thereafter the
holders of such shares of Dividend Series Preferred Stock shall
look only to the corporation for payment of the redemption price
thereof, but without interest. If there are any dividends
accrued to the last preceding quarterly dividend payment date or
dates on the outstanding Dividend Series Preferred Stock or any
other class of preferred stock ranking on a parity therewith as
to assets (both of which are hereinafter in this sentence
collectively referred to as "Preferred Stock"), (i) no Preferred
Stock which is redeemable shall be redeemed, unless all such
Preferred Stock shall be redeemed and unless an offer is made (a)
to purchase all Preferred Stock of any series which is not
redeemable at the time under limited restrictions then applicable
thereto at a price equal to the then redemption price for such
series if such restrictions were not applicable and (b) to
purchase all Preferred Stock which is not redeemable at the time
at a price equivalent to the highest then redemption price on any
<PAGE>
outstanding shares of Preferred Stock, after giving effect to the
differences in par value among classes of Preferred Stock, and
(ii) no Preferred Stock shall be purchased, unless an offer is
made to purchase all Preferred Stock for which redemption prices
applicable at the time have been established (whether or not
there is then any applicable restriction on the redemption
thereof) at the same percentage (not in excess of one hundred per
centum (100%)) of the then applicable redemption price of each
series of said stock and unless an offer is made to purchase all
Preferred Stock for which redemption prices applicable at the
time have not been established at the same percentage of a price
equal to the then highest redemption price for any of said stock
for which a redemption price applicable at the time has been
established. All stock redeemed or purchased under the
provisions of this subsection C shall be retired.
D. In the event of any liquidation, dissolution or winding
up (whether voluntary or involuntary) of the affairs of the
corporation or any distribution of its capital, then before any
distribution shall be made to the holders of stock ranking junior
to the Dividend Series Preferred Stock as to assets, the holders
of each series of the Dividend Series Preferred Stock at the time
outstanding shall be entitled to be paid in cash the amount for
the particular series fixed therefor, together in each case with
dividends accrued thereon to the date fixed for payment of such
distributive amounts, and no more. No payments on account of
such distributive amounts shall be made to the holders of any
series of the Dividend Series Preferred Stock or of any other
class of preferred stock ranking on a parity therewith, as to
assets, unless there shall likewise be paid at the same time to
the holders of each other series of the Dividend Series Preferred
Stock and of such parity preferred stock at the time outstanding
like proportionate distributive amounts, ratably, in proportion
to the full distributive amounts to which they are respectively
entitled. After such payment to the holders of Dividend Series
Preferred Stock, the remaining assets and funds of the
corporation shall be divided and distributed among the holders of
junior stock then outstanding according to the respective rights.
Neither the consolidation nor the merger of the corporation with
or into any other corporation shall be deemed to be a
liquidation, dissolution or winding up of the corporation.
E. The holders of Dividend Series Preferred Stock shall
have no right to vote except as provided by law and except as
hereafter specifically provided in Section 4 of this Article I.
F. Except as otherwise expressly provided by law, no
holder of Dividend Series Preferred Stock shall be entitled as
such as a matter of right to subscribe for or purchase any part
of any new or additional issue of stock or warrants carrying
rights to stock, or securities convertible into stock, of any
class whatever, whether now or hereafter authorized, and whether
issued for cash, property, services or otherwise. If it is
expressly required by law that such new or additional issue be
offered proportionately to the stockholders, the holders of all
classes of preferred stock only shall be entitled to subscribe
<PAGE>
for new or additional preferred stock of any class and the
holders of common stock only shall be entitled to subscribe for
new or additional common stock; and notice of such increase as
required by law need be given and the new shares need be offered
proportionately only to the stockholders who are so entitled to
subscribe.
G. Subject to the limitations, if any, contained in
Sections 4 and 5 of this Article I, the corporation may from time
to time issue additional capital stock divided into classes with
such preferences as to dividends, voting power and other
incidents as may be determined in accordance with applicable
provisions of law and terms of outstanding capital stock.
Without limiting the generality of the foregoing, any such
additional capital stock may be an additional series of Dividend
Series Preferred Stock or additional shares of the initial or any
other series of Dividend Series Preferred Stock.
H. So long as any shares of the Dividend Series Preferred
Stock of any series are outstanding, the payment of dividends on
stock of the corporation ranking junior to the Dividend Series
Preferred Stock as to dividends or assets (other than (i)
dividends payable in stock ranking junior to the Dividend Series
Preferred Stock as to dividends and assets or (ii) dividends paid
in cash if immediately thereafter there shall be paid to the
corporation in cash an amount equal to such dividends for shares
of or as a capital contribution with respect to stock ranking
junior to the Dividend Series Preferred Stock as to dividends or
assets) and the making of any distribution of assets to holders
of stock ranking junior to the Dividend Series Preferred Stock as
to dividends or assets by purchase of shares or otherwise (each
of such actions being herein embraced within the term "payment of
junior stock dividends") shall be subject to the following
limitations:
(1) if and so long as the junior stock equity is less
than twenty per cent (20%) of total capitalization, the
payment of junior stock dividends, including the proposed
payment, during the twelve months ending with and including
the date on which the proposed payment is to be made shall
not exceed fifty per cent (50%) of the net income of the
corporation available for the payment of dividends on the
stock ranking junior to the Dividend Series Preferred Stock
as to dividends and assets for the twelve full calendar
months immediately preceding the calendar month in which
such dividend is declared;
(2) if and so long as the junior stock equity is less
than twenty-five per cent (25%) but is twenty per cent (20%)
or more of total capitalization, the payment of junior stock
dividends, including the proposed payment, during the twelve
months ending with and including the date on which the
proposed payment is to be made shall not exceed seventy-five
per cent (75%) of the net income of the corporation
available for the payment of dividends on the stock ranking
junior to the Dividend Series Preferred Stock as to
<PAGE>
dividends and assets for the twelve full calendar months
immediately preceding the calendar month in which such
dividend is declared; and
(3) except to the extent permitted under subsections
(1) and (2) above, the corporation shall not make any
payment of junior stock dividends which would reduce the
junior stock equity to less than twenty-five per cent (25%)
of total capitalization.
For the purposes of this subsection H "net income" shall be
determined in accordance with sound accounting practice, less the
excess, if any, of the largest minimum depreciation requirement
for the period of any mortgage indenture to which the corporation
is a party during such period over the amount charged by the
corporation on its books for depreciation during such period.
The term "junior stock equity" is defined in subsection
E(2)(i) of Section 4 of this Article I.
The term "total capitalization" as used in this subsection H
means the aggregate of (x) the junior stock equity, (y) the par
value of, or stated capital represented by, the outstanding
shares of Dividend Series Preferred Stock and any other stock
ranking prior thereto or on a parity therewith as to dividends or
assets and the premium thereon, and (z) the principal amount of
all outstanding indebtedness of the corporation represented by
bonds, notes and other evidences of indebtedness maturing by
their terms more than one year from the date of issue thereof.
I. No stockholder, director, officer or agent of the
corporation shall be held individually responsible for any action
taken in good faith though subsequently adjudged to be in
violation of this Section 2.
J. The shares of Dividend Series Preferred Stock from time
to time duly authorized may be issued for such consideration as
may be fixed from time to time either by the board of directors
or otherwise, as provided by law. Any and all shares of Dividend
Series Preferred Stock upon receipt by the corporation of the
consideration so fixed shall be deemed fully paid stock and shall
not be liable to any further call or assessment thereon.
K. Every holder of Dividend Series Preferred Stock of the
corporation by becoming such shall be held to have consented to
all of these provisions and to have agreed to be bound thereby
and to have waived to the full extent permitted by law any right
such holder may have either now or at any time in the future
contrary to these provisions.
Section 3. Preferred Stock-Cumulative.
A. The shares of Preferred Stock-Cumulative may be issued,
as the board of directors may determine, in one or more series
designated "Cumulative Preferred Stock, $25 Par Value,
% Series" (inserting in each case the amount of the annual
<PAGE>
dividend rate, as determined by the board of directors for each
such series) or, with respect to issues with an adjustable
dividend rate, "Cumulative Preferred Stock, $100 Par Value,
Adjustable Rate Series "(inserting in each case an
appropriate designation, as determined by the board of directors
for each such series). All shares of Preferred Stock-Cumulative,
irrespective of series, shall constitute one and the same class
of stock and shall be of equal rank as to dividends and assets
with each other and with the 6% Cumulative Preferred Stock and
the Dividend Series Preferred Stock. The shares of Preferred
Stock-Cumulative of different series, subject to any applicable
provisions of law, may vary, as the board of directors may
determine, as to the following rights and preferences:
(1) the dividend rate, or method of calculation
thereof, and the date from which the dividends on shares
issued prior to the record date for the first dividend shall
be cumulative and the date for the first dividend;
(2) the redemption price or prices, or method of
calculation thereof, and any restriction on the exercise by
the corporation of its right to redeem such series;
(3) the amount or amounts payable upon any liquidation
or dissolution or winding up;
(4) the terms and amount of any sinking fund provided
for the purchase or redemption of shares; and
(5) the conversion, participation or other special
rights.
B. Before any dividends on, or any distribution of assets
(by purchase of shares or otherwise) to holders of, the Common
Stock or any other stock ranking junior to the Preferred Stock-
Cumulative as to dividends (both hereinafter called "junior
stock") shall be paid or set apart for payment or otherwise
provided, the holders of the Preferred Stock-Cumulative shall be
entitled to receive, but only when and as declared by the board
of directors, out of any funds legally available for the
declaration of dividends, cumulative dividends at the annual
dividend rate per share fixed for the particular series payable
quarterly on the first days of January, April, July and October
in each year commencing on a date specified for the first
dividend date as herein provided to stockholders of record on the
respective dates, not exceeding forty-five (45) days preceding
such dividend payment dates fixed in advance for the purpose by
the board of directors prior to the payment of each particular
dividend. No dividends shall be declared on any series of the
Preferred Stock-Cumulative or of any other class of preferred
stock ranking on a parity therewith, as to dividends, in respect
of any quarter-yearly dividend period, unless there shall
likewise be declared on all shares of all series of the Preferred
Stock-Cumulative and of any other class of such parity preferred
stock at the time outstanding, like proportionate dividends,
ratably, in proportion to the respective annual dividend rates
fixed therefor, in respect of the same quarter-yearly dividend
<PAGE>
period, to the extent that such shares are entitled to receive
dividends for such quarter-yearly dividend period. The dividends
on shares of all series of the Preferred Stock-Cumulative shall
be cumulative. In the daze of all shares of each particular
series, the dividends on shares of such series shall be
cumulative.
(1) on shares issued prior to the record date for the
first dividend on the shares of such series, from the date
for the particular series fixed therefor;
(2) on shares issued after a record date for a
dividend, but prior to the dividend payment date for such
dividend, from said dividend payment date; and
(3) otherwise from the quarter-yearly dividend payment
date next preceding the date of issue of such shares;
so that dividends accrued on all outstanding shares of Preferred
Stock-Cumulative to the last preceding quarterly dividend payment
date shall have been paid in full or declared and set apart for
payment before there shall be any distribution on, or purchase
of, junior stock. The holders of the Preferred Stock-Cumulative
shall not be entitled to receive any dividends thereon other than
the dividends referred to in this subsection B and other than
distributions provided in subsection D below. As used in this
Section 3, the expression "dividends accrued" shall mean the sum
of amounts with respect to all shares of Preferred Stock-
Cumulative then outstanding, which as to each share shall be an
amount computed at the rate per annum of the par value thereof
fixed for the particular series from the date from which
dividends on such share become cumulative to the date with
reference to which the expression is used, irrespective of
whether such amount shall have been declared as dividends or thee
shall have existed any funds legally available for the payment
thereof, less the aggregate of all dividends paid or declared
payable on or before said last mentioned date and set aside for
such payment on such share.
C. The corporation, pursuant to action of its board of
directors or as provided in subsection A(8) of Section 4 of this
Article I, may redeem the whole or any part of any series of the
Preferred Stock-Cumulative at the time outstanding; at any time
or from time to time, by paying in cash as herein provided the
redemption price of the shares of the particular series fixed
therefor, together with dividends accrued to the date fixed for
such redemption, and by mailing, postage prepaid, at least thirty
(30) days and not more than ninety (90) days prior to the date
fixed for said redemption a notice specifying said redemption
date to the holders of record of the Preferred Stock-Cumulative
to be redeemed, at their respective addresses as the same shall
appear on the books of the corporation; provided, however, that
the exercise by the corporation of its right to redeem shares of
any particular series may be subject to such restrictions as are
determined for said series. In case of the redemption of a part
only of any series of the Preferred Stock-Cumulative at the time
<PAGE>
outstanding, the corporation shall select by lot in such manner
as the board of directors determines, the shares so to be
redeemed. If such notice of redemption shall have been so
mailed, and if on or before the redemption date specified in such
notice all funds necessary for such redemption shall have been
set aside by the corporation, so as to be and continue to be
available therefor, then, on and after said redemption date,
notwithstanding that any certificate for the shares of the
Preferred Stock-Cumulative so called for redemption shall not
have been surrendered for cancellation, the shares represented
thereby shall no longer be deemed outstanding, the right to
receive dividends thereon shall cease to accrue, and all rights
of the holders thereof shall forthwith cease and terminate,
except only the right of the holders thereof to receive the
amount payable upon redemption thereof, but without interest;
provided, however, that if, after mailing said notice as
aforesaid and prior to the date of redemption specified in such
notice, said funds shall be set aside by deposit in trust, for
the account of the holders of the Preferred Stock-Cumulative to
be redeemed, with a bank or trust company in good standing,
organized under the laws of the United States of America or of
The Commonwealth of Massachusetts, having a capital, undivided
profits and surplus aggregating at least $5,000,000, thereupon
all shares of the Preferred Stock-Cumulative with respect to
which such deposit shall have been made shall no longer be deemed
to be outstanding, and all rights with respect to such shares of
Preferred Stock-Cumulative shall forthwith upon such deposit in
trust cease and terminate, except only the right of the holders
thereof to receive from such deposit the amount payable upon the
redemption but without interest. In case the holders of the
Preferred Stock-Cumulative which shall have been redeemed shall
not within four years of the date of redemption thereof claim any
amount so deposited in trust for the redemption of such shares,
such bank or trust company shall, upon demand, pay over to the
corporation any such unclaimed amount so deposited with it and
shall thereupon be relieved of all responsibility in respect
thereof, and the corporation shall not be required to hold the
amount so paid over to it separate and apart from its other
funds, and thereafter the holders of such shares of Preferred
Stock-Cumulative shall look only to the corporation for payment
of the redemption price thereof, but without interest. If there
are any dividends accrued to the last preceding quarterly
dividend payment date or dates on the outstanding Preferred
Stock-Cumulative or any other class of preferred stock ranking on
a parity therewith as to assets (both of which are hereinafter in
this sentence collectively referred to as "Preferred Stock"), (i)
no Preferred Stock which is redeemable shall be redeemed, unless
all such Preferred Stock shall be redeemed and unless an offer is
made (a) to purchase all Preferred Stock of any series which is
not redeemable at the time under limited restrictions then
applicable thereto at a price equal to the then redemption price
for such series if such restrictions wee not applicable and (b)
to purchase all Preferred Stock which is not redeemable at the
time at a price equivalent to the highest then redemption price
on any outstanding shares of Preferred Stock, after giving effect
to the differences in par value among classes of Preferred Stock,
<PAGE>
and (ii) no Preferred Stock shall be purchased, unless an offer
is made to purchase all Preferred Stock for which redemption
prices applicable at the time have been established (whether or
not there is then any applicable restriction on the redemption
thereof) at the same percentage (not in excess of one hundred per
centum (100%)) of the then applicable redemption price for each
series of said stock and unless an offer is made to purchase all
Preferred Stock for which redemption prices applicable at the
time have not been established at the same percentage of a price
equal to the then highest redemption price for any of said stock
for which a redemption price applicable at the time has been
established. All stock redeemed or purchased under the
provisions of this subsection C shall be retired.
D. In the event of any liquidation, dissolution or winding
up (whether voluntary or involuntary) of the affairs of the
corporation or any distribution of its capital, then before any
distribution shall be made to the holders of stock ranking junior
to the Preferred Stock-Cumulative as to assets, the holders of
each series of the Preferred Stock-Cumulative at the time
outstanding shall be entitled to be paid in cash the amount for
the particular series fixed therefor, together in each case with
dividends accrued thereon to the date fixed for payment of such
distributive amounts, and no more. No payments on account of
such distributive amounts shall be made to the holders of any
series of the Preferred Stock-Cumulative or of any other class of
preferred stock ranking on a parity therewith, as to assets,
unless there shall likewise be paid at the same time to the
holders of each other series of the Preferred Stock-Cumulative
and of such parity preferred stock at the time outstanding like
proportionate distributive amounts, ratably, in proportion to the
full distributive amounts to which they are respectively
entitled. After such payment to the holders of Preferred Stock-
Cumulative, the remaining assets and funds of the corporation
shall be divided and distributed among the holders of junior
stock then outstanding according to the respective rights.
Neither the consolidation nor the merger of the corporation with
or into any other corporation shall be deemed to be a
liquidation, dissolution or winding up of the corporation.
E. The holders of Preferred Stock-Cumulative shall have no
right to vote except as provided by law and except as hereafter
specifically provided in Section 4 of this Article I.
F. Except as otherwise expressly provided by law, no
holder of Preferred Stock-Cumulative shall be entitled as such as
a matter of right to subscribe for or purchase any part of any
new or additional issue of stock or warrants carrying rights to
stock, or securities convertible into stock, of any class
whatever, whether now or hereafter authorized, and whether issued
for cash, property, services or otherwise. If it is expressly
required by law that such new or additional issue be offered
proportionately to the stockholders, the holders of all classes
of preferred stock only shall be entitled to subscribe for new or
additional preferred stock of any class and the holders of common
stock only shall be entitled to subscribe for new or additional
<PAGE>
common stock; and notice of such increase as required by law need
be given and the new shares need be offered proportionately only
to the stockholders who are so entitled to subscribe.
G. Subject to the limitations, if any, contained in
Sections 4 and 5 of this Article I, the corporation may from time
to time issue additional capital stock divided into classes with
such preferences as to dividends, voting power and other
incidents as may be determined in accordance with applicable
provisions of law and terms of outstanding capital stock.
Without limiting the generality of the foregoing, any such
capital stock may be an additional series of Preferred Stock-
Cumulative or additional shares of the initial or any other
series of Preferred Stock-Cumulative.
H. So long as any shares of the Preferred Stock-Cumulative
of any series are outstanding, the payment of dividends on stock
of the corporation ranking junior to the Preferred Stock-
Cumulative as to dividends or assets (other than (i) dividends
payable in stock ranking junior to the Preferred Stock-Cumulative
as to dividends and assets or (ii) dividends paid in cash if
immediately thereafter there shall be paid to the corporation in
cash an amount equal to such dividends for shares of or as a
capital contribution with respect to stock ranking junior to the
Preferred Stock-Cumulative as to dividends or assets) and the
making of any distribution of assets to holders of stock ranking
junior to the Preferred Stock-Cumulative as to dividends or
assets by purchase of shares or otherwise (each of such actions
being herein embraced within the term "payment of junior stock
dividends") shall be subject to the following limitations:
(1) if and so long as the junior stock equity is less
than twenty per cent (20%) of total capitalization, the
payment of junior stock dividends, including the proposed
payment, during the twelve months ending with and including
the date on which the proposed payment is to be made shall
not exceed fifty per cent (50%) of the net income of the
corporation available for the payment of dividends on the
stock ranking junior to the Preferred Stock-Cumulative as to
dividends and assets for the twelve full calendar months
immediately preceding the calendar month in which such
dividend is declared:
(2) if and so long as the junior stock equity is less
than twenty-five per cent (25%) but is twenty per cent (20%)
or more of total capitalization, the payment of junior stock
dividends, including the proposed payment, during the twelve
months ending with and including the date on which the
proposed payment is to be made shall not exceed seventy-five
per cent (75%) of the net income of the corporation
available for the payment of dividends on the stock ranking
junior to the Preferred Stock-Cumulative as to dividends and
assets for the twelve full calendar months immediately
preceding the calendar month in which such dividend is
declared; and
<PAGE>
(3) except to the extent permitted under subsections
(1) and (2) above, the corporation shall not make any
payment of junior stock dividends which would reduce the
junior stock equity to less than twenty-five per cent (25%)
of total capitalization.
For the purposes of this subsection H "net income" shall be
determined in accordance with sound accounting practice, less the
excess, if any, of the largest minimum depreciation requirement
or the period of any mortgage indenture to which the corporation
is a party during such period over the amount charged by the
corporation on its books for depreciation during such period.
The term "junior stock equity" is defined in subsection
E(2)(i) of Section 4 of this Article I.
The term "total capitalization" as used in this subsection H
means the aggregated of (x) the junior stock equity, (y) the par
value of, or stated capital represented by, the outstanding
shares of Preferred Stock-Cumulative and any other stock ranking
prior thereto or on a parity therewith as to dividends or assets
and the premium thereon, and (z) the principal mount of all
outstanding indebtedness of the corporation represented by bonds,
notes and other evidences of indebtedness maturing by their terms
more than one year from the date of issue thereof.
I. No stockholder, director, officer or agent of the
corporation shall be held individually responsible for any action
taken in good faith though subsequently adjudged to be in
violation of this Section 3.
J. The share of Preferred Stock-Cumulative from time to
time duly authorized may be issued for such consideration as may
be fixed from time to time either by the board of directors or
otherwise, as provided by law. Any and all shares of Preferred
Stock-Cumulative upon receipt by the corporation of the
consideration so fixed shall be deemed fully paid stock and shall
not be liable to any further call or assessment thereon.
K. Every holder of Preferred Stock-Cumulative of the
corporation by becoming such shall be held to have consented to
all of these provisions and to have agreed to be bound thereby
and to have waived to the full extent permitted by law any right
such holder may have either now or at any time in the future
contrary to these provisions
Section 4. Certain Rights of Dividend Series Preferred
Stock and Preferred Stock-Cumulative.
A. (1) If dividends accrued to the last preceding
quarterly dividend payment date or dates on the outstanding
Dividend Series Preferred Stock, Preferred Stock-Cumulative and
any other class of preferred stock ranking on a parity therewith,
as to dividends, shall at any time and from time to time equal or
exceed an amount equivalent to four (4) full quarterly dividends
on any shares of any series of the Dividend Series Preferred
Stock, Preferred Stock-Cumulative and such parity preferred stock
<PAGE>
at the time outstanding, then until all dividends in default on
the Dividend Series Preferred Stock, Preferred Stock-Cumulative
and such parity preferred stock shall have been paid, the holders
of Dividend Series preferred Stock, Preferred Stock-Cumulative
and such parity preferred stock, voting separately as one class,
shall have the right to elect the smallest number of directors
necessary to constitute a majority of the full board of
directors, and the holders of stock generally entitled to vote,
voting separately as one class, shall have the right to elect the
remaining members of the board of directors. If and when all
dividends in default on the Dividend Series Preferred Stock,
Preferred Stock-Cumulative and such parity preferred stock shall
be paid (and, except when prevented from so doing by any
applicable restriction of law or contained in any agreement
relating to indebtedness of the corporation, such dividends shall
be declared and paid out of any funds legally available therefor
as soon as reasonably practicable unless, by a majority vote of
the directors elected by the holders of stock generally entitled
to vote, it is determined that such payment is not in the best
interests of the corporation), the Dividend Series Preferred
Stock, Preferred Stock-Cumulative and such parity preferred stock
shall thereupon be divested of such special right to elect any
member of the board of directors, but subject always to the same
provisions for the vesting of such special right in the Dividend
Series Preferred Stock, Preferred Stock-Cumulative and such
parity preferred stock in case of further like default or
defaults.
(2) Whenever under the provisions of this subsection A
the holders of Dividend Series Preferred Stock, Preferred Stock-
Cumulative and any other class of preferred stock ranking on
parity therewith as to dividends become entitled to elect a
majority of the board of directors, a special meeting of the
holders of Dividend Series Preferred Stock, Preferred Stock-
Cumulative and such parity preferred stock and a special meeting
of the stockholders generally entitled to vote shall be held for
the purpose of electing directors. Notices thereof shall be
given promptly by the corporation and in any case within fifteen
(15) days of the occurrence of such change in voting powers, the
meetings to be held not sooner than forty-five (45) days nor
later than sixty (60) days after the occurrence of such change in
voting powers. However, if the change occurs within ninety (90)
days prior to the date set for the annual meeting of the
stockholders generally entitled to vote, no special meetings need
be called prior thereto and an annual meeting of holders of
Dividend Series Preferred Stock, Preferred Stock-Cumulative and
any other such parity preferred stock shall be called for the
same date as the date of the annual meeting of stockholders
generally entitled to vote; provided, however, that, if the
change occurs within forty-five (45) days prior to the date set
for the annual meeting of the stockholders generally entitled to
vote, special meetings in lieu of annual meetings shall be called
to be held not later than sixty (60) days after such change
occurs. If the corporation fails to call the special or annual
meetings as above provided or fails to hold such annual meetings
within three (3) days of the date provided therefor in the by-
laws, any holder or holders of Dividend Series Preferred Stock,
<PAGE>
Preferred Stock-Cumulative, such parity preferred stock and/or
stock generally entitled to vote holding in the aggregate one
thousand (1,000) shares may call special meetings for such
purpose. Notice of each such meeting of stockholders of the
corporation setting forth the purpose or purposes of such meeting
shall be mailed by the corporation not less than thirty (30) days
prior to such meeting to all stockholders at their respective
addresses appearing upon the books of the corporation entitled to
vote thereat, unless such notice shall have been waived either
before or after the holding of such meeting by all such
stockholders.
(3) Upon reversion, pursuant to subsection A(1), of the
voting powers to their status prior to default, a special or
annual meeting of stockholders generally entitled to vote shall
be held for the purpose of electing directors. Notice thereof
shall have been given promptly by the corporation and in any case
within fifteen (15) days after such reversion, such notice to be
mailed by the corporation not less than seven (7) nor more than
ten (10) days prior to such meeting to all stockholders generally
entitled to vote at their respective addresses appearing upon the
books of the corporation, unless such notice shall have been
waived either before or after the holding of such meeting by all
such stockholders. If the corporation fails to call such meeting
or fails to hold such annual meeting within three (3) days of the
date provided therefor in the by-laws, any holder or holders of
stock generally entitled to vote holding in the aggregate one
thousand (1,000) shares may call a special meeting for such
purpose.
(4) Any director elected by holders of Dividend Series
Preferred Stock, Preferred Stock-Cumulative and any other class
of preferred stock ranking on a parity therewith, as to
dividends, shall hold office until the next annual meeting of the
holders of Dividend Series Preferred Stock, Preferred Stock-
Cumulative and such parity preferred stock and until his
successor is chosen and qualified, except as otherwise provided
in this subsection A. Once any directors have been elected by
holders of Dividend Series Preferred Stock, Preferred Stock-
Cumulative and such parity preferred stock, and so long as such
holders are entitled to elect such directors, annual meetings of
such holders shall be held for the purpose of electing directors,
such meetings to immediately follow the annual meetings of
stockholders generally entitled to vote. During any period in
which the holders of Dividend Series Preferred Stock, Preferred
Stock-Cumulative and such parity preferred stock have the right
to elect a majority of the board of directors, pursuant to
subsection A(1), the number of directors constituting the full
board of directors shall be the number constituting the full
board of directors immediately prior to said period unless it be
changed by a two-thirds vote at an annual meeting of such holders
and by a two-thirds vote at an annual meeting in the same year of
the holders of stock generally entitled to vote. In the event
the number of directors is so increased or decreased, the holders
of Dividend Series Preferred Stock, Preferred Stock-Cumulative
and such parity preferred stock shall have the right at such
annual meeting to elect the smallest number of directors
<PAGE>
necessary to constitute a majority of the new number of
directors, and the holders of stock generally entitled to vote
shall have the right to elect the remaining directors, provided,
however, that neither group of directors so elected shall be
entitled to hold office until both groups have been duly elected.
(5) At all meetings of stockholders held for the purpose of
electing directors, during such times as the holders of shares of
the Dividend Series Preferred Stock, Preferred Stock-Cumulative
and any other class of preferred stock ranking on a parity
therewith, as to dividends, shall have the right to elect a
majority of the board of directors, pursuant to the foregoing
provisions of this subsection A, the presence in person or by
proxy of the holders of a majority of the outstanding shares of
the stock generally entitled to vote, as one class, shall be
required to constitute a quorum of such class for the election of
directors and the presence in person or by proxy of the holders
of a majority of the outstanding shares of all series of the
Dividend Series Preferred Stock, Preferred Stock-Cumulative and
such parity preferred stock, voting separately as one class,
shall be required to constitute a quorum of such class for the
election of directors. The absence of a quorum of the holders of
either such class shall not prevent or invalidate the election of
directors by the other such class if the necessary quorum of the
holders of stock of such class is present in person or by proxy
at the meeting of such class or any adjournment thereof, except
that in the case of the first election following the accrual of
the special right of the holders of Dividend Series Preferred
Stock, Preferred Stock-Cumulative and any such parity preferred
stock to elect a majority of the board of directors, the
directors elected by the holders of stock generally entitled to
vote shall not take office until the election of such majority.
In the absence of a quorum of the holders of stock of either such
class, the meeting shall be adjourned from time to time, which
may be without notice other than announcement at the meeting,
until such quorum shall be obtained within ninety (90) days from
the date of such meeting as originally called (or, in the case of
any annual meeting held during the continuance of such special
right, from the date fixed for such annual meeting) the presence
in person or by proxy of the holders of one-third, instead of
said majority, of said shares shall then be sufficient to
constitute a quorum for the election of the directors whom such
stockholders are then entitled to elect. In the calculation of
any quorum of the class composed of the holders of the Dividend
Series Preferred Stock, the Preferred Stock-Cumulative and parity
preferred stock, each share of stock bearing $100 par value shall
be counted as one and each share of stock bearing $25 par value
shall be counted as one-quarter.
(6) Forthwith upon the election of a majority of the board
of directors of the corporation by the holders of Dividend Series
Preferred Stock, Preferred Stock-Cumulative and any other class
of preferred stock ranking on a parity therewith, as to
dividends, pursuant to subsection A(1) hereof, the terms of
office of all persons who may be directors of the corporation at
the time shall terminate, whether or not the holders of stock
generally entitled to vote shall then have elected the remaining
<PAGE>
members of the board of directors, and, if the holders of stock
generally entitled to vote shall not have elected the remaining
members of the board of directors, then the directors so elected
by the holders of Dividend Series Preferred Stock, Preferred
Stock-Cumulative and such parity preferred stock shall constitute
the board of directors pending such election of the remaining
members by such holders of stock generally entitled to vote.
Upon the reversion, pursuant to subsection A(1), of the voting
powers to their status prior to default, then forthwith upon the
election of new directors by the holders of stock generally
entitled to vote, the terms of office of the directors elected by
the holders of Dividend Series Preferred Stock, Preferred Stock-
Cumulative and such parity preferred stock shall terminate.
(7) In case of any vacancy in the office of a director
elected by the holders of Dividend Series Preferred Stock,
Preferred Stock-Cumulative and any other class of preferred stock
ranking on a parity therewith, as to dividends, pursuant to the
foregoing provisions of this subsection A, the remaining
directors elected by the holders of Dividend Series Preferred
Stock, Preferred Stock-Cumulative and such parity preferred
stock, by affirmative vote of a majority of said directors, or
the remaining director so elected if there be but one, may elect
a successor or successors to hold office for the unexpired term
of the director or directors whose place or places shall be
vacant.
(8) Under all circumstances, however, the directors elected
by the holders of stock generally entitled to vote shall have the
right, and neither the holders of Dividend Series Preferred
Stock, Preferred Stock-Cumulative or any other class of preferred
stock ranking on a parity therewith, as to dividends, nor any
directors elected under these provisions by the holders of
Dividend Series Preferred Stock, Preferred Stock-Cumulative and
any other class of preferred stock ranking on a parity therewith,
as to dividends, shall have any right, to vote upon the question
of calling for redemption, or of purchasing, all of the Dividend
Series Preferred Stock, the Preferred Stock-Cumulative and such
parity preferred stock at the time outstanding.
(9) Except when some mandatory provision of law shall be
controlling or as otherwise provided in this Section 4 and, with
respect to any special rights of (i) the Dividend Series
Preferred Stock as a class, or (ii) the Preferred Stock-
Cumulative as a class, or (iii) any series of either such class
as a series, in the provisions or of the by-laws or articles of
organization controlling said class or in the votes creating said
series, neither the Dividend Series Preferred Stock nor the
Preferred Stock-Cumulative shall be entitled to vote as a
separate class, and no outstanding series of either such class
shall be entitled to vote as a separate series, on any matter and
all shares of the Dividend Series Preferred Stock of all series
and all shares of the Preferred Stock-Cumulative of all series
shall be deemed to constitute but one class for any purpose for
which a vote of the stockholders of the corporation by classes
may now or hereafter be required.
<PAGE>
(10) During the period the Dividend Series Preferred Stock
and the Preferred Stock-Cumulative have the special voting rights
provided by this subsection A, the 6%Cumulative Preferred Stock,
which is generally entitled to vote as specified in Section 1,
may vote either as stock generally entitled to vote or as parity
preferred stock or as both.
B. So long as any shares of the Dividend Series Preferred
Stock of any series are outstanding, the corporation shall not,
without the vote at a meeting called for that purpose of the
holders of at least two-thirds of the total number of shares of
the Dividend Series Preferred Stock of all series then
outstanding make any change in the provisions relative to the
Dividend Series Preferred stock, or of any series thereof, which
would change the express terms and provisions of such stock
(other than the express terms and provisions thereof set forth in
subsections A, D, and E of this Section 4) in any manner
prejudicial to the holders thereof except that if such change is
prejudicial to the holders of one or more, but not all of such
series, only to the vote of the holders of two-thirds of the
total number of shares of all series so affected and then
outstanding shall be required.
C. So long as any shares of the Preferred Stock-Cumulative
of any series are outstanding, the corporation shall not, without
the vote at a meeting called for that purpose of the holders of
at least two-thirds of the total number of shares of the
Preferred Stock-Cumulative of all series then outstanding make
any change in the provisions relative to the Preferred Stock-
Cumulative, or of any series thereof, which would change the
express terms and provisions of such stock (other than the
express terms and provisions thereof set forth in subsections A,
D, and E of this Section 4) in any manner prejudicial to the
holders thereof except that if such change is prejudicial to the
holders of one or more, but not all of such series, only to the
vote of the holders of two-thirds of the total number of shares
of all series so affected and then outstanding shall be required.
D. So long as any shares of the Dividend Series Preferred
Stock or the Preferred Stock-Cumulative of any series are
outstanding, the corporation shall not, without the vote at a
meeting called for that purpose of at least two-thirds of the
votes entitled to be cast by the holders of the total number of
shares of the Dividend Series Preferred Stock and the Preferred
Stock-Cumulative of all series then outstanding:
(1) make any change in the provisions of this Section
4, which would change the express terms and provisions of
subsections A, D, or E of this Section 4 in any manner
prejudicial to the holders of the Dividend Series Preferred
Stock and the Preferred Stock-Cumulative except that if such
change is prejudicial to the holders of one class, but not
both, only the vote of the holders of two-thirds of the
total number of shares of the class so affected and then
outstanding shall be required; or
<PAGE>
(2) create or authorize any class of stock which shall
be preferred as to dividends or assets over the Dividend
Series Preferred Stock or the Preferred Stock-Cumulative.
No preferred stock so preferred as to dividends or assets
over the Dividend Series Preferred Stock or the Preferred
Stock-Cumulative shall be issued more than six months after
the above referred to vote creating or authorizing such
class of stock unless within six months prior to such issue
approval thereof has been obtained, at a meeting called for
the purpose, by vote of at least two-thirds of the total
number of shares of Dividend Series Preferred Stock and the
Preferred Stock-Cumulative of all series outstanding.
"Premium" as used in this subsection D with reference to
capital stock shall mean such premium on capital stock as has
been paid in, or will have been paid in immediately after the
proposed issue of additional capital stock, and is not available
for distribution on, or purchase of, junior stock. If the
corporation has outstanding at any time shares without par value,
then references in subsection D (2) above to par value shall
refer, in the case of such shares without par value, to that part
of the stated capital represented by such share.
E. So long as any shares of the Dividend Series Preferred
Stock or the Preferred Stock-Cumulative of any series are
outstanding, the corporation shall not, without the vote at a
meeting called for that purpose of at least a majority of the
votes entitled to be case by the holders of the total number of
shares of the Dividend Series Preferred Stock and the Preferred
Stock-Cumulative of all series then outstanding:
(1) Issue shares of any series of Dividend Series
Preferred Stock or Preferred Stock-Cumulative if after such
issue the aggregate outstanding par value of all such series
would exceed $250,000,000.
(2) Issue additional shares of any series of Dividend
Series Preferred Stock or Preferred Stock-Cumulative or of
any other stock ranking prior thereto or on a parity
therewith as to dividends or assets, except for refunding an
equal par value of Dividend Series Preferred Stock or
Preferred Stock-Cumulative, or other such prior or parity
preferred stock, of the corporation theretofore outstanding:
(i) unless the junior stock equity to be
outstanding immediately after such issue shall be at
least equal to the aggregate of the par or stated value
of the Dividend Series Preferred Stock and the
Preferred Stock-Cumulative and of any other such prior
or parity stock to be outstanding immediately after
such issue; provided, however, that if for the purpose
of meeting this requirement it shall have been
necessary to take into consideration any earned surplus
of the corporation, such surplus shall not be available
thereafter for distribution of or purchase of stock
ranking junior to the Dividend Series Preferred Stock
<PAGE>
or the Preferred Stock-Cumulative as to dividends or
assets while said additional issue is outstanding (the
term "junior stock equity" as used in this subsection E
and in subsections H of Sections 2 and 3 means the
aggregate of the par value of, or stated capital
represented by, the outstanding shares of stock ranking
junior to the Dividend Series Preferred Stock and the
Preferred Stock-Cumulative as to dividends and assets,
of the premium on such junior stock and of the surplus
(including Retained earnings and other paid-in capital)
of the corporation less, unless the amounts or items
are being amortized or are being provided for by
reserves, (a) any amounts recorded on the books of the
corporation for utility plant and other plant in excess
of the original cost thereof, (b) unamortized debt
discount and expense, capital stock discount and
expense and any other intangible items set forth on the
asset side of the balance sheet as a result of
accounting convention, (c) the excess, if any of the
aggregate amount payable on involuntary liquidation,
dissolution or winding up of the affairs of the
corporation upon all outstanding preferred stock of the
corporation over the aggregate par or stated value
thereof and any premiums thereon and (d) the aggregate
of the excess, if any, for each year and the final
fraction of a year, if any, during the period from
January 1, 1953 to the end of a month within ninety
(90) days preceding the date as of which junior stock
equity is determined, of the largest minimum
depreciation requirement for such year and such final
fraction of a year of any mortgage indenture to which
the corporation is a party during such year or such
final fraction of a year over the amount charged by the
corporation on its books for depreciation during such
year or such final fraction of a year);
(ii) unless the gross income of the corporation
available for interest on its indebtedness and for
dividends on the Dividend Series Preferred Stock, the
Preferred Stock-Cumulative and any other such prior or
parity stock, determined in accordance with sound
accounting practice, for a period of twelve (12)
consecutive calendar months within the fifteen (15)
calendar months immediately preceding the calendar
month in which such additional stock is issued, or in
which a contract for the issuance and sale thereof is
made, is at least one and one-half (1-1/2) times the
aggregate of the annual interest charges and dividend
requirements on all interest bearing indebtedness and
all series of Dividend Series Preferred Stock,
Preferred Stock-Cumulative and such prior or parity
stock to be outstanding immediately after the proposed
issue; and
(iii) unless the net income of the corporation
available for dividends on the Dividend Series
Preferred Stock, the Preferred Stock-Cumulative and any
<PAGE>
other such prior or parity stock, determined in
accordance with sound accounting practice, for the same
twelve (12) months' period, is at least two (2) times
the aggregate of the annual dividend requirements on
all series of Dividend Series Preferred Stock,
Preferred Stock-Cumulative and such prior or parity
stock to be outstanding immediately after the proposed
issue.
In said computations in subsections (ii) and (111):
(a) interest on indebtedness and dividends on
stock in each case to be retired with the proceeds of
the proposed issue are to be excluded;
(b) such gross income or net income, respectively,
similarly determined for said twelve (12) month period,
from any property acquired by purchase, merger or
otherwise during or after said period or to be acquired
in connection with the proposed issue, may be included:
(c) the amount deducted for taxes shall be the
amount charged by the corporation on its books for
taxes; and
(d) the amount deducted for depreciation shall be
the higher of the amount charged by the corporation on
its books for depreciation during such period or the
largest minimum depreciation requirement for such
period of any mortgage indenture to which the
corporation is a party during such period.
(3) Merge or consolidate with or into any other
corporation or corporations or sell, lease or dispose of all
or substantially all its assets, unless such merger,
consolidation or sale, lease or disposition, or the issuance
and assumption of all securities to be issued or assumed in
connection therewith, shall have been ordered, approved or
permitted by the Securities and Exchange Commission under
the provisions of the Public Utility Holding Company Act of
1935 or by any successor commission or regulatory authority
of the United States of America having jurisdiction in the
premises under said Act or by any court of the United States
having such jurisdiction.
F. No stockholder, director, officer or agent of the
corporation shall be held individually responsible for any action
taken in good faith though subsequently adjudged to be in
violation of this Section 4.
The voting rights set forth in subsection B, C and D shall
not be effective if, in connection with any matter specified
therein, provision is made for the purchase, redemption or
retirement of all the Dividend Series Preferred Stock and the
Preferred Stock-Cumulative at the time outstanding, or it is
provided that the proposed action shall not be effective unless
such provision is made.
<PAGE>
In the calculations in subsections D and E of "at least two-
thirds of the total number of shares of the Dividend Series
Preferred Stock and the Preferred Stock-Cumulative" or of "at
least a majority of the total number" of such shares, each share
of Dividend Series Preferred Stock bearing $100 par value shall
be counted as one and each share of the Preferred Stock-
Cumulative bearing $25 par value shall be counted as one-quarter.
Section 5. Maximum Issues of Preferred Stock. The
corporation shall not, without the vote at a meeting called for
the purpose of at least a majority of the shares of stock
generally entitled to vote, issue shares of any series of
Dividend Series Preferred Stock or Preferred Stock-Cumulative if
after such issue the aggregate outstanding par value of all such
series would exceed $250 million.
ARTICLE II.
Stock Certificates and Transfers.
Section 1. Certificates. Each stockholder shall be
entitled to a certificate of the capital stock of the corporation
owned by him in such form as shall, in conformity to law, be
prescribed from time to time by the board of directors. Such
certificate shall be signed by the president or a vice-president
and by the treasurer or an assistant treasurer, and shall bear
the seal of the corporation; provided, however, that when any
such certificate is signed by a transfer agent and by a registrar
and the registrar is not the same person, partnership,
association, trust or corporation as the transfer agent, the
signature of the president or a vice-president or of the
treasurer or an assistant treasurer of the corporation, or both
such signatures, or the seal of the corporation, or either or
both of such signatures and such seal, upon such certificate may
be facsimile, and such certificate shall be as valid and
effectual for all purposes as if signed by such officer or
officers, or sealed with the seal of the corporation, as the case
may be. The fact that a person signing has ceased to be an
officer shall not invalidate any such certificate.
Section 2. Transfer Books. The Treasurer or such agent
or agents as may be employed by the treasurer with the approval
of the board of directors shall keep the stock and transfer books
of the corporation and a record of all certificates of stock
issued and of all transfers of stock and a register of all the
stockholders, their addresses and the number of shares held by
each. The board of directors may fix in advance a time, not more
than thirty days preceding the date of any meeting of
stockholders or the date for the payment of any dividend or the
making of any distribution to stockholders or the last day on
which the consent or dissent of stockholders may be effectively
expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such
meeting and any adjournment thereof or the right to receive such
dividend or distribution or the right to give such consent or
dissent, and in such case only stockholders of record on such
<PAGE>
record date shall have such right, notwithstanding any transfer
of stock on the books of the corporation after the record date;
or without fixing such record date the board of directors may for
any of such purposes close the transfer books for all or any part
of such thirty-day period.
Section 3. Transfer of Shares. Subject to the
restrictions, if any, imposed by the agreement of association,
title to a certificate of stock and to the shares represented
thereby shall be transferred only by delivery of the certificate
properly endorsed, or by delivery of the certificate accompanied
by a written assignment of the same, or a written power or
attorney to sell, assign or transfer the same or the share
represented thereby, properly executed; but the person registered
on the books of the corporation as the owner of shards shall have
the exclusive right to receive dividends thereon and to vote
thereon as such owner and, except only as may be required by law,
may in all respects be treated by the corporation as the
exclusive owner thereof.
It shall be the duty of each stockholder to notify the
corporation of his post office address.
Section 4. Loss of Certificates. In case of the alleged
loss or destruction, or the mutilation of a certificate of stock,
a duplicate certificate may be issued in place thereof, upon such
reasonable terms as the board or directors may prescribe.
ARTICLE III.
Stockholders.
Section 1. Annual Meeting. The annual meeting of
stockholders generally entitled to vote shall be held on the
third Wednesday of April in each year, if it be not a legal
holiday, and if it be a legal holiday, then on the next
succeeding full business day not a legal holiday. Annual
meetings of stockholders shall be held at the office of the
corporation in the Town of Westborough, Massachusetts, or at such
other place in Massachusetts as the president or a majority of
the directors may designate. Purposes for which annual meetings
are to be held additional to those prescribed by law, by the
agreement of association and by these by-laws may be specified by
the board of directors or by writing signed by the president or
by a majority of the directors or by stockholders who hold at
least one-tenth of the aggregated par value of the capital stock
entitled to vote at the meeting. If any such annual meeting is
omitted on the day herein provided therefor, a special meeting
may be held in place thereof, and any business transacted or
elections held at such meeting shall have the same effect as if
transacted or held at said annual meeting.
Section 2. Special Meetings. Special meetings of the
stockholders may be called to be held anywhere in Massachusetts
by the president or by a majority of the directors, and shall be
called by the clerk or, in case of the death, absence, incapacity
or refusal of the clerk, by any other officer of the corporation,
<PAGE>
upon written application of stockholders who hold at least one-
tenth of the aggregate par value of the capital stock entitled to
vote at the meeting, stating the time, place and purpose of the
meeting.
Section 3. Notice of Meetings. Except as otherwise
provided in Section 4 of Article I, a written or printed notice
of each meeting of stockholders, stating the place, day and hour
thereof and the purpose for which the meeting is called, shall be
given by the clerk, at least seven days before such meeting, to
each stockholder entitled to vote thereat, by leaving such notice
with him or at his residence or usual place of business, or by
mailing it, postage prepaid and addressed to such stockholder at
his address as it appears upon the books of the corporation. In
the absence or disability of the clerk, such notice may be given
by a person designated either by the clerk or by the person or
persons calling the meeting or by the board of directors. No
notice of the time, place or purpose of any regular or special
meeting of the stockholders shall be required if every
stockholder entitled to notice thereof is present in person or is
represented at the meeting by proxy or if every such stockholder,
or his attorney thereunto authorized, by a writing which is filed
with the records of the meeting, waives such notice.
Section 4. Quorum. Except as otherwise provided in
Section 4 of Article I, at any meeting of the stockholders, a
majority in interest of all stock issued and outstanding and
entitled to vote upon a question to be considered at the meeting
shall constitute a quorum for the consideration of such question,
but a lesser interest may adjourn any meeting from time to time,
and the meeting may be held as adjourned without further action.
When a quorum is present at any meeting, a majority of the stock
represented thereat and entitled to vote shall, except where a
larger vote is required by law, by the agreement of association
or by these by-laws, decide any question brought before such
meeting.
Section 5. Proxies and Voting. Subject to the
provisions of Article I hereof and to provisions of law,
stockholders who are entitled to vote shall have one vote for
each share of stock owned by them, except that holders of
Preferred Stock-Cumulative shall have one-quarter vote for each
share of such stock owned by them. Stockholders may vote either
in person or by proxy in writing dated not more than six (6)
months before the meeting named therein, which shall be filed
with the clerk of the meeting before being voted. Such proxies
shall entitle the holders thereof to vote at any adjournment of
such meeting but shall not be valid after the final adjournment
of such meeting.
ARTICLE IV.
Directors.
Section 1. Powers. The board of directors shall have,
and may exercise, all the powers of the corporation, except such
<PAGE>
as are conferred upon the stockholders by law, by the agreement
of association and by these by-laws.
Section 2. Election. A board of not less than three
directors shall be chosen by ballot at the annual meeting of the
stockholders or at the special meeting held in place thereof, or
as provided in Section 4 of Article I. The number of directors
for each corporate year shall be fixed by vote at the meeting at
which they are elected but the stockholders may, at any special
meeting held for the purpose during any such year, increase or
decrease (within the limit above specified) the number of
directors as thus fixed, and elect new directors to complete the
number so fixed, or remove directors to reduce the number of
directors to the number so fixed; provided, however, that while
thee are four (4) full quarterly dividends in default on the
Dividend Series Preferred Stock and the Preferred Stock-
Cumulative the number of such directors shall be fixed in
accordance with Section 4 of Article I. No director need be a
stockholder. Subject to law, to the articles of organization, to
the terms of the Dividend Series Preferred Stock and the
Preferred Stock -Cumulative and to the other provisions of these
by-laws, each director shall hold office until the next annual
meeting of the stockholders electing such director and until his
successor is chosen and qualified.
Section 3. Regular Meeting. Regular meetings of the
board of directors may be held at such places and at such times
as the board may by vote from time to time determine, and if so
determined, no notice thereof need be given. A regular meeting
of the board of directors may be held without notice immediately
after, and at the same place as the annual meeting of the
stockholders, or the special meeting of the stockholders held in
place of such annual meeting.
Section 4. Special Meetings. Special meetings of the
board of directors may be held at any time and at any place when
called by the president, treasurer or two or more directors,
reasonable notice thereof being given to each director, or at any
time without call or formal notice, provided all the directors
are present or waive notice thereof by a writing which is filed
with the records of the meeting. In any case it shall be deemed
sufficient notice to a director to send notice by mail or
telegram at least forty-eight hours before the meeting addressed
to him as his usual or last known business or residence address.
Section 5. Quorum. A majority of the board of
directors shall constitute a quorum for the transaction of
business, but a less number may adjourn any meeting from time to
time, and the meeting may be held as adjourned without further
notice. Except as otherwise provided, when a quorum is present
at any meeting, a majority of the members in attendance thereat
shall decide any question brought before such meeting.
Section 6. Vacancies. If the office of any director,
one or more, elected by the stockholders generally entitled to
vote, becomes vacant by reason of death, resignation, removal,
disqualification or otherwise, the remaining directors so
<PAGE>
elected, though less than a quorum, may, unless such vacancy
shall have been filled by the stockholders generally entitled to
vote, choose by a majority vote of their entire number, a
successor or successors, who shall hold office for the unexpired
term. Any vacancy in the office of a director elected by holders
of the Dividend Series Preferred Stock and the Preferred Stock-
Cumulative shall be filled as provided in Section 4 of Article I.
ARTICLE V.
Officers.
Section 1. Election and Appointment. The officers shall
be a president, a clerk, a treasurer and such other officers and
agents as the board of directors may in their discretion appoint.
The treasurer and the clerk shall be chosen by ballot at the
annual meeting of the stockholders generally entitled to vote.
The president shall be elected annually by the board of directors
after its election by the stockholders. The president shall be a
director. The clerk shall be a resident of Massachusetts. So
far as is permitted by law, any two or more offices may be filled
by the same person. Subject to law, to the agreement of
association and to the other provisions of theses by-laws, the
treasurer and clerk shall each hold office until the next annual
meeting of stockholders generally entitled to vote and until his
successor is chosen and qualified, the president shall hold
office until the first meeting of directors after the next annual
meeting of stockholders generally entitled to vote and until his
successor is chosen and qualified and the other officers and
agents shall hold office during the pleasure of the board of
directors or for such term as the board of directors shall
prescribe. Each officer shall, subject to these by-laws, have in
addition to the duties and powers herein set forth such duties
and powers as are commonly incident to his office, and such
duties and powers as the board of directors shall from time to
time designate.
Section 2. President. Except as otherwise determined by
the board of directors, the president shall be the chief
executive officer of the corporation and shall preside at all
meetings of the stockholders and of the board of directors at
which he is present. The president shall have custody of the
treasurer's bond.
Section 3. Clerk. The clerk shall keep an accurate
record of the proceedings of all meetings of the stockholders in
books provided for the purpose, which books shall be kept at the
principal office of the corporation and shall be open at all
reasonable times to the inspection of any stockholder. In the
absence of the clerk at any such meeting, a temporary clerk shall
be chosen, who shall record the proceedings of such meeting in
the aforesaid books. The clerk and such temporary clerk shall be
sworn.
If no secretary is appointed, the clerk shall also keep
accurate minutes of all meetings of the board of directors and in
his absence from any such meeting a temporary clerk shall be
<PAGE>
chosen, who shall be sworn and shall record the proceedings of
such meeting.
Section 4. Secretary. If a secretary is appointed, he
shall keep accurate minutes of all meetings of the board of
directors, and in his absence from any such meeting a temporary
secretary shall record the proceedings thereof.
Section 5. Treasurer. The treasurer shall, subject to
the direction and under the supervision of the board of
directors, have general charge of the financial concerns of the
corporation and the care and custody of the funds and valuable
papers of the corporation, except his own bond, and he shall have
power to endorse for deposit or collection all notes, checks,
drafts, etc., payable to the corporation or its order, and to
accept drafts on behalf of the corporation. He shall keep, or
cause to be kept, accurate books of account, which shall be the
property of the corporation. If required by the board of
directors he shall give bond for the faithful performance of his
duty in such form, in such sum, and with such sureties as the
board of directors shall require.
Any assistant treasurer shall have such powers as the board
of directors shall from time to time designate.
Section 6. Removals. The stockholders generally
entitled to vote may, at any special meeting called for the
purpose, by vote of a majority of the capital stock issued and
outstanding and generally entitled to vote, remove from office
the treasurer, clerk or any director elected by the stockholders
generally entitled to vote, and elect his successor. The board
of directors may likewise, by vote of a majority of their entire
number, remove from office any officer or agent of the
corporation; provided, however, that the board of directors may
remove the treasurer or clerk for cause only.
Section 7. Vacancies. If the office of any officer or
agent, one or more, becomes vacant by reason of death,
resignation, removal, disqualification or otherwise, the
directors may, unless such vacancy, if in the office of the
treasurer or clerk, shall have been filled by the stockholders
generally entitled to vote, choose by a majority vote of their
entire number, a successor or successors, who shall hold office
for the unexpired term, subject to the provisions of Section 6 of
this Article V.
ARTICLE V-A
Liability and Indemnification.
No director of the corporation shall be personally liable to
the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director notwithstanding any
provision of law imposing such liability, except with respect to
any matter as to which such liability shall have been imposed (i)
for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not
<PAGE>
in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section sixty-one or sixty-
two of chapter one hundred and fifty-six B of the General Laws of
Massachusetts, or (iv) for any transaction from which the
director derived an improper personal benefit.
The corporation shall indemnify each of its directors and
officers against any loss, liability or expense, including
amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and counsel fees, imposed upon or reasonably
incurred by him in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal,
including but not limited to derivative suits (to the extent
permitted by law), in which he may be involved or with which he
may be threatened, while in office or thereafter, by reason of
his being or having been a director or officer, except with
respect to any matter as to which he shall have been adjudicated
in such action, suit or proceeding not to have acted in good
faith in the reasonable belief that his action was in the best
interests of the corporation, or, to the extent that such matter
relates to service with respect to any employee benefit plan, as
in the best interests of the participants or beneficiaries of
such plan. As to any matter disposed of by a compromise payment
by a director or officer, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any
other expenses shall be provided unless such compromise shall be
approved as in the best interests of the corporation, after
notice that it involves such indemnification, if no change in
control has occurred (a) by a disinterested majority of the
directors then in office, (b) by a majority of the disinterested
directors then in office, provided that there has been obtained
an opinion in writing of independent legal counsel to the effect
that such director or officer appears to have acted in good faith
in the reasonable belief that his action was in the best
interests of the corporation, or (c) by the vote, at a meeting
duly called and held, of the holders of a majority of the shares
outstanding and entitled to vote thereon, exclusive of any shares
owned by any interested director or officer or, if a change in
control shall have occurred, by an opinion in writing of
independent legal counsel to the effect that such director or
officer appears to have acted in good faith in the reasonable
belief that his action was in the best interests of the
corporation.
Expenses incurred with respect to the defense or disposition
of any action, suit or proceeding heretofore referred to in this
Article shall be advanced by the corporation prior to the final
disposition of such action, suit or proceeding, upon receipt of
an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to
indemnification, which undertaking shall be accepted without
reference to the financial ability of the recipient to make such
repayment. If in an action, suit or proceeding brought by or in
right of the corporation, a director is held not liable, whether
because relieved of liability under the first paragraph of this
Article or otherwise, he shall be deemed to have been entitled to
<PAGE>
indemnification for expenses incurred in defense of said action,
suit or proceeding.
(i) The term "officer" includes (a) persons who serve
at the request of the corporation as directors, officers, or
trustees of another organization and (b) employees of the
corporation and its affiliates who serve in any capacity
with respect to benefit plans for the corporation's
employees.
(ii) An "interested director" or officer is one against
whom in such capacity the proceeding in question or another
proceeding on the same or similar grounds is then pending.
(iii) A "change in control" occurs when (a) any
individual, corporation, association, partnership, joint
venture, trust or other entity or association thereof acting
in concert (excluding any employee benefit plan, dividend
reinvestment plan or similar plan of the corporation, or any
trustee thereof acting in such capacity) acquires more than
20% of the corporation's outstanding stock having general
voting rights or more than 20% of the common shares of any
entity owning more than 50% of the corporation's outstanding
stock having general voting rights, whether in whole or in
part, by means of an offer made publicly to the holders of
all or substantially all of such outstanding stock or shares
to acquire stock or shares for cash, other property, or a
combination thereof or by any other means, unless the
transaction is consented to by vote of a majority of the
continuing directors; or (b) continuing directors cease to
constitute a majority of the board.
(iv) The term "continuing director" shall mean any
director of the corporation who (a) was a member of the
board of directors of the corporation on the later of
January 1, 1987, or the date the director or officer seeking
indemnification first became such, or (b) was recommended
for his initial term of office by a majority of continuing
directors in office at the time of such recommendation.
Nothing contained in this Article shall (i) limit the power
of the corporation to indemnify employees and agents of the
corporation or its subsidiaries other than directors and officers
on any terms it deems appropriate not prohibited by law, (ii)
limit the power of the corporation to indemnify directors and
officers for expenses incurred in suits, actions, or other
proceedings initiated by such director of officer or (iii) affect
any rights to indemnification to which corporation personnel
other than directors and officers may be entitled by contract or
otherwise. The rights provided in this Article shall not be
exclusive of or affect any other right to which any director or
officer may be entitled and such rights shall inure to the
benefit of its or his successors, heirs, executors,
administrators and other legal representatives. Such other
rights shall include all powers, immunities and rights of
reimbursement allowable under the laws of The Commonwealth of
Massachusetts.
<PAGE>
The provisions of this Article shall not apply with respect
to any act or omission occurring prior to June 25, 1987. No
amendment to or repeal of this Article shall apply to or have any
effect upon the liability, exoneration or indemnification of any
director or officer for or with respect to any acts or omissions
of the director or officer occurring prior to such amendment or
repeal.
ARTICLE VI.
Seal.
The seal of the corporation shall, subject to alteration by
the board of directors, consist of a flat-faced circular die with
the words "New England Power Company Massachusetts" on the
periphery, and the words "Corporate Seal Consolidated 1916"
within the circle, cut or engraved thereon.
ARTICLE VII.
Execution of Papers.
Except as the board of directors may generally or in
particular cases authorized the execution thereof in some other
manner, all deeds, leases, transfers, contracts, bonds, notes,
checks, drafts and other obligations made, accepted or endorsed
by the corporation, shall be signed by the president, any vice-
president, the treasurer or any assistant treasurer.
ARTICLE VII.
Fiscal Year.
Except as from time to time otherwise provided by the board
of directors, the fiscal year of the corporation shall be the
calendar year.
ARTICLE IX.
Amendments.
Subject to the provisions of law and of the Dividend Series
Preferred Stock and the Preferred Stock-Cumulative, these by-laws
may be amended, altered or repealed by a vote of a majority of
the outstanding capital stock generally entitled to vote at any
meeting of such stockholders, provided notice of the proposed
amendment, alteration or repeal is given in the notice of said
meeting.
<PAGE>
NEW ENGLAND POWER COMPANY
--------------------------
Primary Service for Resale
AMENDMENT TO SERVICE AGREEMENT
------------------------------
Effective Date Commencing on the later of July 1, 1996 or the date that all
and Term: required regulatory approvals necessary to implement the
Massachusetts Electric Company Pilot Programs are granted by
the Federal Energy Regulatory Commission ("FERC") (on this
amendment and in Docket No ER96-1309-000), the Securities
and Exchange Commission and continuing through December 31,
1997 for the Residential and Small Commercial Pilot Program
or until retail access is generally available for the MHTC
Pilot Program (the "Term").
Parties: NEW ENGLAND POWER COMPANY
A Massachusetts Corporation ("NEP" or the "Company")
25 Research Drive
Westborough, Massachusetts 01582
and
MASSACHUSETTS ELECTRIC COMPANY
A Massachusetts Corporation ("Mass. Electric")
25 Research Drive
Westborough, Massachusetts 01582
WHEREAS, Mass. Electric is an all-requirements customer under NEP's FERC
Electric Tariff, Original Volume 1 ("Tariff No. 1");
WHEREAS, Mass. Electric wishes to implement two retail electric pilot
programs (the "Pilot Programs"), the first for residential and small
commercial and industrial customers located in the cities of Lawrence, Lynn,
Northampton, and Worcester for up to 100 million kilowatthours per year (the
"Residential and Small Commercial Pilot Program"), and the second for members
of the Massachusetts High Technology Council ("MHTC") served under Mass.
Electric's G-3 Rate for up to 200 million kilowatthours per year (the "MHTC
Pilot Program");
WHEREAS, the implementation of the Pilot Programs requires Mass.
Electric to allow the kilowatthour sales in the Pilot Programs to be served by
suppliers other than Mass. Electric for the Term of the Pilot Programs; and
WHEREAS, the Pilot Programs have been approved by the Massachusetts
Department of Public Utilities;
THEREFORE, NEP and Mass. Electric agree to amend Mass. Electric's Tariff
No. 1 Service Agreement as follows:
1. NEP agrees to waive during the Term those requirements of Tariff
No. 1 that obligate Mass. Electric to buy all of its electricity
requirements under Tariff No. 1 only to the extent necessary to
implement the Pilot Programs. This waiver is conditioned on Mass.
Electric's payment of the access charges set forth in Paragraph 4.
At the end of the Term, the foregoing waiver shall expire, and
Mass. Electric shall again be bound by all of the requirements
under its Tariff No. 1 Service Agreement;
<PAGE>
2. NEP also agrees during the Term to credit its purchased power and
fuel billings to assure that the implementation of the Pilot
Programs is revenue neutral to NEP's other customers and that the
NEP's fuel adjustment factor does not change for NEP's Tariff No.
1 sales despite the reduction in purchases by Mass. Electric
during the Term. The calculation of this credit is shown on
Attachment 1 to this amendment. In addition, NEP agrees during
the Term to credit Mass. Electric's fixed payments to NEP to
assure that the average cost of purchased power expense to Mass.
Electric's customers who do not participate in the Pilot Programs
remains unchanged as a result of the Pilot Programs. The
calculation of this credit on Mass. Electric's bill is shown on
Attachment 2 to this amendment.
3. NEP agrees to execute all appropriate waivers and consents
necessary to allow its affiliate, NEES Transmission Company (NEES
Trans), to provide access during the Term to the retail customers
participating in the Pilot Programs through service agreements
under NEES Trans network service tariff with Mass. Electric.
Continuation of these consents and waivers shall be conditioned
upon continued payment of the access charges listed below.
4. As consideration for NEP's waiver, as set forth in Paragraph 1,
above, Mass. Electric agrees to pay NEP access charges equal to
three cents per kilowatthour for all electricity transmitted or
distributed under Mass. Electric's unbundled tariffs, or by any
other party, to customers participating in the Pilot Programs who
are located within Mass. Electric's service territory.
IN WITNESS WHEREOF, Mass. Electric and NEP hereby, as of the date
written below, execute this Amendment to Mass. Electric's Tariff No. 1 Service
Agreement.
NEW ENGLAND POWER COMPANY
By ___________________________________
Title ___________________________________
Date ___________________________________
MASSACHUSETTS ELECTRIC COMPANY
By ___________________________________
Title ___________________________________
Date ___________________________________
<PAGE>
NEW ENGLAND POWER COMPANY
--------------------------
PRIMARY SERVICE FOR RESALE
---------------------------
AMENDMENT TO SERVICE AGREEMENT
-------------------------------
Dated as of: February 1, 1997
Parties: NEW ENGLAND POWER COMPANY,
a Massachusetts corporation (the "Company")
and
MASSACHUSETTS ELECTRIC COMPANY and
NANTUCKET ELECTRIC COMPANY,
Massachusetts corporations (the "Customer"),
WHEREAS, the Customer is currently an all-requirements electric customer
of the Company under the Company's FERC Tariff, Original Volume No. 1 (the
"Tariff"), and a Service Agreement as amended (the "Service Agreement"); and
WHEREAS, under the Service Agreement, the Customer purchases from the
Company for resale all of the electric requirements of the ultimate customers
in the Customer's service territory; and
WHEREAS, the Customer desires to terminate the requirement that it
purchase all of the electric requirements of the customers in its service
territory from the Company under the Tariff before the term of the Service
Agreement has expired, and to retain the flexibility to terminate such
purchase requirement on or after January 1, 1998, upon the introduction of
retail choice for all customers of investor-owned utilities in Massachusetts
or upon another such date designated by the Customer; and
WHEREAS, the Customer desires to continue to receive transmission
service over the transmission facilities owned or operated by the Company
after the termination of its purchases under the Tariff; and
WHEREAS, the Customer desires to retain the option, but not the
obligation, to purchase electricity from the Company after the termination of
its purchases under the Tariff or the option for the ultimate customers in the
Customer's service territory to do so; and
WHEREAS, the Company is willing to permit the Customer to terminate its
purchase requirement before the Term has expired and to provide the options
desired by the Company, but only upon the terms and conditions set forth in
this Amendment to Service Agreement ("Amendment");
NOW, THEREFORE, the Company and the Customer, in consideration of their
mutual commitments set forth herein, agree as follows:
1. The Parties agree that, notwithstanding anything to the contrary
in the Service Agreement or in the Tariff, the Customer's obligation to
purchase electricity under the Service Agreement and the Company's obligation
to provide electricity under the Service Agreement shall terminate as of the
Contract Termination Date, which shall be determined pursuant to section 2 of
this Amendment. Except as provided in Section 7, below, or in a separate
contract for power supply, the Company shall have no further obligation to
meet the electricity demands of the ultimate customers in the service
territory of the Customer on or after the Contract Termination Date, or to
make any plan, investment, purchase, or commitment to maintain sufficient
generating capacity to provide adequate, continuous, or reliable electricity
supplies to the Customer or its ultimate customers on or after such date.
<PAGE>
2. The Contract Termination Date shall be defined as the first to
occur of the Retail Access Date, determined in accordance with sub-paragraph
(a) or the Wholesale Access Date, determined in accordance with sub-paragraph
(b).
(a) The Retail Access Date shall be the later of (i) January 1,
1998; or (ii) the date when retail access is made available to all
ultimate customers of the investor-owned electric utilities in
Massachusetts; provided, however, that in the event the condition stated
in clause (ii) is not satisfied by January 1, 1998, the Customer in its
sole discretion shall have the option to accelerate the Retail Access
Date and implement retail access for its ultimate customers in its
service territory by providing the Company at least 90 days advance
written notice of the date such access shall be made available.
(b) The Wholesale Access Date shall be the date upon which the
Customer in its sole discretion decides to terminate purchases under
Tariff 1 and the Service Agreement, provided that such date shall not be
earlier than January 1, 1998 and provided further that the Customer
shall give the Company at least 90 days advance written notice of its
declaration of the Wholesale Access Date.
3. After the Contract Termination Date, the Customer shall pay to the
Company the Contract Termination Charges determined in accordance with
Appendix 1 and the Schedules attached to this Amendment, which set forth Base
Contract Termination Charges and formulae for the adjustment of the Base
Contract Termination Charges.
4. For service under the Tariff prior to the Contract Termination
Date, the Company shall charge and the Customer shall pay the Demand and
Energy Charges shown on Fifty-third Revised Page No. 1 of Schedule II-A, which
sets forth the W-95(S) rates, and, except as provided in footnote 1 below,
such charges shall not be subject to change during such period for service to
the Customer/1/; provided, however, nothing in this agreement shall preclude
the Company from requesting an increase in rates that may become effective
after suspension on January 1, 2001, if the Contract Termination Date has not
occurred by that time.
______________________
/1/ By April 1 of each year after 1998 during which the Retail Access Date or
the Contract Termination Date pursuant to footnote 4 of the Agreement has not
occurred, the Company shall file a report with the Commission calculating its
return on equity for the prior calendar year using the earnings available for
common equity as reported to the Securities and Exchange Commission in the
Company's annual report divided by the average of the thirteen monthly common
equity balances on the Company's books for the same period. The Company's
earnings available for common equity and common equity balances shall be
adjusted to eliminate the effects of any writedown and to restore expenses
associated with any such writedown that may result from the implementation of
industry restructuring or this Agreement. If the Company's return so
calculated is above 11.75 percent, it shall calculate the revenue requirement
associated with 72.6 percent of the excess above 11.75 percent and shall: (1)
refund to the Customer revenues sufficient to cause the Customer's return on
equity for the prior calendar year to reach 11.75 percent; and (2) accrue the
balance to the Reconciliation Account established under Section 3.4 of this
Agreement. The obligation in this footnote shall cease as of the Retail
Access Date or the Contract Termination Date pursuant to footnote 4 of the
Agreement.
<PAGE>
5. Notwithstanding anything to the contrary in the Tariff or the
Service Agreement, the Contract Termination Charges specified in Appendix 1
and attached Schedules to this Amendment shall remain in effect until the
Company has collected all amounts subject to collection thereunder and neither
the Customer's obligation to pay the Contract Termination Charges in full nor
the formulae for the calculation of the Contract Termination Charges set forth
in Appendix 1 and the attached Schedules to this Amendment shall be subject to
change through application to the Federal Energy Regulatory Commission
pursuant to the provisions of Section 205 or Section 206 of the Federal Power
Act, absent the agreement of the Company or its successors or assigns.
6. Commencing on the Contract Termination Date, the Company
(including any successor or assign of the Company that succeeds to the
Company's obligations with respect to the operation of its transmission
facilities) shall, upon request of the Customer, provide network integration
transmission service to the Customer in accordance with the Service Agreement
for Network Integration Transmission Service between the Customer and the
Company of even date, and with the terms and conditions of the tariff
maintained in effect by the Company for such service, or in accordance with
the policy of the Federal Energy Regulatory Commission as in effect from time
to time. Such service shall be provided to the Customer after the Wholesale
Access Date to enable the Customer to integrate its loads and resources and
shall be provided to the Customer after the Retail Access Date to enable the
ultimate customers in the Customer's service territory to integrate their
loads and resources.
7. For the period commencing on the Contract Termination Date and
extending through December 31, 2004 (the "Standard Offer Period"), the Company
shall provide service to the Customer in accordance with this section 7, such
service being referred to as "Standard Offer Service."
(a) Standard Offer Service shall be made available at the prices
set forth in the Stipulation and Agreement, adjusted for a fuel index.
The prices for Standard Offer Service do not include charges for
transmission services provided in accordance with section 6 of this
Amendment, or charges for distribution services under the Customer's
rates for distribution services, but otherwise reflect the price of
electricity delivered to the meters of the ultimate customers of the
Customer.
(b) Standard Offer Service shall be made available by the
Company to the Customer after the Wholesale Access Date for the purposes
set forth in paragraph D of Schedule I of the Tariff or to the Company
for resale to those ultimate customers in the Customer's service
territory who elect to purchase Standard Offer Service after the Retail
Access Date and have not terminated Standard Offer Service to purchase
electricity from another supplier, provided that, neither the Customer
nor the ultimate customers shall be required to purchase Standard Offer
Service from the Company. For the first year after the Retail Access
Date, the Company shall make Standard Offer Service available to all
residential or G-1 customers of the Customer, who have previously taken
service from an alternative supplier, if such residential or G-1
customer elects to return to Standard Offer Service within 120 days of
taking service from the alternative supplier.
(c) In the event the Contract Termination Date is determined by
the Wholesale Access Date, the Customer shall be free, either in its
notice pursuant to section 2(b), or thereafter by giving the Company at
least 90 days advance written notice directed to the first day of a
calendar month, to terminate or reduce its purchases of Standard Offer
Service from the Company in order to obtain electricity from other
suppliers in the market. Once the Customer has reduced or terminated
its purchases of Standard Offer Service from the Company, the Company
shall have no obligation to supply Standard Offer Service to the
Customer with respect to the terminated or reduced purchases.
<PAGE>
(d) No less than 90 days before the Retail Access Date, the
Customer shall notify the Company in writing of the quantity of energy
it shall purchase under Standard Offer Service for resale to ultimate
customers in its service territory. The Customer shall provide the
Company with at least 30 days prior advance written notice, directed to
the first day of a calendar month, of reductions in the quantity of
energy so purchased due to decisions by customers initially electing
Standard Offer Service to purchase electricity from other suppliers
after the Retail Access Date. Nothing in this Amendment shall restrict
the right of any ultimate customer to purchase electricity from other
suppliers after the Retail Access Date, provided that, except as set
forth in section 7(b), above, once any such ultimate customer has
purchased electricity from another supplier, the Company shall have no
obligation to supply Standard Offer Service to the Customer for resale
to such ultimate customer.
(e) The Company acknowledges that the Customer will offer
alternative power suppliers the opportunity in an auction to supply
electricity to enable the Customer to provide Standard Offer Service to
ultimate customers in its service territory after the Retail Access
Date. The Company shall be free to bid in the auction, provided that
the Company's bid shall not exceed the prices set forth in the
Stipulation and Agreement, adjusted for the fuel index set forth in that
Agreement.
8. This Amendment shall take effect as of the date it is permitted to
become effective by the Federal Energy Regulatory Commission, which date shall
be referred to as the "Effective Date." This Amendment, together with all
provisions of the Tariff and the Service Agreement necessary to effectuate all
provisions of this Amendment, shall remain in effect until all obligations of
the parties under this Amendment, including, without limitation, the
obligation of the Customer to pay to the Company the Contract Termination
Charges, have been discharged in full. Upon the discharge in full of all such
obligations, this Amendment and the Service Agreement shall terminate.
9. The provisions of this Amendment shall override any inconsistent
provisions of the Service Agreement and, with respect to the Customer, all
inconsistent provisions of the Tariff, but all provisions of the Tariff and
the Service Agreement that are not inconsistent with this Amendment shall
remain in full force and effect.
10. The rights conferred and obligations imposed on the Customer and
Company under this Amendment shall be binding on or inure to the benefit of
their successors in interest or assignees as if such successor or assignee was
itself a signatory hereto.
IN WITNESS WHEREOF, the parties have executed this Amendment of Service
Agreement as of the date first written above.
NEW ENGLAND POWER COMPANY
By
Its
MASSACHUSETTS ELECTRIC COMPANY
By
Its
NANTUCKET ELECTRIC COMPANY
By
Its
<PAGE>
NEW ENGLAND POWER COMPANY
PRIMARY SERVICE FOR RESALE
--------------------------
AMENDMENT OF SERVICE AGREEMENT
------------------------------
Dated: October 30, 1995
Parties: NEW ENGLAND POWER COMPANY
a Massachusetts corporation (the "Company")
25 Research Drive
Westboro, Massachusetts 01582
and
THE NARRAGANSETT ELECTRIC COMPANY
a Rhode Island corporation (the "Customer")
280 Melrose St.
Providence, Rhode Island 02901
The undersigned hereby agree to the following amendment of the Service
Agreement between them for Primary Service dated February 15, 1974, such
amendment to become effective upon acceptance by the Federal Energy Regulatory
Commission:
In Appendix A forming part of said Service Agreement, "Thirty-
fourth Revised Page No. 4", copy of which is attached to this
agreement, supersedes and is substituted for "Thirty-third Revised
Page No. 4".
WITNESS the corporate names of the parties, by their proper officers
thereunto duly authorized, on the date first above written.
Executed in duplicate.
NEW ENGLAND POWER COMPANY
By
Vice President
THE NARRAGANSETT ELECTRIC COMPANY
By
President
<PAGE>
CERTIFICATE OF CONCURRENCE
This is to certify that THE NARRAGANSETT ELECTRIC COMPANY assents to the
filing of and concurs in the amendment described below, which NEW ENGLAND
POWER COMPANY has filed, insofar as it is one of the parties providing
electric service thereunder, and hereby files this certificate of concurrence
in lieu of the filing of the amendment specified:
Amendment to Service Agreement for the Primary Service for Resale with
New England Power Company dated February 15, 1974 (The Narragansett
Electric Company, FERC Electric Tariff, Original Volume Number 1).
THE NARRAGANSETT ELECTRIC COMPANY
By
President
Dated: October 30, 1995
<PAGE>
NEW ENGLAND POWER COMPANY
--------------------------
PRIMARY SERVICE FOR RESALE
---------------------------
AMENDMENT TO SERVICE AGREEMENT
------------------------------
Dated as of: February 1, 1997
Parties: NEW ENGLAND POWER COMPANY,
a Massachusetts corporation (the "Company" or "NEP")
and
THE NARRAGANSETT ELECTRIC COMPANY
a Rhode Island corporation (the "Customer" or
"Narragansett"),
WHEREAS, the Customer is currently an all-requirements electric customer
of the Company under the Company's FERC Tariff, Original Volume No. 1 (the
"Tariff"), and a Service Agreement as amended (the "Service Agreement"); and
WHEREAS, under the Service Agreement, the Customer purchases from the
Company for resale all of the electric requirements of the ultimate customers
in the Customer's service territory; and
WHEREAS, the Rhode Island General Assembly passed into law the Rhode
Island Utility Restructuring Act of 1996 ("URA"), which extends wholesale
competition in power supply markets to retail customers through the provision
of retail access directly to Narragansett's customers; and
WHEREAS, the termination of all-requirements service under the Tariff
and the provision of unbundled transmission service by the Company to
Narragansett under the Company's open access tariff are necessary to implement
retail access in a manner consistent with the URA; and
WHEREAS, the Customer desires to comply with the URA to terminate the
requirement that it purchase all of the electric requirements of the customers
in its service territory from the Company under the Tariff before the term of
the Service Agreement has expired, and to retain the flexibility to terminate
its purchase requirement entirely on the date when standard offer service is
made available to all distribution customers of Rhode Island electric
utilities pursuant to the terms of the URA; and
WHEREAS, the Customer desires to continue to receive transmission
service over the transmission facilities owned or operated by the Company
after the termination of its purchases under the Tariff; and
<PAGE>
WHEREAS, the Customer desires to retain the option, but not the
obligation, to purchase electricity from the Company after the termination of
its purchases under the Tariff or the option for the ultimate customers in the
Customer's service territory to do so; and
WHEREAS, the Company is willing to permit the Customer to terminate its
purchase requirement before the Term has expired and to provide the options
desired by the Customer, but only upon the terms and conditions set forth in
this Amendment to Service Agreement ("Amendment");
NOW, THEREFORE, the Company and the Customer, in consideration of their
mutual commitments set forth herein, agree as follows:
1. The Parties agree that, notwithstanding anything to the contrary
in the Service Agreement or in the Tariff, the Customer's obligation to
purchase electricity under the Service Agreement and the Company's obligation
to provide electricity under the Service Agreement shall be reduced as of July
1, 1997, in accordance with the Retail Access Schedule (as defined in Section
2 of this Amendment), and shall terminate as of the Contract Termination Date,
which shall be determined pursuant to Section 3 of this Amendment. Except as
provided in Section 9 below, or in a separate contract for power supply, the
Company shall have no further obligation to meet the electricity demands of
the ultimate customers in the service territory of the Customer on or after
the Contract Termination Date, or to make any plan, investment, purchase, or
commitment to maintain sufficient generating capacity to provide adequate,
continuous, or reliable electricity supplies to the Customer or its ultimate
customers on or after such date.
2. The Customer shall not be obligated to purchase, and the Company
shall not be obligated to supply, electricity required by any distribution
service customer of the Customer, or its successor or assign, that is taking
retail access in accordance with the following schedule ("Retail Access
Schedule"):
Phase 1: On July 1, 1997, the following customers shall have retail access:
(i) all new commercial and industrial customers, including new
manufacturing customers, commencing service on or after July 1,
1997, with an anticipated average annual demand of two hundred
(200) kilowatts or greater; (ii) all existing manufacturing
customers with an average annual demand of fifteen hundred (1500)
kilowatts or greater; and (iii) all accounts in the name of the
<PAGE>
State of Rhode Island, provided, however, the Customer may limit
retail access to no more than ten percent (10%) of its total
kilowatt-hour sales.
Phase 2: On January 1, 1998, retail access shall be extended to the
following customers: all existing manufacturing customers with an
average annual demand of two hundred (200) kilowatts or greater
and all accounts in the name of the cities and towns in Rhode
Island, provided, however, the Customer may limit retail access to
no more than twenty percent (20%) of its total kilowatt-hour
sales.
Phase 3: The remaining customers shall have retail access on the earlier to
occur of (i) the Retail Access Date defined in Section 3, below,
(ii) within three months after retail access is available to forty
percent (40%) or more of the kilowatt-hour sales in New England
including the total kilowatt-hour sales in Rhode Island, or (iii)
July 1, 1998, provided, however, if the Rhode Island Public
Utilities Commission ("Rhode Island Commission") extends the
deadline beyond July 1, 1998, then the remaining customers shall
have access on the extended date established by the Rhode Island
Commission.
3. The Contract Termination Date shall occur on the earlier of the
Retail Access Date, determined in accordance with subparagraph (a) or the
Wholesale Access Date, determined in accordance with subparagraph (b).
(a) The Retail Access Date shall be the later of January 1,
1998, or the date of a final nonappealable order of the Rhode
Island Commission approving the divestiture plan for the
disposition of the Company's non-nuclear generating facilities,
provided, however, that in any event, the Retail Access Date shall
occur no later than three months after retail access is available
to forty percent (40%) or more of the kilowatthour sales in New
England, including the total kilowatthour sales in Rhode Island.
(b) The Wholesale Access Date shall be the earlier of the Retail
Access Date or the date on which the Customer in its sole
discretion decides to terminate purchases under Tariff 1 and the
Service Agreement, provided that such date shall not be earlier
than January 1, 1998, and provided further that the Customer shall
<PAGE>
give the Company at least 90 days advance written notice of its
declaration of the Wholesale Access Date.
4. The Customer shall pay to the Company the Contract Termination
Charges determined in accordance with Appendix 1 and the Schedules attached to
this Amendment, which set forth Base Contract Termination Charges and formulae
for the adjustment of the Base Contract Termination Charges. Between July 1,
1997 and the Contract Termination Date, the Contract Termination Charges shall
apply to all kilowatthours delivered but not sold by the Customer, or its
successor or assign, in the Customer's Service Area. After the Contract
Termination Date, the Contract Termination Charges shall apply to all
kilowatthours delivered by the Customer, or its successor or assign in the
Customer's Service Area, whether or not such kilowatthours are sold by the
Customer. The Customer's Service Area is defined to include the area served
by the Customer on August 6, 1996. Kilowatthours delivered are defined to
include all kilowatthours delivered to electricity consumers in the Customer's
Service Area, whether or not they are present customers of the Customer.
5. For the period between July 1, 1997 and the Contract Termination
Date, the Company shall charge and the Customer shall pay the Demand and
Energy Charges shown on Fifty-third Revised Page No. 1 of Schedule II-A, which
sets forth the W-95(S) rates, for all kilowatts and kilowatthours purchased by
the Customer from the Company for resale to retail customers, and such charges
shall not be subject to change during such period for service to the Customer.
For the same period, the Company shall charge and the Customer shall pay the
Contract Termination Charges determined in accordance with Appendix 1 and the
Schedules attached to this Amendment for all kilowatthours delivered, but not
sold, to retail customers in its service territory, pursuant to the Retail
Access Schedule. During this period the Company shall reconcile recoveries
under W-95(S) rates and the Contract Termination Charge pursuant to procedure
set forth in Section 1.1.4 of Appendix 1. After the Contract Termination
Date, the Company's service under the W-95(S) rates will cease, and the
Company will charge and the Customer will pay the Contract Termination Charges
for all kilowatthours delivered to the Customer's Service Area. In addition,
the Company shall be obligated to provide the Customer with standard offer
service pursuant to Section 9, below.
<PAGE>
6. For the period between July 1, 1997 and the Contract Termination
Date, the Company will adjust non-fuel billings to the Customer to assure that
the Customer's average purchased power expense is not increased solely as a
result of the phase-in of retail access in Rhode Island. This adjustment is
necessary because of the Company's marginal cost rate design. The sales lost
as the result of the Customer's retail load beginning to purchase electricity
from other power producers would have been billed by the Company at its lower-
cost tail block rates. Thus, a billing adjustment is necessary to prevent the
average cost of power supply to the Customer and its remaining retail load
from increasing solely as a result of the phase-in of retail access.
Base rate adjustments will be established using estimated and/or actual
hourly loads provided to the Company on a monthly basis for Tariff No. 1
billing. The hourly loads will be summed to determine usage during On-Peak
Hours and Off-Peak Hours. The Customer will provide the average rate of
delivery associated with retail customers in its service territory who
purchased electricity from a power producer other than the Company during the
sixty-minute clock hour occurring at the time of the Company's peak load for
the month. These amounts ("the Retail Access Loads") need to be estimated
because the wholesale meter reads at the Company's interconnections with the
Customer cannot distinguish between requirements loads under the Company's
Tariff No. 1 and Retail Access Loads.
The Company will adjust the Customer's base rate purchased power expense
excluding the Retail Access Loads to equal what the base rate purchased
power expense would have been if the Retail Access Loads had continued to
purchase requirements service from the Customer. Adjustments will be made for
demand, on-peak energy and off-peak energy. The total adjustment shall equal
the sum of the: (1) Adjustment to Demand Related Expense, (2) Adjustment to
On-Peak Energy Expense, and (3) Adjustment to Off-Peak Energy Expense.
Formulas for each of these three adjustments are shown below.
ADJUSTMENT TO (Average Demand Average Demand ) Total kW
DEMAND RELATED = (Charge Including - Charge Excluding )x Purchases Excluding
EXPENSE (Retail Access Load Retail Access Load) Retail Access Load
ADJUSTMENT TO (Avg Peak Energy Avg Peak Energy ) Total Peak kWh
ON-PEAK = (Charge Including - Charge Excluding )x Purchases Excluding
ENERGY EXPENSE (Retail Access Load Retail Access Load) Retail Access Load
ADJUSTMENT TO (Avg Off-Pk Energy Avg OffPk Energy ) Total Off-Pk kWh
OFF-PEAK = (Charge Including - Charge Excluding )x Purchases Excluding
ENERGY EXPENSE (Retail Access Load Retail Access Load) Retail Access Load
<PAGE>
After the Contract Termination Date, the adjustments pursuant to this
paragraph shall cease.
7. Notwithstanding anything to the contrary in the Tariff or the
Service Agreement, the Contract Termination Charges specified in Appendix 1
and the attached Schedules to this Amendment shall remain in effect until the
Company has collected all amounts subject to collection thereunder and neither
the Customer's obligation to pay the Contract Termination Charges in full nor
the formulae for the calculation of the Contract Termination Charges set forth
in Appendix 1 and the attached Schedules to this Amendment shall be subject to
change through application to the Federal Energy Regulatory Commission
pursuant to the provisions of Section 205 or Section 206 of the Federal Power
Act, absent the agreement of the Company or its successors or assigns.
8. Notwithstanding anything to the contrary in Schedule III-B of the
Tariff, the Company will discontinue fixed credits to the Customer for
generation and transmission effective on the date or dates that the Customer's
integrated generation or transmission facilities are transferred to the
Company, a separate affiliate, or an unaffiliated third party. During any
period in which the Customer has transferred some, but less than all of its
generation or transmission facilities, the amount of the applicable fixed
credit, excluding municipal taxes and cost of removal expenses associated with
the South Street Station, will be prorated to reflect the remaining facilities
by multiplying the appropriate fixed credit for either generation or
transmission by the ratio of gross plant investment remaining to the total
gross plant. Nothing in this Amendment shall preclude the Company from
otherwise petitioning the FERC to adjust the level of the fixed credits in
accordance with the terms of the Tariff.
9. For the period commencing on the Contract Termination Date and
extending through December 31, 2009 (the "Standard Offer Period"),/1/ the
_______________________
/1/ Company and Customer shall have the right in their sole discretion
to shorten the period of standard offer service to December 31, 2004, if
Customer no longer has the obligation under the Rhode Island URA to extend
standard offer service through 2009.
<PAGE>
Company shall provide service to the Customer in accordance with this section,
such service being referred to as "Standard Offer Service."
(a) Standard Offer Service shall be made available at the
prices set forth in the Stipulation and Agreement, adjusted for a
fuel index. The prices for Standard Offer Service do not include
charges for transmission services provided in accordance with
section 10 of this Amendment, or charges for distribution services
under the Customer's rates for distribution services, but
otherwise reflect the price of electricity delivered to the meters
of the ultimate customers of the Customer.
(b) Standard Offer Service shall be made available by the
Company to the Customer after the Wholesale Access Date for the
purposes set forth in paragraph D of Schedule I of the Tariff or
to the Customer for resale to those ultimate customers in the
Customer's service territory who elect to purchase Standard Offer
Service after the Retail Access Date and have not terminated
Standard Offer Service to purchase electricity from another
supplier, provided that, neither the Customer nor the ultimate
customers shall be required to purchase Standard Offer Service
from the Company. For the first year after the Retail Access
Date, the Company shall make Standard Offer Service available to
all residential or Rate C-2 customers of the Customer, who have
previously taken service from an alternative supplier, if such
residential or Rate C-2 customer elects to return to Standard
Offer Service within 120 days of taking service from the
alternative supplier.
(c) In the event the Contract Termination Date is determined by
the Wholesale Access Date, the Customer shall be free, either in
its notice pursuant to section 3(b), or thereafter by giving the
Company at least 90 days advance written notice directed to the
first day of a calendar month, to terminate or reduce its
purchases of Standard Offer Service from the Company in order to
obtain electricity from other suppliers in the market. Once the
Customer has reduced or terminated its purchases of Standard Offer
Service from the Company, the Company shall have no obligation to
<PAGE>
supply Standard Offer Service to the Customer with respect to the
terminated or reduced purchases.
(d) No less than 90 days before the Retail Access Date, the
Customer shall notify the Company in writing of the quantity of
energy it shall purchase under Standard Offer Service for resale
to ultimate customers in its service territory. The Customer
shall provide the Company with at least 30 days prior advance
written notice, directed to the first day of a calendar month, of
reductions in the quantity of energy so purchased due to decisions
by customers initially electing Standard Offer Service to purchase
electricity from other suppliers after the Retail Access Date.
Nothing in this Amendment shall restrict the right of any ultimate
customer to purchase electricity from other suppliers after the
Retail Access Date, provided that, except as set forth in section
9(b), above, once any such ultimate customer has purchased
electricity from another supplier, the Company shall have no
obligation to supply Standard Offer Service to the Customer for
resale to such ultimate customer.
(e) The Company acknowledges that the Customer will offer
alternative power suppliers the opportunity in an auction to
supply electricity to enable the Customer to provide Standard
Offer Service to ultimate customers in its service territory after
the Retail Access Date. The Company shall be free to bid in the
auction, provided that the Company's bid shall not exceed the
prices set forth in the Stipulation and Agreement, adjusted for
the fuel index set forth in that Agreement.
10. In accordance with the Retail Access Schedule, the Company
(including any successor or assign of the Company that succeeds to the
Company's obligations with respect to the operation of its transmission
facilities) shall, upon request of the Customer, provide network integration
transmission service to the Customer in accordance with the Service Agreement
for Network Integration Transmission Service between the Customer and the
Company included in Attachment 3 to the Stipulation and Agreement, and with
the terms and conditions of the tariff maintained in effect by the Company for
such service, or in accordance with the policy of the Federal Energy
<PAGE>
Regulatory Commission as in effect from time to time. Such service shall be
provided to the Customer after the Wholesale Access Date to enable the
Customer to integrate its loads and resources and shall be provided to the
Customer after the Retail Access Date to enable the ultimate customers in the
Customer's service territory to integrate their loads and resources. From
July 1, 1997 through the Contract Termination Date, the Network Integration
Transmission Service shall only apply to kilowatthours delivered, but not
sold, by the Customer in the Customer's Service Area, and the Company shall
continue to provide transmission service to the Customer pursuant to the
W-95(S) wholesale rate for the retail customers continuing to purchase power
from the Customer. After the Contract Termination Date, the Network
Transmission Service shall apply to all kilowatthours delivered in the
Customer's Service Area.
11. This Amendment shall take effect as of the date it is permitted to
become effective by the Federal Energy Regulatory Commission, which date shall
be referred to as the "Effective Date." This Amendment, together with all
provisions of the Tariff and the Service Agreement necessary to effectuate all
provisions of this Amendment, shall remain in effect until all obligations of
the parties under this Amendment, including, without limitation, the
obligation of the Customer to pay to the Company the Contract Termination
Charges, have been discharged in full. Upon the discharge in full of all such
obligations, this Amendment and the Service Agreement shall terminate.
12. The provisions of this Amendment shall override any inconsistent
provisions of the Service Agreement and, with respect to the Customer, all
inconsistent provisions of the Tariff, but all provisions of the Tariff and
the Service Agreement that are not inconsistent with this Amendment shall
remain in full force and effect.
13. The rights conferred and obligations imposed on the Customer and
Company under this Amendment shall be binding on or inure to the benefit of
their successors in interest or assignees as if such successor or assignee was
itself a signatory hereto.
IN WITNESS WHEREOF, the parties have executed this Amendment of Service
Agreement as of the date first written above.
<PAGE>
NEW ENGLAND POWER COMPANY
By
Its
THE NARRAGANSETT ELECTRIC COMPANY
By
Its
<PAGE>
WHOLESALE SALES AGREEMENT
WHOLESALE SALES AGREEMENT
between
NEW ENGLAND POWER COMPANY
and
USGEN ACQUISITION CORPORATION
Dated as of August 5, 1997
<PAGE>
Table of Contents
ARTICLE 1. BASIC UNDERSTANDINGS........................................ 1
ARTICLE 2. DEFINITIONS................................................. 1
ARTICLE 3. TERM AND REGULATORY APPROVAL................................ 3
3.1 Term........................................................ 3
3.2 Filings..................................................... 4
ARTICLE 4. SALE AND PURCHASE........................................... 4
4.1 Sale and Purchase........................................... 4
4.2 Quantities.................................................. 4
ARTICLE 5. PRICE AND BILLING........................................... 5
5.1 Price....................................................... 5
5.3 Taxes, Fees and Levies...................................... 7
ARTICLE 6. DELIVERY AND LOSSES......................................... 7
6.1 Delivery.................................................... 7
ARTICLE 7. DEFAULT AND TERMINATION..................................... 7
7.1 Material Breach and Termination............................. 7
ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES..................... 9
8.1 Notices..................................................... 9
8.2 Authority of Representative................................. 9
ARTICLE 9. LIABILITY, INDEMNIFICATION, AND
RELATIONSHIP OF PARTIES..................................... 10
9.1 Limitation on Consequential, Incidental and Indirect
Damages..................................................... 10
9.2 Indemnification............................................. 10
9.3 Independent Contractor Status............................... 11
ARTICLE 10. ASSIGNMENT.................................................. 11
10.1 General Prohibition Against Assignments..................... 11
10.2 Exceptions to Prohibition Against Assignments............... 11
ARTICLE 11. SUCCESSORS AND ASSIGNS...................................... 11
ARTICLE 12. FORCE MAJEURE............................................... 12
12.1 Force Majeure Standard...................................... 12
12.2 Force Majeure Definition.................................... 12
12.3 Obligation to Diligently Cure Force Majeure................. 12
ARTICLE 13. WAIVERS..................................................... 13
ARTICLE 14. REGULATION.................................................. 13
14.1 Laws and Regulations........................................ 13
14.2 NEPOOL Requirements......................................... 13
ARTICLE 15. INTERPRETATION.............................................. 13
ARTICLE 16. SEVERABILITY................................................ 14
ARTICLE 17. MODIFICATIONS............................................... 14
ARTICLE 18. SUPERSESSION................................................ 14
ARTICLE 19. COUNTERPARTS................................................ 14
ARTICLE 20. HEADINGS.................................................... 14
<PAGE>
WHOLESALE SALES AGREEMENT
-------------------------
This WHOLESALE SALES AGREEMENT ("Agreement") is dated as of August 5,
1997 and is by and between NEW ENGLAND POWER COMPANY ("NEP"), a Massachusetts
corporation, and USGen Acquisition Corporation, a Delaware corporation
("Buyer"). This Agreement provides for the purchase by Buyer and the sale by
NEP of Wholesale Nuclear Entitlement as defined in this Agreement.
ARTICLE 1. BASIC UNDERSTANDINGS
NEP has ownership and/or contractual interests in certain nuclear
generating units and is willing to supply electric energy, capacity, and any
other associated electric products from those interests to Buyer on the terms
specified in this Agreement. Buyer desires to purchase that electric energy,
capacity, and any other associated electric products from NEP. Nothing in
this Agreement shall be deemed to cause Buyer to have acquired any Ownership
Interest or otherwise be treated as an owner of any Nuclear Interest.
ARTICLE 2. DEFINITIONS
The following words and terms shall be understood to have the following
meanings when used in this Agreement, or in any associated documents entered
into in conjunction with this Agreement. In addition, except as otherwise
expressly provided, where terms used in this Agreement are defined in the
NEPOOL Agreement and not otherwise defined herein, such definitions are
expressly incorporated into this Agreement by reference.
CLOSING DATE - The date upon which Buyer acquires control of the generating
assets it purchases from NEP.
COMMISSION OR FERC - The Federal Energy Regulatory Commission or such
successor federal regulatory agency as may have jurisdiction over this
Agreement.
CONTRACT PERIOD - A three month period during the term of this Agreement,
except that the first Contract Period shall begin on the Closing Date and end
on the last day of the third month following the month in which the Closing
Date occurred and, if the term of this Agreement expires on a date other than
the last day of any three month period, the last Contract Period shall also
end on that date.
DEPARTMENT - The Massachusetts Department of Public Utilities.
GOOD UTILITY PRACTICE(S) - The practices, methods and acts (including but not
limited to the practices, methods and acts engaged in or approved by a
significant portion of the electric utility industry) that at a particular
time, in the exercise of reasonable judgment in light of the facts known or
that should reasonably have been known at the time a decision was made, would
have been expected to accomplish the desired result in a manner consistent
with law, regulation, codes, standards, equipment manufacturer's
recommendations, reliability, safety, environmental protection, economy and
expedition.
GWH - Gigawatt hour.
ISO - The Independent System Operator to be established in accordance with the
NEPOOL Agreement and the Interim Independent System Operator Agreement as
amended, superseded or restated from time to time.
KW - Kilowatt.
KWH - Kilowatt- hour.
MMBTU - Million British thermal units.
<PAGE>
NUCLEAR INTERESTS - NEP's interests as a joint owner in Seabrook Unit 1 and
Millstone Unit 3 and as a purchaser under power contracts with Vermont Yankee
Nuclear Power Corporation and Maine Yankee Atomic Power Company.
NEPEX - The New England Power Exchange.
NEPOOL - The New England Power Pool.
NEPOOL AGREEMENT - The New England Power Pool Agreement dated as of September
1, 1971, as amended and as may be amended or restated from time to time.
OWNERSHIP INTERESTS - NEP's interests as a joint owner in Seabrook Unit 1 and
Millstone Unit 3 and as a stockholder of Vermont Yankee Power Corporation and
Maine Yankee Atomic Power Company.
PRICE - The price set forth in SECTION 5, below.
PRIME RATE - The prime (or comparable) rate announced from time to time as its
prime rate by the Bank of Boston or its successor, which rate may differ from
the rate offered to its more substantial and creditworthy customers.
PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL
Agreement.
WHOLESALE NUCLEAR ENTITLEMENT - NEP's generation and delivery to Buyer at any
location on the NEPOOL PTF system of electric energy, capacity, and any other
associated electric product produced by NEP's Nuclear Interests in the
quantities determined in accordance with ARTICLE 4, SECTION 4.2.
WHOLESALE STANDARD OFFER SERVICE AGREEMENTS - The Agreement(s) of even date
herewith entered into between the Buyer and certain of NEP's affiliates under
which Buyer supplies Wholesale Standard Offer Service, as defined therein, to
NEP's affiliates.
ARTICLE 3. TERM AND REGULATORY APPROVAL
3.1 Term
The term of this Agreement shall begin at 12:01 am on the Closing Date
and continue until the earlier of: (a) the day that the last Wholesale
Standard Offer Service Agreement terminates; (b) the day NEP consummates a
permanent sale or other disposition of the last of its Nuclear Interests; or
(c) the day the last of NEP's Nuclear Interests has been permanently retired
by decision of the owners or board of directors of the unit or by order of the
Nuclear Regulatory Commission.
3.2 Filings
NEP will file this Agreement with FERC (and any other regulatory agency
as may have jurisdiction over the Agreement) in accordance with the provisions
of applicable laws, rules and regulations. Buyer will be responsible for any
filing fees for filing this Agreement with FERC (and any other regulatory
agency as may have jurisdiction over the Agreement).
ARTICLE 4. SALE AND PURCHASE
4.1 Sale and Purchase
NEP shall sell and deliver to the Delivery Points and Buyer shall
purchase the quantity of Wholesale Nuclear Energy determined for each Contract
Period in accordance with SECTION 4.2. The price for such sale and purchase
shall be as set forth in ARTICLE 5, SECTION 5.1, below.
4.2 Quantities
<PAGE>
On or before the Closing Date, with respect to the first Contract Period
and, thereafter, at least thirty (30) days prior to the beginning of each
Contract Period, Buyer will notify NEP of the quantity of Wholesale Nuclear
Entitlement that Buyer desires to purchase from NEP during the next Contract
Period (the "Purchased Quantity"). Such quantity shall be expressed in a
stated number of kilowatts for each Nuclear Interest during each month of the
Contract Period, Buyer having the right to nominate different quantities
(including zero) for different months during any Contract Period. Failure by
Buyer to nominate a quantity of Wholesale Nuclear Entitlement in a timely
fashion as set forth in the first sentence of this section, for any Contract
Period, shall be deemed a nomination of zero kilowatts for each Nuclear
Interest for each month during the Contract Period. During each month of a
Contract Period, NEP shall sell and deliver and Buyer shall purchase a
quantity of Wholesale Nuclear Entitlement equal to the lesser of: (a) the
quantity nominated by the Buyer with respect to the month and (b)(1) if Buyer
has purchased NEP's fossil generating stations, 88.2% of the total of the
winter maximum claimed capability ratings of NEP's Nuclear Interests during
the month and (2) if Buyer has purchased NEP's hydroelectric generating
stations, 9.8% of the total of the winter maximum claimed capability ratings
of NEP's Nuclear Interests during the month.
Notwithstanding anything in this Agreement to the contrary, NEP shall
not be required to deliver any Wholesale Nuclear Entitlement from any plant
that fails to operate for any reason whatsoever, nor shall anything in this
Agreement be construed to constrain NEP in any way from exercising its
judgment as to when any Nuclear Interests should be temporarily shut down or
permanently retired.
ARTICLE 5. PRICE AND BILLING
5.1 Price
(a) For each month during any Contract Period that kW or kWh are sold
and delivered under this Agreement, Buyer shall pay NEP the
NEPOOL Market Price, which shall be the sum of:
(1) the NEPOOL Installed Capability Clearing Price for the month
(expressed in dollars per kilowatt) times the Purchased
Quantity for the month; plus
(2) the NEPOOL Energy Clearing Price (expressed in dollars per
megawatt-hour) times the megawatt-hours delivered by NEP
from the Purchased Quantity, for each hour of the month;
plus
(3) the NEPOOL Operable Capability Clearing Price (expressed in
dollars per megawatt-hour) times the operable megawatt-hours
made available from the Purchased Quantity, for each hour of
the month.
It is understood by the parties that the Nuclear Interests do not
currently provide Automatic Generation Control, 10-Minute
Spinning Reserve, 10-Minute Non-Spinning Reserve and 30-Minute
Operating Reserve. In the event one or more of the Nuclear
Interests provide one or more of these services in the future,
the parties will modify the price in this paragraph to include
the appropriate NEPOOL market-clearing price for such service
provided.
(b) For any month during a Contract Period in which Buyer provides
service under a Wholesale Standard Offer Service Agreement and
the average Energy Price (as defined below) exceeds the prices
set forth below, NEP shall credit the amount owed to NEP by Buyer
with an amount as defined below:
<PAGE>
Contract Period Price in Cents per kWh
--------------- ----------------------
1998 3.0 Cents
1999 3.2 Cents
2000 3.5 Cents
2001 3.5 Cents
2002 3.9 Cents
2003 4.3 Cents
2004 4.7 Cents
Please see
Amendment No. 1
attached
5.2 Payment
(a) On or before the tenth (10th) day of each month during the term
of this Agreement, NEP shall calculate the amount due and payable pursuant to
this ARTICLE 5 with respect to the preceding month and shall render a bill to
Buyer for that amount. The amount payable shall be as calculated in ARTICLE
5, SECTION 5.1, above, for the applicable Contract Period.
(b) Buyer shall pay NEP any amounts due and payable on or before the
twenty-fifth (25th) day after a bill is rendered pursuant to paragraph (a).
In the event a bill is rendered after the date specified in paragraph (a),
Buyer shall have an additional period of time to make payment equal to the
period of the delay in issuance of the bill. If all or any part of any amount
due and payable pursuant to paragraph (a) shall remain unpaid thereafter,
interest shall thereafter accrue and be payable to NEP on such unpaid amount
at a rate per annum equal to two percent (2%) above the Prime Rate in effect
on the date of such bill; provided, however, if the amount due and payable is
disputed, interest shall accrue and be payable to NEP on the unpaid amount
finally determined to be due and payable at a rate per annum equal to the
Prime Rate in effect on the date the bill is rendered.
(c) If either party discovers an error in a bill (whether the amount
is paid or not), the calculation may be corrected, and any overpayment or
underpayment will be refunded or paid up, as appropriate. Interest shall
accrue from the date of the error and be payable on the unpaid amount finally
determined to be due and payable at a rate per annum equal to the Prime Rate
in effect on the date the error is originally discovered.
5.3 Taxes, Fees and Levies
Buyer shall be obligated to pay all present and future taxes, fees and
levies which may be assessed by any entity upon the purchase or sale of
electricity covered by the Agreement.
ARTICLE 6. DELIVERY AND LOSSES
6.1 Delivery
All electricity shall be delivered by NEP to Buyer in the form of three-
phase sixty-hertz alternating current at any location on the NEPOOL PTF system
or MECO's System ("Delivery Points"). Title shall pass to the Buyer at the
Delivery Point. If the NEPOOL control area experiences congestion, Buyer will
be responsible for any congestion costs incurred in delivering power across
the PTF system to the extent such costs are imposed by NEPOOL or the ISO on
suppliers. NEP shall be responsible for any local point to point charges and
distribution charges needed to deliver the power to the NEPOOL PTF, it being
anticipated that there will be no such costs.
ARTICLE 7. DEFAULT AND TERMINATION
7.1 Material Breach and Termination
<PAGE>
(a) (i) If NEP fails in any material respect to comply with, observe or
perform any covenant, warranty or obligation under this Agreement
(except due to causes excused by force majeure or attributable to
Buyer's wrongful act or wrongful failure to act); and
(ii) After receipt of written notice from Buyer such failure continues
for a period of forty-five (45) days, or, if such failure cannot
be reasonably cured within such forty-five (45) day period, such
further period as shall reasonably be required to effect such
cure, provided that NEP commences within such forty-five (45) day
period to effect such cure and at all times thereafter proceeds
diligently to complete such cure as quickly as possible; then
(iii) Buyer shall have the right to terminate this Agreement; and
subject to the duty to mitigate, Buyer shall be entitled to
collect from Seller the difference between the NEPOOL Market
Price and the price it would have paid had Seller performed.
(b) (i) If Buyer fails in any material respect to comply with, observe,
or perform any covenant, warranty or obligation under this
Agreement (except due to causes excused by force majeure or
attributable to NEP's wrongful act or wrongful failure to act);
and
(ii) After receipt of written notice from Buyer such failure continues
for the Cure Period (as defined below) or, if such failure cannot
be reasonably cured within the Cure Period, such further period
as shall reasonably be required to effect such cure, provided
that Buyer commences within the Cure Period to effect such cure
and at all times thereafter proceeds diligently to complete such
cure as quickly as possible; then
(iii) NEP shall have the right to terminate this Agreement. For
purposes of this Section 7.1(a), the Cure Period shall mean five
(5) days in the case of a failure by Buyer to fulfill its payment
obligations pursuant to Section 5.2 and forty-five (45) days in
the case of a failure by Buyer to comply with, observe or perform
any other covenant, warranty or obligation under this Agreement.
(c) Nothing in this SECTION 7.1 shall be construed to limit the right of any
party to seek any remedies for damages, as limited by ARTICLE 9 of this
Agreement, even if a cure of an alleged breach is made within the periods of
time specified for curing any such breach stated above. The provisions of
this SECTION 7.1 are intended only to provide the exclusive process through
which one party may exercise and effectuate its right to terminate this
Agreement as a result of a material breach of this Agreement.
ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES
8.1 Notices
Any notice, demand, or request required or authorized by this Agreement
to be given by one party to another party shall be in writing. It shall
either be sent by facsimile (confirmed by telephone), overnight courier,
personally delivered and acknowledged in writing or by registered or certified
mail (return receipt requested), postage prepaid, to the representative of the
other party designated in this ARTICLE 8. Any such notice, demand, or request
shall be deemed to be given (i) when sent by facsimile confirmed by telephone,
(ii) when actually received if delivered by courier or personal deliver or
(iii) three (3) days after deposit in the United States mail, if sent by first
class mail.
Notices and other communications by Buyer to NEP shall be addressed to:
<PAGE>
New England Power Company
25 Research Drive
Westborough, MA 01582
Attention: Michael J. Hager
Fax: (508) 389-3001
Notices and other communications by NEP to Buyer shall be addressed to:
USGen Acquisition Corporation
7500 Old Georgetown Road, 13th Floor
Bethesda, MD 20814
Attention: Stephen A. Herman, Esq.
Fax: (301) 718-6913
Any party may change its representative by written notice to the others.
8.2 Authority of Representative
The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall
have full authority to act for their respective principals in all technical
matters relating to the performance of this Agreement. They shall not,
however, have the authority to amend, modify, or waive any provision of this
Agreement unless they are authorized officers of their respective entities.
ARTICLE 9. LIABILITY, INDEMNIFICATION,
AND RELATIONSHIP OF PARTIES
9.1 Limitation on Consequential, Incidental and Indirect Damages
To the fullest extent permissible by law, neither NEP nor Buyer, nor
their respective officers, directors, agents, employees, parent or affiliates,
successor or assigns, or their respective officers, directors, agents, or
employees, successors, or assigns, shall be liable to the other parties or its
parent, subsidiaries, affiliates, officers, directors, agents, employees,
successors or assigns, for claims, suits, actions or causes of action for
incidental, indirect, special, punitive, multiple or consequential damages
(including attorney's fees or litigation costs) connected with or resulting
from performance or non-performance of this Agreement, or any actions
undertaken in connection with or related to this Agreement, including without
limitation any such damages which are based upon causes of action for breach
of contract, tort (including negligence and misrepresentation), breach of
warranty, strict liability, Massachusetts Gen. Laws ch 93A, statute, operation
of law, or any other theory of recovery. The provisions of this SECTION 9.1
shall apply regardless of fault and shall survive termination, cancellation,
suspension, completion or expiration of this Agreement.
9.2 Indemnification
(a) Buyer agrees to defend, indemnify and save NEP, its officers,
directors, employees, agents, successors, assigns, and affiliates and their
officers, directors, employees, and agents harmless from and against any and
all claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by Buyer, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by
an officer, director, agent, employee or Affiliate of NEP or their successors
or assigns.
(b) NEP agrees to defend, indemnify and save Buyer, its officers,
directors, employees, agents, successors, assigns, and affiliates and their
officers, directors, employees, and agents harmless from and against any and
all claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by NEP, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by
an officer, director, agent, employee or Affiliate of Buyer or their
successors or assigns.
<PAGE>
(c) If any party intends to seek indemnification under this ARTICLE
from another party with respect to any action or claim, the party seeking
indemnification shall give the other party notice of such claim or action
within fifteen (15) days of the commencement of, or actual knowledge of, such
claim or action. Such party seeking indemnification shall have the right, at
its sole cost and expense, to participate in the defense of any such claim or
action. The party seeking indemnification shall not compensate or settle any
such claim or action without the prior consent of the other parties, which
consent shall not be unreasonably withheld.
9.3 Independent Contractor Status
Nothing in this Agreement shall be construed as creating any
relationship between NEP and Buyer other than that of independent contractors
for the sale and purchase of electricity.
ARTICLE 10. ASSIGNMENT
10.1 Assignment
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto,
including by operation of law without the prior written consent of the other
party, nor is this Agreement intended to confer upon any other Person except
the parties hereto any rights or remedies hereunder. Notwithstanding the
foregoing, (i) NEP may, without Buyer's prior written consent, (A) assign all
or a portion of its rights and obligations under this Agreement to any
Affiliate of NEP or (B) assign its rights and obligations hereunder, or
transfer such rights and obligations by operation of law, to any corporation
or other entity with which or into which NEP shall merge or consolidate or to
which NEP shall transfer all or substantially all of its assets, provided that
such Affiliate or other entity agrees to be bound by the terms thereof; (ii)
the Buyer may assign all of its rights and obligations hereunder to any wholly
owned Subsidiary (direct or indirect) of PG&E Corporation and upon NEP's
receipt of notice from Buyer of any such assignment, the Buyer will be
released from all liabilities and obligations hereunder, accrued and
unaccrued, such assignee will be deemed to have assumed, ratified, agreed to
be bound by and perform all such liabilities and obligations, and all
references herein to "Buyer" shall thereafter be deemed references to such
assignee, in each case without the necessity for further act or evidence by
the parties hereto or such assignee; provided, however, that no such
assignment and assumption shall release the Buyer from its liabilities and
obligations hereunder unless the assignee shall have acquired all or
substantially all of the Buyer's assets; provided, further, however, that no
such assignment and assumption shall relieve or in any way discharge PG&E
Corporation from the performance of its duties and obligations under the
Guaranty dated as of the date of this Agreement executed by PG&E Corporation,
and (iii) the Buyer or its permitted assignee may assign, transfer, pledge or
otherwise dispose of its rights and interests hereunder to a trustee or
lending institution(s) for the purposes of financing or refinancing the
Purchased Assets, including upon or pursuant to the exercise of remedies under
such financing or refinancing, or by way of assignments, transfers,
conveyances or dispositions in lieu thereof; provided, however, that no such
assignment or disposition shall relieve or in any way discharge the Buyer or
such assignee from the performance of its duties and obligations under this
Agreement. NEP agrees to execute and deliver such documents as may be
reasonably necessary to accomplish any such assignment, transfer, conveyance,
pledge or disposition of rights hereunder so long as NEP's rights under this
Agreement are not thereby altered, amended, diminished or otherwise impaired.
ARTICLE 11. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the parties hereto and their respective permitted successors and assigns.
<PAGE>
ARTICLE 12. FORCE MAJEURE
12.1 Force Majeure Standard
The parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise, if and
only to the extent that they are unable to so perform or are prevented from
performing by an event of force majeure.
12.2 Force Majeure Definition
An event of force majeure includes, without limitation, storm, flood,
lightning, drought, earthquake, fire, explosion, equipment failure, civil
disturbance, labor dispute, act of God or the public enemy, action of a court
or public authority, or any other cause beyond a party's control.
12.3 Obligation to Diligently Cure Force Majeure
If any party shall rely on the occurrence of an event or condition
described in ARTICLE 12, SECTION 12.2, above, as a basis for being excused
from performance of its obligations under this Agreement, then the party
relying on the event or condition shall:
a. provide written notice to the other parties promptly, but in no
event later than 5 days of the occurrence of the event or
condition giving an estimation of its expected duration and the
probable impact on the performance of its obligations hereunder;
b. exercise all reasonable efforts to continue to perform its
obligations hereunder;
c. expeditiously take reasonable action to correct or cure the event
or condition excusing performance; provided that settlement of
strikes or other labor disputes will be completely within the
sole discretion of the party affected by such strike or labor
dispute;
d. exercise all reasonable efforts to mitigate or limit damages to
the other parties to the extent such action will not adversely
affect its own interests; and
e. provide prompt notice to the other parties of the cessation of
the event or condition giving rise to its excuse from
performance.
ARTICLE 13. WAIVERS
The failure of any party to insist in any one or more instance upon
strict performance of any of the provisions of this Agreement or to take
advantage of any of its rights under this Agreement shall not be construed as
a general waiver of any such provision or the relinquishment of any such
right, but the same shall continue and remain in full force and effect, except
with respect to the particular instance or instances.
ARTICLE 14. REGULATION
14.1 Laws and Regulations
This Agreement and all rights, obligations, and performances of the
parties hereunder, are subject to all applicable Federal and state laws, and
to all duly promulgated orders and other duly authorized action of
governmental authority having jurisdiction.
<PAGE>
14.2 NEPOOL Requirements
This Agreement must comply with all NEPOOL Criteria, Rules, and Standard
Operating Procedures ("Rules"). If, during the term of this Agreement, the
NEPOOL Agreement is terminated or amended in a manner that would eliminate or
materially alter a Rule affecting a right or obligation of a party hereunder,
or if such a Rule is eliminated or materially altered by NEPOOL, the parties
agree to negotiate in good faith in an attempt to amend this Agreement to
incorporate a replacement Rule ("Replacement Rule"). The intent of the
parties is that any such Replacement Rule reflect, as closely as possible, the
intent and substance of the Rule being replaced as such Rule was in effect
prior to such termination or amendment of the NEPOOL Agreement or elimination
or alteration of the Rule.
ARTICLE 15. INTERPRETATION
The interpretation and performance of this Agreement shall be in
accordance with and controlled by the laws of The Commonwealth of
Massachusetts.
ARTICLE 16. SEVERABILITY
If any provision or provisions of this Agreement shall be held invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
ARTICLE 17. MODIFICATIONS
No modification to this Agreement will be binding on any party unless it
is in writing and signed by all parties.
ARTICLE 18. SUPERSESSION
This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and its execution supersedes any other
agreements, written or oral, between the parties concerning such subject
matter.
ARTICLE 19. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
executed counterpart shall have the same force and effect as an original
instrument.
ARTICLE 20. HEADINGS
Article and Section headings used throughout this Agreement are for the
convenience of the parties only and are not to be construed as part of this
Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.
NEW ENGLAND POWER COMPANY
/s/ Michael E. Jesanis
BY:
Its Treasurer
USGEN ACQUISITION CORPORATION
/s/ Joseph P. Kearney
BY:
Its President
<PAGE>
AMENDMENT NO. 1
TO
WHOLESALE SALES AGREEMENT
Amendment No. 1, dated as of September 25, 1997, to the Wholesale Sales
Agreement, dated as of August 5, 1997 (the "Agreement"), by and among New
England Power Company, a Massachusetts corporation ("NEP") and USGen New
England, Inc. (formerly named USGen Acquisition Corporation), a Delaware
corporation (the "Buyer").
Whereas, NEP and the Buyer are parties to the Agreement.
Whereas, NEP and the Buyer desire to amend the Agreement in certain
respects.
Now, therefore, in consideration of the premises and the representations
and warranties, covenants and other agreements hereinafter set forth, the
parties hereto, intending to be legally bound hereby, agree as follows:
Section 1. Section 5.1 of the Agreement is hereby amended by
adding the following text at the end of Section 5.1 following the table
and immediately prior to the beginning of Section 5.2:
"For purposes of this paragraph, "average Energy Price" shall be
the value obtained by dividing (i) the amount determined in
accordance with paragraph 5.1(a)(2) above and (ii) the total
number of megawatt-hours delivered by NEP from the Purchased
Quantity during the month.
The amount of the credit, if any, shall be the product of (i) the
difference between (a) the average Energy Price (as expressed in
dollars per megawatt-hour) and (b) the applicable value from the
above table (expressed in dollars per megawatt-hour) and (ii) the
lesser of (a) the number of megawatt-hours delivered under the
Wholesale Standard Offer Service Agreements during the month or
(b) the total number of megawatt-hours delivered by NEP from the
Purchased Quantity for the month."
IN WITNESS WHEREOF, the undersigned parties hereto have executed this
Amendment No. 1 as of the date first written above.
NEW ENGLAND POWER COMPANY
By:_________________________
Name:
Title:
USGEN NEW ENGLAND, INC.
By:_________________________
Name:
Title:
<PAGE>
PPA TRANSFER AGREEMENT
This PPA TRANSFER AGREEMENT ("Agreement") is dated as of August 5, 1997
and is made by and between NEW ENGLAND POWER COMPANY, a Massachusetts
corporation ("NEP"), and USGEN ACQUISITION CORPORATION, a Delaware corporation
("Asset Purchaser"). This Agreement sets forth the terms and conditions under
which NEP will transfer to Asset Purchaser the economic benefits and
performance obligations, subject to NEP's continuing obligations to make
certain payments, associated with certain Power Purchase Agreements between
NEP and third party power suppliers (the "Power Sellers") that NEP and Asset
Purchaser desire to be transferred concurrently with the sale of NEP's
generation business to Asset Purchaser pursuant to the Asset Purchase
Agreement, dated as of August 5, 1997 (the "APA"), by and among NEP, The
Narragansett Electric Company and Asset Purchaser.
1. The following Power Purchase Agreements (each, as amended or
supplemented, a "Commitment") are incorporated into this Agreement by
reference:
<TABLE>
<CAPTION>
Doc.
No. Party Date
- --- ----- ----
<S> <C> <C>
2076 Ocean State Power 5/14/86*
2077 Ocean State Power II 6/15/88*
2068 Altresco Pittsfield, L.P. 12/9/87*
2071 Milford Power L.P. 4/24/96
2072 Pawtucket Power Associates L.P. 12/14/87*
2062 Ogden Haverhill Associates 12/30/85*
2065 SES Millbury Company, L.P. 12/17/85
2063 Massachusetts Refusetech, Inc. 1/6/81*
2064 Refuse Energy Systems Company 1/1/6
2075 L'Energia L.P. 2/26/91
2058 Lawrence Hydroelectric Associates 1/1/85
2061 Ridgewood Providence Power Partners, L.P. 11/6/87*
2060 Pontook Hydro L.P. 1/26/85
2102 Waste Management of New Hampshire, Inc. 5/20/91*
2067 Suncook Energy Corporation 9/7/94*
2059 Mascoma Hydro Corporation 11/14/86
2066 Phillip's Energy, Inc. 9/7/94*
2073 Massachusetts Water Resources Authority 9/21/95
2069 Clark University 2/12/82*
2070 Clark University 2/12/82*
2078 General Electric Lynn River Works 7/7/92
2079 Refuse Fuels Associates 6/12/80*
2080 Simpson Paper 1/1/85
2074 Canal I 12/1/65*
2035 HydroQuebec Phase II 10/14/85
2033 HydroQuebec Phase I 3/21/83
2103 Connecticut Light & Power 1/4/89*
2592 Cambridge Electric Light Company,
Commonwealth Electric Light Company 7/3/93*
* Indicates agreement has been amended or supplemented.
</TABLE>
A Commitment shall be automatically deleted from the above Commitment
list without further action by the parties: (i) on the effective date of
any Novation (as defined in Section 7, below), (ii) upon the expiration
of a Commitment pursuant to its terms, or (iii) upon the termination of
a Commitment pursuant to the written agreement of the parties thereto.
2. This Agreement shall become effective on the Effective Date (as defined
in Section 13) and shall remain in effect until Asset Purchaser has made
payment to NEP of amounts owed pursuant to Section 4(a), below, and NEP
has made payment to Asset Purchaser and/or the Power Sellers of amounts
<PAGE>
owed pursuant to Sections 3, 4(b) and 8, below, for the last month in
which a Commitment is listed on the Section 1 Commitment list; provided
however that the provisions of Section 8 of this Agreement shall survive
until NEP has paid all amounts due thereunder.
3. Commencing as of the Effective Date, NEP agrees to provide to Asset
Purchaser all electric capacity, energy and any other benefits it
receives under each Commitment listed on the Section 1 Commitment list
as of the first day of the month simultaneously with NEP's receipt
thereof from each Power Seller. All electric energy shall be delivered
to Asset Purchaser at the point at which the Power Seller makes delivery
to NEP as established under the Commitment. Asset Purchaser shall be
responsible for making all arrangements necessary for the further
transmission of such energy. NEP shall, however, promptly reimburse
Asset Purchaser for all costs actually and reasonably incurred by Asset
Purchaser in transmitting such energy from such delivery points to the
NEPOOL Pool Transmission Facility system either pursuant to this Section
3 or pursuant to a Commitment which has been amended and assigned
pursuant to Section 7, provided that NEP shall not be responsible for an
increase in such cost attributable to any amendment to a Commitment by
the Asset Purchaser.
4. (a) Commencing as of the month following the Effective Date, Asset
Purchaser agrees to pay to NEP each month all amounts properly due from
NEP to the Power Seller for the preceding month associated with
capacity, energy and any other benefits made available to NEP by the
Power Seller and accordingly by NEP to it from each Commitment listed on
the preceding month's Section 1 Commitment list, less the amount of
NEP's Monthly Payment Obligation specified in Section 8 below. For
purposes of the first monthly payment due from Asset Purchaser to NEP
under this Agreement in connection with each Commitment, energy payments
shall be based on meter readings taken on the first day for which Asset
Purchaser has a payment obligation under this Agreement and capacity
payments shall be based on the ratio of the number of days in the month
for which Asset Purchaser has a payment obligation under this Agreement
to the total number of days in the month. Asset Purchaser shall make
such payment sufficiently in advance of the time that such payment is
due by NEP to the Power Seller as to allow NEP to make timely payment
under such Commitment. In turn, each month NEP agrees to timely pay
each Power Seller all amounts due under each Commitment, which includes
the amount NEP receives from Asset Purchaser in connection with such
Commitment and the amount of NEP's payment obligation specified in
Section 8 below.
(b) Upon the Effective Date, NEP shall irrevocably and unconditionally
assign and thereafter hold for the benefit of and/or credit to Asset
Purchaser against payments due from it to NEP under Section 4(a) hereof
or at the termination of this Agreement pay to Asset Purchaser any and
all amounts which are then or thereafter received by NEP from the Power
Sellers under the Commitments, including, without limitation, any
aggregate differential balances under any Commitment and the benefit of
and proceeds from any security deposits, letters of credit or other
similar instruments or accounts established for the benefit of NEP by
the Power Seller, but excluding any credits or refunds received by NEP
after the Effective Date which relate to billing errors or
reconciliations of pre-Effective Date bills, and any amounts paid by the
Power Sellers to NEP with respect to disputes arising before the
Effective Date that are attributable to a period prior to the Effective
Date.
5. (a) Effective as of the Effective Date, NEP hereby irrevocably and
unconditionally appoints Asset Purchaser as its representative and agent
for all purposes under each Commitment. Asset Purchaser is hereby
authorized to take all actions that NEP may lawfully take under the
Commitment without further approval by NEP, including, without
limitation, the following: with respect to all matters arising under
the Commitments, deal directly with the Power Sellers, the New England
Power Pool ("NEPOOL"), the Independent System Operator (as designated
under the Restated NEPOOL Agreement as filed with the Federal Energy
Regulatory Commission on December 31, 1996, and as amended from time to
time), other transporters of electric energy, federal, state and local
governmental authorities, and any other persons; act on NEP's behalf in
<PAGE>
the prosecution or defense, as the case may be, of any rights or
liabilities arising under the Commitments; monitor the Power Sellers'
performance under the Commitments; review and audit all bills and
related documentation rendered by the Power Sellers; and on NEP's behalf
enter into amendments to the Commitments of any nature; provided,
however Asset Purchaser shall not amend any Commitment with respect to
any of NEP's interconnection rights and obligations, or extend the term
thereof or increase NEP's obligations thereunder without NEP's consent,
which shall not be unreasonably withheld. Asset Purchaser shall have
the right to delegate to its affiliates or third parties any of its
responsibilities under this Section 5. NEP hereby agrees to provide and
deliver to Asset Purchaser all information which NEP now has or
hereafter acquires or to which it is entitled with respect to each
Commitment and Asset Purchaser hereby agrees to be subject to any
confidentiality provisions of such Commitment with respect to such
information. NEP also agrees to participate at Asset Purchaser's
request and under Asset Purchaser's direction in any governmental
proceeding with respect to the Commitments or this Agreement.
(b) NEP agrees not to agree to any amendment to or waiver of rights
under a Commitment without Asset Purchaser's consent, which Asset
Purchaser may grant or withhold in its sole discretion, and will not
take any actions inconsistent with the provisions of this Section 5.
6. (a) NEP will indemnify, defend and hold harmless the Asset Purchaser
from and against any and all claims, demands or suits (by any person),
losses, liabilities, damages (excluding consequential or special
damages), obligations, payments, costs and expenses (including, without
limitation, the costs and expenses of any and all actions, suits,
proceedings, assessments, judgments, settlements, and compromises
relating thereto and reasonable attorneys' fees and reasonable
disbursements in connection therewith) to the extent the foregoing are
not covered by insurance (each, an "Indemnifiable Loss"), asserted
against or suffered by Asset Purchaser relating to, resulting from or
arising out of any relationship or payment obligation of NEP resulting
from or contained in this Agreement or any obligation of NEP for any
acts or omissions under the Commitments incurred prior to the Effective
Date. For purposes hereof, any willful or negligent failure of NEP to
perform any act required to be performed by it under a Commitment which
increases the amounts payable by Asset Purchaser under Section 4(a)
hereof shall be an Indemnifiable Loss for which Asset Purchaser shall be
entitled to indemnification hereunder.
(b) Asset Purchaser will indemnify, defend and hold harmless NEP from
and against any and all Indemnifiable Losses asserted against or
suffered by NEP relating to, resulting from or arising out of any
relationship or payment obligation of Asset Purchaser resulting from or
contained in this Agreement. For purposes hereof, NEP's costs incurred
in administering the Commitments and performing its obligations under
this Agreement shall not be an Indemnifiable Loss.
(c) Any person entitled to receive indemnification under this Agreement
(an "Indemnitee") having a claim under these indemnification provisions
shall make a good faith effort to recover all losses, damages, costs and
expenses from insurers of such Indemnitee under applicable insurance
policies so as to reduce the amount of any Indemnifiable Loss hereunder.
The amount of any Indemnifiable Loss shall be reduced (i) to the extent
that Indemnitee receives any insurance proceeds with respect to an
Indemnifiable Loss and (ii) to take into account any net Tax benefit
recognized by the Indemnitee arising from the recognition of the
Indemnifiable Loss and any payment actually received with respect to an
Indemnifiable Loss.
(d) The expiration, termination or extinguishment of any covenant or
agreement shall not affect the parties' obligations under this Section 6
if the Indemnitee provided the person required to provide
indemnification under this Agreement (the "Indemnifying Party") with
proper notice of the claim or event for which indemnification is sought
prior to such expiration, termination or extinguishment.
<PAGE>
(e) The rights and remedies of NEP and Asset Purchaser under this
Section 6 are exclusive and in lieu of any and all other rights and
remedies which NEP and Asset Purchaser may have under this Agreement or
otherwise for monetary relief with respect to any relationship or
payment obligation resulting from this Agreement.
(f) NEP and Asset Purchaser each agree that, notwithstanding any
provisions in this Agreement to the contrary, all parties to this
Agreement retain their remedies at law or in equity with respect to
willful or intentional breaches of this Agreement.
(g) If any Indemnitee receives notice of the assertion of any claim or
of the commencement of any claim, action, or proceeding made or brought
by any person who is not a party to this Agreement or any affiliate of a
party to this Agreement (a "Third Party Claim") with respect to which
indemnification is to be sought from an Indemnifying Party, the
Indemnitee will give such Indemnifying Party reasonably prompt written
notice thereof, but in any event not later than ten (10) calendar days
after the Indemnitee's receipt of notice of such Third Party Claim.
Such notice shall describe the nature of the Third Party Claim in
reasonable detail and will indicate the estimated amount, if
practicable, of the Indemnifiable Loss that has been or may be sustained
by the Indemnitee. The Indemnifying Party will have the right to
participate in or, by giving written notice to the Indemnitee, to elect
to assume the defense of any Third Party Claim at such Indemnifying
Party's own expense and by such Indemnifying Party's own counsel, and
the Indemnitee will cooperate in good faith in such defense at such
Indemnitee's own expense.
(h) If within ten (10) calendar days after an Indemnitee provides
written notice to the Indemnifying Party of any Third Party Claim the
Indemnitee receives written notice from the Indemnifying Party that such
Indemnifying Party has elected to assume the defense of such Third Party
Claim as provided in the last sentence of clause (g), the Indemnifying
Party will not be liable for any legal expenses subsequently incurred by
the Indemnitee in connection with the defense thereof; provided,
however, that if the Indemnifying Party fails to take reasonable steps
necessary to defend diligently such Third Party Claim within twenty (20)
calendar days after receiving notice from the Indemnitee that the
Indemnitee believes the Indemnifying Party has failed to take such
steps, the Indemnitee may assume its own defense, and the Indemnifying
Party will be liable for all reasonable expenses thereof. Without the
prior written consent of the Indemnitee, the Indemnifying Party will not
enter into any settlement of any Third Party Claim which would lead to
liability or create any financial or other obligation on the part of the
Indemnitee for which the Indemnitee is not entitled to indemnification
hereunder. If a firm offer is made to settle a Third Party Claim
without leading to liability or the creation of a financial or other
obligation on the part of the Indemnitee for which the Indemnitee is not
entitled to indemnification hereunder and the Indemnifying Party desires
to accept and agree to such offer, the Indemnifying Party will give
written notice to the Indemnitee to that effect. If the Indemnitee
fails to consent to such firm offer within ten (10) calendar days after
its receipt of such notice, the Indemnitee may continue to contest or
defend such Third Party Claim and, in such event, the maximum liability
of the Indemnifying Party as to such Third Party Claim will be the
amount of such settlement offer, plus reasonable costs and expenses paid
or incurred by the Indemnitee up to the date of such notice.
(i) Any claim by an Indemnitee on account of an Indemnifiable Loss which
does not result from a Third Party Claim (a "Direct Claim") will be
asserted by giving the Indemnifying Party reasonably prompt written
notice thereof, stating the nature of such claim in reasonable detail
and indicating the estimated amount, if practicable, but in any event
not later than ten (10) calendar days after the Indemnitee becomes aware
of such Direct Claim, and the Indemnifying Party will have a period of
thirty (30) calendar days within which to respond to such Direct Claim.
If the Indemnifying Party does not respond within such thirty (30)
calendar day period, the Indemnifying Party will be deemed to have
<PAGE>
accepted such claim. If the Indemnifying Party rejects such claim, the
Indemnitee will be free to seek enforcement of its rights to
indemnification under this Agreement.
(j) If the amount of any Indemnifiable Loss, at any time subsequent to
the making of an indemnity payment in respect thereof, is reduced by
recovery, settlement or otherwise under or pursuant to any insurance
coverage, or pursuant to any claim, recovery, settlement or payment by
or against any other entity, the amount of such reduction, less any
costs, expenses or premiums incurred in connection therewith (together
with interest thereon from the date of payment thereof at the prime rate
then in effect of the Bank of Boston), will promptly be repaid by the
Indemnitee to the Indemnifying Party. Upon making any indemnity
payment, the Indemnifying Party will, to the extent of such indemnity
payment, be subrogated to all rights of the Indemnitee against any third
party in respect of the Indemnifiable Loss to which the indemnity
payment relates; provided, however, that (i) the Indemnifying Party will
then be in compliance with its obligations under this Agreement in
respect of such Indemnifiable Loss and (ii) until the Indemnitee
recovers full payment of its Indemnifiable Loss, any and all claims of
the Indemnifying Party against any such third party on account of said
indemnity payment is hereby made expressly subordinated and subjected in
right of payment to the Indemnitee's rights against such third party.
Without limiting the generality or effect of any other provision hereof,
each such Indemnitee and Indemnifying Party will duly execute upon
request all instruments reasonably necessary to evidence and perfect the
above-described subrogation and subordination rights, and otherwise
cooperate in the prosecution of such claims at the direction of the
Indemnifying Party. Nothing in this clause (j) shall be construed to
require any party hereto to obtain or maintain any insurance coverage.
(k) A failure to give timely notice as provided herein will not affect
the rights or obligations of any party hereunder except if, and only to
the extent that, as a result of such failure, the party which was
entitled to receive such notice was actually prejudiced as a result of
such failure.
7. NEP and Asset Purchaser agree to work cooperatively and use all
reasonable efforts to amend each Commitment and assign each such amended
Commitment to Asset Purchaser so that NEP will be released of all
further liabilities and obligations under the Commitment and Asset
Purchaser will be directly in contract with the Power Seller (a
"Novation"). Any such Novation shall include all modifications
necessary to reflect the substitution of Asset Purchaser for NEP as the
purchasing party under the Commitment (including modifications to
Commitment price indices, where appropriate) and to properly describe
interconnection, delivery point and transmission system references and
obligations in the Commitment. The provisions of Section 8(d) shall
apply to all such Novations. It is intended by the parties that all
such Novations preserve the economic benefit and other rights of the
Commitment to the Asset Purchaser without increasing the Asset
Purchaser's obligations under the Commitment while continuing to afford
to NEP the protections for its transmission system embodied in the
interconnection provisions of the Commitment; provided however that
nothing contained herein is intended to limit the ability of Asset
Purchaser to direct the availability, dispatch, quantity or timing of
the capacity or electrical output of a plant, facility or system which
is the subject of a Commitment, subject to the current terms of such
Commitment. NEP and Asset Purchaser agree to execute all agreements and
documents reasonably required by the other in connection with all such
Novations.
8. (a) In the month in which the Effective Date occurs, NEP shall be
obligated to pay the Power Sellers an aggregate amount equal to (i) the
Monthly Payment Obligation (as defined in 8(d)(1) below), as adjusted in
accordance with Section 8(d)(4) below, multiplied by (ii) a fraction,
the numerator of which is the total number of days in the month in which
the Effective Date occurs, less the number of days in such month up to
the Effective Date, and the denominator of which is the total number of
days in the month in which the Effective Date occurs, and such adjusted
amount shall be deducted by Asset Purchaser from the amount due NEP
under Section 4 above for such month.
<PAGE>
(b) Commencing as of the month following the Effective Date and
continuing for each succeeding month through and including January 2008,
NEP shall be obligated to pay the Power Sellers each month an aggregate
amount equal to the Monthly Payment Obligation, as adjusted in
accordance with Section 8(c) and Section 8(d)(4) below, and such
adjusted amount shall be deducted by Asset Purchaser from the amount due
NEP under Section 4 above.
(c) In the event that the amount of NEP's Monthly Payment Obligation set
forth in Section 8(b) (as adjusted to reflect any increases pursuant to
this Section 8(c)) shall in any month exceed the amount due NEP from
Asset Purchaser under Section 4, NEP shall increase the amount of its
obligation in the next month (in addition to its obligation set forth in
Section 8(b)) by the amount of such excess plus interest thereon at the
Applicable Discount Rate (as defined in Section 8(d)(3)) from the date
payment from Asset Purchaser for such month would have been due to the
date of the next payment by Asset Purchaser under Section 4 (the "Excess
Obligation") and Asset Purchaser shall also be allowed to deduct such
Excess Obligation from the amount due NEP under Section 4 for such
month. Should there be an Excess Obligation as of January 31, 2008, NEP
shall within thirty days thereafter pay at the direction of Asset
Purchaser the amount of such Excess Obligation.
(d) To the extent that a "Trigger Event" (as hereinafter defined) shall
occur with respect to any Commitment, NEP will, with the consent of
Asset Purchaser, make a full or a partial lump-sum payment ("Trigger
Payment") to the appropriate Power Seller or such other party as the
Asset Purchaser may direct, as the case may be. Subject to subsection
(6) below, Trigger Payments shall, unless otherwise agreed to by Asset
Purchaser, be made concurrently with the Trigger Event, or as soon
thereafter as is practicable (but not later than the later of (x) sixty
(60) days thereafter and (y) one hundred twenty (120) days after
reasonable notice was given by Asset Purchaser that a Trigger Event was
likely to occur) ("Trigger Payment Date").
(1) NEP's monthly payment obligations under Sections 8(a) and
(b) above, and before adjustment in accordance with subsection (5)
below, are detailed on Schedule B hereto ("Monthly Payment
Obligation"). For each Commitment, and for each year from 1998
through 2007, a corresponding percentage of the Monthly Payment
Obligation is set forth on Schedule A hereto (the "Applicable
Percentage").
(2) "Trigger Event" shall mean: (i) a Novation; (ii) a
termination of a Commitment; (iii) a negotiated modification of a
Commitment under which the obligations of NEP are reduced; or
(iv) a legislative, regulatory or court-ordered change in the
terms of a Commitment under which the obligations of NEP are
reduced; provided, however, that if at the time any one of the
events specified in (i), (ii), or (iii) above shall occur, Asset
Purchaser shall be in default with respect to indemnification as
to its payment obligations under Section 6(b) hereof, no Trigger
Event shall be deemed to have arisen from any such event unless
and until such default shall have been cured.
(3) The amount of any Trigger Payment (i) if in respect of a
Trigger Event listed in subsection (2)(i) or (ii) above, shall,
except as otherwise approved by Asset Purchaser, be the discounted
amount as of the Trigger Payment Date (using as the discount rate
a percentage equal to the sum of (x) the yield reported on page
PX1 of the Bloomberg Financial Market Services Screen (or, if not
available, any other nationally recognized trading screen
reporting on-line intraday trading in United States government
securities) at 4:00 p.m. (New York time) on the day prior to the
Trigger Payment Date for the off-the-run 5-year Treasury Note plus
(y).50% (the "Applicable Discount Rate")) of (A) NEP's remaining
Monthly Payment Obligations as of the Trigger Payment Date
multiplied by (B) the Commitment's Applicable Percentage for the
year in which the Trigger Payment Date occurs, and (ii) if in
respect of a Trigger Event listed in subsection (2)(iii) or (iv)
above, shall, except as otherwise approved by Asset Purchaser,
<PAGE>
equal (x) the amount calculated under clause (i) above multiplied
by (y) a fraction (but in no event less than zero nor greater than
one (1)) calculated by mutual agreement in accordance with the
following sentence (the "Reduction Factor"). The parties shall
mutually agree to a Reduction Factor for each applicable Trigger
Event that represents the proportion by which the discounted
present value, using the Applicable Discount Rate, of the
projected costs under the affected Commitment minus $.032 per kWh
(as adjusted to be held constant in 1998 dollars using the
Consumer Price Index), has been reduced as a result of such
Trigger Event. Any controversy in connection with the calculation
of the Reduction Factor shall be determined and settled by
arbitration in New York, New York, by a person or persons mutually
agreed upon, or in the event of a disagreement as to the selection
of the arbitrator or arbitrators, in accordance with the rules of
the American Arbitration Association. Any award rendered therein
shall specify the findings of fact of the arbitrator or
arbitrators and the reasons for such award, with the reference to
and reliance on relevant law. Any such award shall be final and
binding on each and all of the parties thereto and their personal
representatives, and judgment may be entered thereon in any court
having jurisdiction thereof and the fees of such arbitrators in
connection with the determination shall be paid by the party
against whom the award was made, or if a compromise was made,
shared equally.
(4) Upon the making of any such Trigger Payment, except as
otherwise agreed to by Asset Purchaser, the amounts thereafter
payable in accordance with Section 8(a) or Section 8(b) shall be
reduced by the sum of (i) the reductions arising under this
subsection (4) from all previous Trigger Payments made by NEP plus
(ii)(x) in the case of a Trigger Payment made under Section
8(d)(4)(i), by an amount equal to (A) the Applicable Percentage
used in calculating such Trigger Payment multiplied by (B) the
Monthly Payment Obligation and (y) in the case of a Trigger
Payment made under Section 8(d)(4)(ii), by an amount equal to (A)
the Applicable Percentage used in calculating such Trigger Payment
multiplied by (B) the Monthly Payment Obligation multiplied by (C)
the Reduction Factor.
(5) Notwithstanding the foregoing, NEP's obligation to make any
Trigger Payment shall, at the option of NEP, be deferred, in whole
or in part, pending satisfaction of the following conditions:
(i) NEP shall be reasonably satisfied that the full amount of such
Trigger Payment will be currently deductible for Federal and state
income tax purposes and that such deduction shall be fully
utilized in its Federal and state tax returns and (ii) NEP shall
have received approval from all necessary regulatory authorities
for any financing that NEP reasonably requires in order to fund
such Trigger Payment. NEP shall use reasonable efforts to obtain
and maintain, from all regulatory authorities having jurisdiction,
approvals for the issuance of up to $100,000,000 in long-term
securities for the purpose of funding Trigger Payments.
(6) If NEP shall elect to defer making a Trigger Payment
pursuant to subsection (5) above, then not later than the date
that such Trigger Payment is otherwise due, NEP will grant a first
priority, perfected security interest to Asset Purchaser in such
portion of NEP's Contract Termination Charge revenues and related
Service Agreements (the "CTCs") with Massachusetts Electric
Company ("MECO") and The Narragansett Electric Company ("NECO") as
is equal to the amount by which each Monthly Payment Obligation
would be reduced pursuant to subsection (4) above had the Trigger
Payment not been deferred. Such security interest shall be
granted pursuant to a duly executed security agreement in form and
substance reasonably satisfactory to Asset Purchaser, and shall
provide that proceeds of the collateral shall be assigned to Asset
Purchaser and paid by MECO and NECO to Asset Purchaser or as
otherwise directed by Asset Purchaser; provided, however, that
unless and until there shall occur an event of default under such
security agreement, the Asset Purchaser will waive its right to
receive proceeds directly from MECO and NECO pursuant to such
<PAGE>
assignment. Further, NEP shall not be permitted to exercise its
election under subsection (5) unless the granting of the security
interest contemplated in this subsection (6) and the assignment of
proceeds in connection therewith shall be consented to by MECO and
NECO.
(7) During the term of this Agreement, NEP shall not grant,
permit or suffer to exist any encumbrance, pledge, security
interest, assignment, lien or other disposition of its rights to
such portion of the CTCs referred to in subsection (7) above as is
sufficient at all times to cover NEP's then remaining aggregate
Monthly Payment Obligations and will at its sole expense take all
actions required to remove and/or defend against any claim or
encumbrance that may be created or asserted by any other party
thereon.
(8) Asset Purchaser shall release any security interest granted
hereunder with respect to any Trigger Payment if: (a) NEP has
provided Asset Purchaser with a letter of credit, collateral or
other security in substitution for, and replacement of, the
collateral referred to in Section 8(d)(6) which shall be at least
equivalent in value to the security represented by such collateral
as agreed between NEP and the Asset Purchaser, in the exercise of
by each of its reasonable commercial judgment, or (b) NEP has paid
Asset Purchaser the present value of the remaining security, using
the Applicable Discount Rate applied in calculating the related
deferred Trigger Payment.
9. This Agreement and all rights, obligations, and performances of the
parties hereunder, are subject to all applicable Federal and state laws,
and to all duly promulgated orders and other duly authorized action of
governmental authority having jurisdiction.
10. Except as otherwise set forth in Section 5 hereof, this Agreement and
all of the provisions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party
hereto, including by operation of law without the prior written consent
of the other party, nor is this Agreement intended to confer upon any
other person except the parties hereto any rights or remedies hereunder.
Notwithstanding the foregoing, (i) the Asset Purchaser may assign all of
its rights and obligations hereunder to any wholly owned Subsidiary
(direct or indirect) of PG&E Corporation and upon NEP's receipt of
notice from Asset Purchaser of any such assignment, the Asset Purchaser
will be released from all liabilities and obligations hereunder, accrued
and unaccrued, such assignee will be deemed to have assumed, ratified,
agreed to be bound by and perform all such liabilities and obligations,
and all references herein to Asset Purchaser shall thereafter be deemed
references to such assignee, in each case without the necessity for
further act or evidence by the parties hereto or such assignee;
provided, however, that no such assignment and assumption shall release
the Asset Purchaser from its liabilities and obligations hereunder
unless the assignee shall have acquired all or substantially all of the
Asset Purchaser's assets; provided, further, however, that no such
assignment and assumption shall relieve or in any way discharge PG&E
Corporation from the performance of its duties and obligations under the
Guaranty dated as of the date of this Agreement executed by PG&E
Corporation for the purpose of financing or refinancing the Purchased
Assets (as defined in the APA); and (ii) the Asset Purchaser or its
permitted assignee may assign, transfer, pledge or otherwise dispose of
its rights and interests hereunder to a trustee or lending
institution(s) for the purpose of financing or refinancing the Purchased
Assets (as defined in the APA), including upon or pursuant to the
exercise of remedies under a financing or refinancing, or by way of
assignments, transfers, conveyances or dispositions in lieu thereof;
provided, however, that no such assignment or disposition shall relieve
or in any way discharge the Asset Purchaser or such assignee from the
performance of its duties and obligations under this Agreement. NEP
agrees to execute and deliver such documents as may be reasonably
necessary to accomplish any such assignment, transfer, conveyance,
<PAGE>
pledge or disposition of rights hereunder so long as NEP's rights under
this Agreement are not thereby altered, amended, diminished or otherwise
impaired.
11. This Agreement, the APA and any other agreement entered into by the
parties pursuant to the APA constitute the entire agreement between the
parties and supersede all previous offers, negotiations, discussions,
communications and correspondence. This Agreement may be amended only
by a written agreement signed by the parties. This Agreement is not
intended to confer upon any other person (including, without limitation,
the Power Sellers) except the parties hereto any rights or remedies.
The interpretation and performance of this Agreement shall be according
to and controlled by the laws of The Commonwealth of Massachusetts
(regardless of the laws that might otherwise govern under applicable
Massachusetts principles of conflicts of laws).
12. All payments required under this Agreement shall be paid in cash by
federal or other wire transfer of immediately available funds to an
account designated by the party to receive such payment.
13. This Agreement shall be of no force and effect until the Effective Date.
If the APA shall have been terminated before the occurrence of the
Closing Date (as defined in the APA), this Agreement shall, without any
action of the parties hereto, terminate as of the time of the
termination of the APA. As used in this Agreement, "Effective Date"
shall mean the Closing Date (as defined in the APA).
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.
NEW ENGLAND POWER COMPANY
By:
Name:
Title:
USGEN ACQUISITION CORPORATION
By:
Name:
Title:
<PAGE>
PSA PERFORMANCE SUPPORT AGREEMENT
This PSA PERFORMANCE SUPPORT AGREEMENT ("Agreement") is dated as of
August 5, 1997 and is made by and between NEW ENGLAND POWER COMPANY, a
Massachusetts corporation ("NEP"), and USGEN ACQUISITION CORPORATION, a
Delaware corporation ("Asset Purchaser"). This Agreement sets forth the terms
and conditions under which Asset Purchaser will make available certain
electric energy and capacity to NEP in order to assist NEP in performing its
obligations under a certain Power Sales Agreement between NEP and
__________________ dated _____________ (the "Commitment"), and NEP will
transfer to Asset Purchaser the economic benefits of the Commitment and Asset
Purchaser will undertake certain responsibilities for administering the
Commitment. This Agreement is being entered into in connection with the
transactions contemplated by the Asset Purchase Agreement, dated as of August
5, 1997, by and among NEP, The Narragansett Electric Company and Asset
Purchaser (the "APA"), under which NEP is selling its electric generation
business to Asset Purchaser.
1. This Agreement shall become effective on the Effective Date (as defined
in Section 11) and shall remain in effect until NEP has made payment to
Asset Purchaser of amounts owed pursuant to Section 3, below.
2. Commencing as of the Effective Date, Asset Purchaser agrees to provide
to NEP each month all electric capacity and energy necessary for NEP to
perform its obligations under the Commitment. All electric energy shall
be delivered to NEP at the point at which ____________ (the "Power
Buyer") takes delivery from NEP under the terms of the Commitment.
Asset Purchaser shall be responsible for making all arrangements
necessary, if any, for the transmission of such energy to such delivery
points.
3. Commencing as of the Effective Date, and in consideration of Asset
Purchaser's undertakings hereunder, NEP agrees to pay to Asset Purchaser
all amounts payable by Power Buyer under the Commitment. For purposes
of the first and last monthly payments due from NEP to Asset Purchaser
under this Agreement, energy payments shall be based on meter readings
taken on the first and last day, respectively, for which NEP has a
payment obligation under this Agreement and capacity payments shall be
based on the ratio of the number of days in the month for which NEP has
a payment obligation under this Agreement to the total number of days in
the month. At the request of Asset Purchaser, NEP shall direct Power
Buyer to make all payments due under the Commitment into such bank
account of Asset Purchaser as Asset Purchaser shall notify NEP of in
such request.
4. Effective as of the Effective Date, NEP hereby appoints Asset Purchaser
as its agent for purposes of administering the Commitment. Asset
Purchaser is authorized to take all actions that NEP may lawfully take
under the Commitment without further approval by NEP, including, without
limitation, initiating legal or other actions to enforce the obligations
of Power Buyer thereunder and calculating and rendering bills to the
Power Buyer on NEP's behalf; except that NEP's prior written consent
shall be required for (i) actions that materially affect the price
charged for or the quantity of power to be sold by NEP under the
Commitment and (ii) Commitment option exercises, term extensions and/or
amendments. NEP shall not unreasonably withhold such consent. NEP
agrees not to agree to any amendment of, or to waive any rights under,
the Commitment without Asset Purchaser's consent. Asset Purchaser and
NEP shall cooperate in maintaining such cost indices as is necessary for
NEP (or Asset Purchaser on NEP's behalf) to calculate the amount due
from Power Buyer under the Commitment.
<PAGE>
5. Each party shall be entitled to indemnification under this Agreement to
the extent and in the manner set forth in Article X of the APA which is
hereby incorporated herein by reference.
6. NEP and Asset Purchaser agree to work cooperatively and use all
reasonable efforts to amend the Commitment and assign such amended
Commitment to Asset Purchaser so that NEP will be released of all
further liabilities and obligations under the Commitment and Asset
Purchaser will be directly under contract with the Power Buyer. Any
such amendment and assignment shall include all modifications necessary
to reflect the substitution of Asset Purchaser for NEP as the selling
party under the Commitment (including modification of Commitment price
indices, where appropriate) and to properly describe delivery point and
transmission system references made in the Commitment. It is intended
by the parties and a condition to the obligation of Asset Purchaser to
agree to any such Commitment amendment and assignment that such
Commitment amendment and assignment preserve the economic benefit and
other rights of the Commitment to the Asset Purchaser without increasing
the Asset Purchaser's obligations under the Commitment. NEP and Asset
Purchaser agree to execute all agreements and documents reasonably
requested by the other in connection with such Commitment amendment and
assignment. Where a complete assignment is not immediately feasible, the
parties shall work cooperatively to achieve such partial assignment of
rights and obligations as is consistent with the Commitment.
7. This Agreement and all rights, obligations, and performance of the
parties hereunder, are subject to all applicable Federal and state laws,
including, without limitation, the approval of the Federal Energy
Regulatory Commission, and to all duly promulgated orders and other duly
authorized actions of any governmental authority having jurisdiction.
8. This Agreement, the APA and any other agreement entered into by the
parties pursuant to the APA constitute the entire agreement between the
parties and supersedes all previous offers, negotiations, discussions,
communications and correspondence. This Agreement may be amended only
by a written agreement signed by the parties. The interpretation and
performance of this Agreement shall be according to and controlled by
the laws of The Commonwealth of Massachusetts.
9. This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any
party hereto, including by operation of law without the prior written
consent of the other party, nor is this Agreement intended to confer
upon any other person except the parties hereto any rights or remedies
hereunder. Notwithstanding the foregoing, (i) the Asset Purchaser may
assign all of its rights and obligations hereunder to any wholly owned
Subsidiary (direct or indirect) of PG&E Corporation and upon NEP's
receipt of notice from Asset Purchaser of any such assignment, the Asset
Purchaser will be released from all liabilities and obligations
hereunder, accrued and unaccrued, such assignee will be deemed to have
assumed, ratified, agreed to be bound by and perform all such
liabilities and obligations, and all references herein to Asset
Purchaser shall thereafter be deemed references to such assignee, in
each case without the necessity for further act or evidence by the
parties hereto or such assignee; provided, however, that no such
assignment and assumption shall release the Asset Purchaser from its
liabilities and obligations hereunder unless the assignee shall have
acquired all or substantially all of the Asset Purchaser's assets;
provided, further however, that no such assignment and assumption shall
relieve or in any way discharge PG&E Corporation from the performance of
its duties and obligations under the Guaranty dated as of the date of
<PAGE>
this Agreement executed by PG&E Corporation; and (ii) the Asset
Purchaser or its permitted assignee may assign, transfer, pledge or
otherwise dispose of its rights and interests hereunder to a trustee or
lending institution(s) for the purposes of financing or refinancing the
Purchased Assets (as defined in the APA), including upon or pursuant to
the exercise of remedies under a financing or refinancing, or by way of
assignments, transfers, conveyances or dispositions in lieu thereof;
provided, however, that no such assignment or disposition shall relieve
or in any way discharge the Asset Purchaser or such assignee from the
performance of its duties and obligations under this Agreement. NEP
agrees to execute and deliver such documents as may be reasonably
necessary to accomplish any such assignment, transfer, conveyance,
pledge or disposition of rights hereunder so long as NEP's rights under
this Agreement are not thereby altered, amended, diminished or otherwise
impaired.
10. Subject to the provisions of Section 3 hereof, all payments required
under this Agreement shall be paid in cash by federal or other wire
transfer of immediately available funds to an account designated by the
party to receive the payment.
11. This Agreement shall be of no force and effect until the Effective Date.
If the APA shall have been terminated before the occurrence of the
Closing Date (as defined in the APA), this Agreement shall, without any
action of the parties hereto, terminate as of the time of the
termination of the APA. As used in this Agreement, "Effective Date"
shall mean the Closing Date (as defined in the APA).
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.
NEW ENGLAND POWER COMPANY
By:
Name:
Title:
USGEN ACQUISITION CORPORATION
By:
Name:
Title:
<PAGE>
EMPLOYMENT AGREEMENT
---------------------
This Employment Agreement is made and entered into as of the 9th day of
December, 1997, by and between New England Power Company, hereinafter referred
to as "the Company" and Andrew H. Aitken hereinafter referred to as
"Employee".
WHEREAS, the Company would like to have the option to retain the
employment of Employee until the closing date of sale of the Company's
generation assets to USGen Acquisition (USGen) under the Asset Purchase
Agreement by and among New England Power Company, The Narragansett Electric
Company and USGen Acquisition Corporation, dated as of August 5, 1997 ("the
Agreement").
WHEREAS, Employee is willing to change the terms of his employment
relationship with the Company and remain an employee of the Company as set
forth below.
NOW THEREFORE, in consideration of the mutual rights and obligations of
the parties, the parties hereby agree as follows:
1.0 Term
1.1 Subject to the provisions of this Employment Agreement, the
Company agrees to employ Employee and Employee agrees to remain in the
Company's employ, at the Company's sole option, until the earlier of February
5, 1999 or the Closing Date of the sale of the Company's generation assets to
USGen as set forth in Section 4.1 of the Agreement; provided, however, if (1)
the Agreement is terminated pursuant to Section 11.1 of the Agreement prior to
the Closing Date and the Company has given Employee notice under Section 3.1
below that it will not require Employee to remain with the Company after
August 7, 1998 (Notification Letter) or (2) the Company gives Employee a
Notification Letter, Employee shall be free to terminate his employment or
this Employment Agreement, except for the obligations set forth in Articles
3.0, 5.0 and 10.0 below, after the earlier of the Termination Date set forth
in Section 11.1 of the Agreement or August 7, 1998.
2.0 Duties
2.1 Employee shall diligently and conscientiously perform those duties
customarily rendered by a Vice President and Director of Environmental and
Safety and shall conduct his business in the usual, regular and ordinary
course consistent with good industry practice.
3.0 Compensation and Benefits
3.1 In exchange for entering into this Employment Agreement, the Company
shall pay Employee 4-1/2 months base pay (non-pensionable) in a lump sum
payment of Forty Seven Thousand Three Hundred Forty Five dollars ($47,345.00)
taxes withheld, eight to ten days following execution of this Employment
Agreement. On August 7, 1998, the Company shall pay Employee an additional 4-
1/2 months base pay based upon Employee's 1998 salary rate (non- pensionable)
in a lump sum payment taxes withheld, if and only if, the Company desires to
have Employee remain in its employ until the earlier of February 5, 1999 or
the Closing Date. If the Company is not going to require Employee to remain
in its employ until the earlier of February 5, 1999 or the Closing Date, the
Company shall send Employee a Notification Letter by July 6, 1998 and Employee
shall be free to terminate his employment or this Employment Agreement, except
for the obligations set forth in Articles 5.0 and 10.0 below anytime after
August 7, 1998. If Employee has accepted a position with USGen effective upon
closing prior to July 6, 1998, the Company will not factor such information
into its decision. Notwithstanding the foregoing, if the Company terminates
<PAGE>
Employee's employment pursuant to Section 4.1(1), Employee shall be required
to repay the Company the amount of said lump sum payment, which Employee
agrees, the Company may, at its option, offset from Employee's final
paychecks or any other amount owing Employee.
3.2 Notwithstanding any other provision of this Employment Agreement, in
the event that any payment or benefit or portion thereof including any Special
Severance Plan Payments (Total Payment) received or to be received by Employee
in connection with a Change in Control as used in Section 280G of the Internal
Revenue Code or the termination of Employee's employment (whether pursuant to
the terms of this Employment Agreement or any other plan, arrangement or
agreement with the Company) is subject, in whole or part to the Excise Tax
under Section 280G of the Internal Revenue Code, then the Company shall reduce
the Total Payment to the extent necessary so that no portion of the Total
Payment is subject to the excise tax.
3.3 During the term of this Employment Agreement, the Company shall
continue to compensate Employee according to the compensation plans and
policies in effect for employees in ICP IC, in accordance with the Company's
payroll practices for salaried employees.
3.4 Employee shall continue to be entitled to participate in employee
benefit programs made available to employees in effect during the term of this
Employment Agreement in accordance with the terms and conditions of said
programs.
3.5 Employee shall continue to be eligible for the Special Severance Plan
made available to employees in ICP IC, in accordance with the qualifications
for and terms and conditions of said Special Severance Plan.
3.6 Except for claims to enforce this Employment Agreement, in
consideration of the payments provided under this Employment Agreement,
Employee on behalf of himself and his heirs and assigns fully and voluntarily
forever releases, waives and discharges the Company, including all past,
present and future subsidiaries, parents, affiliated companies and assigns and
all past, present, and future fiduciaries trustees, directors, officers,
agents and employees of any such companies from all claims, demands, causes of
action, suits and liabilities of any kind and nature, known or unknown,
asserted or unasserted up to the date of the signing of this Employment
Agreement pertaining to any and all such claims arising out of or related to
this Employment Agreement.
4.0 Termination of Employment
4.1 During the term of this Employment Agreement, the Company may only
terminate this Employment Agreement as set forth in Section 1.1 above or for
cause. For purposes of this Employment Agreement, cause shall mean (1) a
willful breach of duty or misconduct by Employee or (2) death of Employee.
4.2 During the term of this Employment Agreement, Employee may not
terminate this Employment Agreement for any reasons other than as set forth in
Section 1.1 above or due to death of Employee.
4.3 Except as defined in compensation plans, benefits or policies to
which Employee is otherwise entitled outside of this Employment Agreement, if
Employee dies during the term of this Employment Agreement, the Company shall
only be responsible for paying to the estate of Employee the compensation,
including any bonuses due Employee, which would otherwise be payable to
Employee up to the end of the month in which Employee's death occurs.
5.0 Standards of Conduct
<PAGE>
5.1 Employee agrees to abide by the most recent version in effect of the
Standards of Conduct for NEES Companies signed by Employee.
5.2 Employee recognizes and agrees that Employee's obligations under
Section 5.1 herein are ongoing obligations which shall survive the expiration
and/or termination of this Employment Agreement.
6.0 Assignment
6.1 The Company shall have the right to assign this Employment Agreement
to an affiliate, and all covenants and agreements hereunder shall inure to the
benefit of and shall be binding upon said assigns.
6.2 Employee's obligations under this Employment Agreement shall be
binding upon Employee's heirs, executors, administrators and legal
representatives.
7.0 Legal Remedies
7.1 Departure of Employee in breach of this Employment Agreement would be
greatly detrimental to the Company, would be in violation of Article 1.0 and
would cause the Company irreparable harm. Therefore, the parties agree, that
the Company may pursue any legal remedies available to it for any breach or
threatened breach by Employee, including without limitation, money damages.
8.0 Waiver and Election of Remedies
8.1 Waiver by the Company of any term, condition or provision of this
Employment Agreement shall not be considered a waiver of that term, condition
or provision in the future. Any waiver by the Company of the rights listed in
this Employment Agreement shall be in writing and signed by a Company officer
in order to be binding.
9.0 Severability
9.1 In the event that any portion or part of this Employment Agreement is
deemed invalid, against public policy, void or otherwise unenforceable by a
court of law, the parties shall negotiate an equitable adjustment in the
affected provision of this Employment Agreement; however, the validity and
enforceability of the remaining portions hereof shall otherwise be fully
enforceable.
10.0 Confidentiality
10.1 Employee agrees, whether during the term of this Employment
Agreement or after, that he will keep the fact, terms, and amount of this
Employment Agreement completely confidential unless the fact (and only the
fact) that this Employment Agreement exists is waived in writing by the
President of the Company or unless such disclosure is required in a legal
proceeding to enforce its terms, as a defense to any claim or as otherwise
required by law. Notwithstanding the foregoing, Employee may disclose the
terms of this Employment Agreement to his financial and/or tax advisor,
attorney and family; provided said individuals agree to keep the terms of this
Employment Agreement confidential.
10.2 The Company agrees to handle this Employment Agreement in a
confidential manner. It will not disclose the terms or amount of this
Employment Agreement to anyone outside of the Company except to those at
USGen, or others who need to know to develop or effectuate this Employment
Agreement or except in a legal proceeding to enforce its terms, as a defense
to any claim or as otherwise required by law. In addition, the Company will
not disclose the terms or amount of this Employment Agreement to anyone inside
the Company except on a need to know basis.
<PAGE>
11.0 Captions and Paragraph Headings
11.1 The captions and paragraph headings used in this Employment
Agreement are for convenience only and are not to be construed as a part of
this Employment Agreement.
12.0 Applicable Law
12.1 This Employment Agreement shall be construed under the laws of the
Commonwealth of Massachusetts. Employee agrees to submit to the personal
jurisdiction of the Massachusetts courts in respect to any matter or dispute
arising out of this Employment Agreement.
13.0 Notice
Any notice required or permitted to be given under this Employment
Agreement shall be sufficient if in writing, and if sent by registered mail,
return receipt requested, postage prepaid, addressed as set forth below or to
such other address as either party may specify to the other party, in writing,
from time to time:
The Company: Employee:
New England Power Company Andrew H. Aitken
25 Research Drive _______________________
Westborough, MA 01582 _______________________
Attn: Lawrence E. Bailey
14.0 Entire Agreement
14.1 This Employment Agreement constitutes the entire agreement between
Company and Employee with respect to the subject matter hereof and all
previous representations or agreements, whether written or oral are hereby
annulled and superseded. No change, modification or alteration of any of the
provisions of this Employment Agreement shall be binding unless such change,
modification or alteration shall have been approved in writing by a Company
officer.
Employee acknowledges that he has read this Employment Agreement,
understands it and is bound by its terms and conditions. Employee further
acknowledges that he has voluntarily executed this Employment Agreement in
accordance with the terms and conditions set forth herein.
IN WITNESS WHEREOF, each party hereto has caused this Employment
Agreement to be executed by its duly authorized representatives on the day and
year set forth below.
s/Andrew H. Aitken s/Lawrence E. Bailey
Employee Company
Date: December 9, 1997
<PAGE>
Annual Report 1997
New England Power Company
A Subsidiary of
New England Electric System
[LOGO] New England Power
A NEES Company
<PAGE>
New England Power Company
25 Research Drive
Westborough, Massachusetts 01582
Directors
(As of March 18, 1998)
Lawrence E. Bailey
President of the Company
Alfred D. Houston
Chairman of the Company and Executive Vice President of New
England Electric System
Cheryl A. LaFleur
Vice President and General Counsel of the Company and Senior Vice
President, General Counsel, and Secretary of New England Electric
System
Richard P. Sergel
President and Chief Executive Officer of New England Electric
System Officers
(As of March 18, 1998)
Alfred D. Houston
Chairman of the Company and Executive Vice President of New
England Electric System
Lawrence E. Bailey
President of the Company
Andrew H. Aitken
Vice President of the Company
Michael E. Hachey
Vice President of the Company
Michael E. Jesanis
Vice President of the Company and Senior Vice President and Chief
Financial Officer of New England Electric System
Cheryl A. LaFleur
Vice President and General Counsel of the Company and Senior Vice
President, General Counsel, and Secretary of New England Electric
System
John F. Malley
Vice President of the Company
Masheed H. Rosenqvist*
Vice President of the Company
Arnold H. Turner**
Vice President of the Company
Jeffrey W. VanSant
Vice President of the Company
<PAGE>
Robert King Wulff
Clerk of the Company and of certain affiliates, Secretary or
Assistant Clerk of certain affiliates and Assistant Secretary of
an affiliate
John G. Cochrane
Treasurer of the Company and of certain affiliates, Vice
President of an affiliate, Assistant Treasurer of an affiliate
and Treasurer of New England Electric System
Kirk L. Ramsauer
Assistant Clerk of the Company and of certain affiliates, and
Secretary, Assistant Secretary or Clerk of certain affiliates
Howard W. McDowell
Assistant Treasurer and Controller of the Company and of certain
affiliates, Treasurer or Controller of certain affiliates and
Assistant Secretary of an affiliate
* Effective April 1, 1998
** Mr. Turner plans to retire
effective April 1, 1998.
Transfer Agent and Dividend Paying Agent of Preferred Stock
Bank of Boston, Boston, Massachusetts
Registrar of Preferred Stock
State Street Bank and Trust Company, Boston, Massachusetts
This report is not to be considered an offer to sell or buy or
solicitation of an offer to sell or buy any security.
<PAGE>
New England Power Company
New England Power Company, (the Company) a wholly owned
subsidiary of New England Electric System (NEES), is a
Massachusetts corporation qualified to do business in
Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine,
and Vermont. The Company is subject, for certain purposes, to
the jurisdiction of the regulatory commissions of these six
states, the Securities and Exchange Commission (SEC), and the
Federal Energy Regulatory Commission (FERC). The Company's
business is currently that of generating, purchasing,
transmitting, and selling electric energy in wholesale quantities
to other electric utilities, principally its distribution
affiliates Granite State Electric Company (Granite State
Electric), Massachusetts Electric Company (Massachusetts
Electric), Nantucket Electric Company (Nantucket Electric), and
The Narragansett Electric Company (Narragansett Electric). In
August 1997, the Company and Narragansett Electric entered into
an agreement to sell their nonnuclear generating business to an
independent third party. See the "Divestiture of Generation
Business" section of Financial Review.
In accordance with industry restructuring settlements in both
Massachusetts and Rhode Island, the Company's wholesale contracts
with its distribution affiliates have been amended. These
amendments allow for termination of the all-requirements services
under those contracts. They also allow the Company to recover
the cost of its above-market generation commitments allocable to
Massachusetts Electric and Narragansett Electric (95 percent of
the total costs) through a transition access charge, which the
distribution affiliates will collect from customers. In February
1998, a comprehensive settlement agreement was reached with
parties in the state of New Hampshire, which, upon receipt of all
required regulatory approvals, would provide for arrangements
similar to those of the Massachusetts and Rhode Island
settlements. Efforts are ongoing with unaffiliated customers to
secure recovery of the balance of the Company's above-market
commitments. See the "Industry Restructuring" section of
Financial Review for further discussion.
<PAGE>
Report of Independent Accountants
New England Power Company, Westborough, Massachusetts:
We have audited the accompanying balance sheets of New
England Power Company (the Company), a wholly owned subsidiary of
New England Electric System, as of December 31, 1997 and 1996 and
the related statements of income, retained earnings, and cash
flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
March 2, 1998
<PAGE>
New England Power Company
Financial Review
Industry Restructuring
On August 5, 1997, the Company and its Rhode Island
distribution affiliate Narragansett Electric reached an agreement
to sell their nonnuclear generating business to USGen New
England, Inc (USGen), an indirect wholly owned subsidiary of PG&E
Corporation. The divestiture of the nonnuclear generating
business is in connection with the restructuring of the electric
utility industry.
Historically, electric utilities have provided their customers
bundled electric service within exclusive franchise service
territories. As the result of a number of trends, including a
disparity in electric rates among regions of the country and new
regulations and legislation intended to foster competition,
retail customers are being allowed to choose their power
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution
systems. Because of legislation enacted in the states served by
the NEES companies, most customers served by the NEES companies
will have the ability to choose their power supplier by the first
quarter of 1998.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments incurred to supply
customers under a regulated structure. The amounts by which such
costs exceed market prices are commonly referred to as stranded
costs." As described below, the Company has reached settlement
agreements with all of its distribution affiliates and with
parties representing the distribution customers of those
affiliates. In each case, these settlements provide for recovery
of stranded costs.
Massachusetts Legislation and Settlement Agreement
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1,
1998. The legislation requires electric companies to provide
customers who do not choose a power supplier with a transition
rate (or "standard offer generation service") which results in a
10 percent rate reduction, with the discount increasing to 15
percent on or before September 1, 1999. The legislation also
provides a mechanism for the recovery of stranded costs resulting
from the introduction of customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) (formerly the Massachusetts
Department of Public Utilities (MDPU)) found that a settlement
agreement (the Massachusetts Settlement) previously reached among
the Company, the Company's Massachusetts distribution affiliates
Massachusetts Electric and Nantucket Electric, and various
governmental agencies and other interested parties substantially
<PAGE>
complies with or is consistent with the Massachusetts statute.
The Massachusetts Settlement was also conditionally approved by
the FERC in November 1997, subject to a compliance filing to
clarify the impact of the settlement on nonsettling parties.
In accordance with the Massachusetts Settlement, the Company's
wholesale contracts with Massachusetts Electric and Nantucket
Electric have been amended effective March 1, 1998. The
Massachusetts Settlement provides that Massachusetts Electric's
and Nantucket Electric's share of the Company's stranded costs
will be recovered from distribution customers through a
transition access charge, which will be collected by these
distribution companies. Under the Massachusetts Settlement, the
recovery of the Company's stranded costs is divided into several
categories. Unrecovered costs associated with generating plants
and regulatory assets would be recovered over 12 years and would
earn a return on equity of 9.4 percent. The above-market
component of purchased power contracts and nuclear
decommissioning costs would be recovered as incurred over the
life of those obligations, a period expected to extend beyond 12
years. Initially, the transition access charge was set at 2.8
cents per kilowatthour (kWh). The MDTE has approved a reduction
of the initial transition access charge to 2.7 cents per kWh for
Massachusetts Electric and Nantucket Electric, effective March
1, 1998. The Company's filing with the FERC to approve this
reduction is pending. The transition access charge would be
reduced further upon completion of the sale of the Company's
generating business, as described below. As the transition
access charge declines, the Company would earn incentives based
on successful mitigation of its stranded costs. These incentives
would supplement the Company's return on equity.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, the Company and Narragansett Electric entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen. See "Divestiture of Generating
Business" below. The net proceeds from the sale of the
nonnuclear generating business to USGen will be used to reduce
the transition access charge to approximately 1.5 cents per kWh.
In addition, the FERC accepted the NEES companies proposal in
conjunction with their divestiture filing that the recovery of
the remaining above-market nuclear generating plant investment
and regulatory assets be completed by the end of the year 2000.
A referendum question which asks voters to repeal the
Massachusetts statute is expected to be on the ballot in November
1998. The NEES companies are unable to predict the outcome.
While by itself, repeal of the statute is not expected to
materially impair the effectiveness of the previously approved
Massachusetts Settlement, the potential exists that following
repeal, there could be legislative or regulatory actions which
could be materially adverse to the NEES companies.
<PAGE>
Rhode Island Legislation and Settlement Agreement
In August 1996, the state of Rhode Island enacted legislation
that allows customers in that state the opportunity to choose
their power supplier. Under the Rhode Island statute, state
accounts, certain new customers, and the largest manufacturing
customers were able to choose their power supplier beginning on
July 1, 1997. The balance of Rhode Island customers gained the
ability to choose their power supplier on January 1, 1998. The
Rhode Island statute also provided utilities with the ability to
recover stranded costs.
In November 1997, the FERC conditionally approved a settlement
agreement among the Company, its Rhode Island distribution
affiliate Narragansett Electric, the Rhode Island Public
Utilities Commission and the Rhode Island Division of Public
Utilities and Carriers, to implement the stranded cost recovery
provisions of the Rhode Island statute, subject to a compliance
filing to clarify the impact of the settlement on nonsettling
parties. The terms of the Rhode Island Settlement are
substantially the same as the Massachusetts Settlement.
New Hampshire Legislation and Settlement Agreement
On February 3, 1998, the Company and its New Hampshire
distribution affiliate Granite State Electric reached a
comprehensive settlement agreement with the Governor's office of
the State of New Hampshire and a number of other interested
parties on a plan to provide choice of power supplier to its
customers by no later than July 1, 1998. This settlement
agreement was reached in response to a previously enacted New
Hampshire statute which requires customer choice of power
supplier. The principal terms of the New Hampshire settlement
agreement, which require approval by state and federal
regulators, are substantially similar to the Massachusetts
Settlement and the Rhode Island Settlement, including rate
reductions for customers and the ability to recover stranded
costs.
Unaffiliated Customers
Agreements have not yet been reached with certain wholesale
customers that represent less than 2 percent of the Company's
stranded cost exposure. In March 1998, the largest of these
customers, the Town of Norwood, Massachusetts, gave notice of its
intent to terminate its contract with the Company, without
accepting responsibility for its share of the Company's stranded
costs, and to begin taking power from another supplier. The
Company has filed with the FERC for permission to charge Norwood
a contract termination charge for its share of the Company's
stranded costs.
Divestiture of Generating Business
As described above, in August 1997, the Company and
Narragansett Electric (collectively, the Sellers) reached an
agreement to sell their nonnuclear generating business to USGen.
<PAGE>
The nonnuclear generating business includes three fossil-fueled
generating stations and 15 hydroelectric generating stations,
totaling approximately 4,000 megawatts (MW) of capacity, as well
as NEES' interest in Narragansett Energy Resources Company
(NERC), a 20 percent general partner in the Ocean State Power
project, all of which has a book value of $1.1 billion. USGen
will pay the Sellers $1.59 billion in cash, of which $225 million
will be contingent upon the introduction of customer choice of
power supplier in Massachusetts. Based on the enactment of the
Massachusetts statute, the NEES companies believe that the
conditions for payment of the full purchase price have been met.
USGen will also reimburse the NEES companies for $85 million of
costs associated with early retirement and special severance
programs for employees affected by industry restructuring. USGen
will assume responsibility for environmental conditions at the
Sellers' nonnuclear generating stations. USGen will also assume
the Sellers' obligations under long-term fuel and fuel
transportation contracts and certain collective bargaining
agreements for nonnuclear facilities.
In addition to the purchase of the generating stations, USGen
will purchase the Company's entitlement to approximately 1,100 MW
of power procured under long-term contracts. The Company will
make a monthly fixed contribution toward the above-market cost of
the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale and
conditionally approved most supporting filings. On February 27,
1998, the FERC approved the transfer of the hydroelectric
generating licenses to USGen. While the timing of receipt of
final regulatory approvals is uncertain, receipt of all approvals
is unlikely before mid-1998. Closing is contingent upon all
regulatory approvals being obtained by February 1999.
In order to meet the terms of the Company's mortgage
indenture, the Company will be required, prior to the
consummation of the sale, to either defease or call approximately
$278 million of its mortgage bonds. Any defeasance of bonds
would be by deposit of cash representing principal and interest
to the maturity date, or interest, principal, and general
redemption premium to an earlier redemption date. In addition,
the Company will retire approximately $372 million of mortgage
bonds securing the issuance of a like amount of pollution control
revenue bonds (PCRBs) by various public agencies. However, the
Company expects that substantially all of the underlying PCRBs
will remain outstanding as unsecured obligations of the Company.
In addition, the long-term debt of NERC will be retired prior to
the closing.
<PAGE>
Upon completion of the divestiture of the Company's nonnuclear
generation business, the Company's stranded costs that will be
recovered from distribution customers through a transition
access charge, which will be collected by the Company's
distribution affiliates, will be reduced from $4.5 billion to
$2.1 billion.
As part of the divestiture plan, in February 1998, New England
Energy Incorporated (NEEI) (a wholly owned subsidiary of NEES)
sold its oil and gas properties for approximately $50 million.
NEEI's loss on the sale of approximately $120 million, before
tax, has been reimbursed by the Company.
At the divestiture date, any gain or loss from the divestiture
of nonnuclear generating assets and oil and gas assets will be
recorded as a regulatory asset or liability to be recovered as
part of the Company's stranded costs, through the ongoing
transition access charge, consistent with the settlement
agreements. The Company may be required to record a liability
for the monthly fixed contribution towards the above-market cost
of purchased power. In such an event, the Company would also
record a regulatory asset consistent with the settlement
agreements.
In addition, the Company will endeavor to sell, or otherwise
transfer, its minority interest in three nuclear power plants and
a 60 MW interest in a fossil-fueled generating station in Maine
to nonaffiliates. Until such time as the nuclear interests are
divested, the Company will share with customers 80 percent of the
revenues and operating costs related to the units, with
shareholders retaining the balance. In the event that the
Company determines that it has an impairment of its nuclear plant
balances under Statement of Financial Accounting Standards No.
121, Accounting for Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of (FAS 121), it will record any such impairment
as a regulatory asset.
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions beginning in 1998 as a result of industry
restructuring and the sale of the nonnuclear generating business.
The NEES companies are in the process of offering early
retirement programs to their union and non-union employees,
contingent upon the closing of the sale of the nonnuclear
generating business to USGen. In addition, the NEES companies
intend to offer enhanced severance benefits to affected
employees. As previously described, the costs of the early
retirement and severance programs for all NEES companies are
expected to be substantially recovered from the proceeds of the
sale of the nonnuclear generating business. Since the early
retirement program is contingent upon the divestiture, its cost
will not be accrued until that time.
<PAGE>
Risk Factors
While the Company believes that the previously described
settlements and legislation and the sale agreement with USGen and
other developments, including the New Hampshire Settlement,
constitute substantial progress in reducing the impacts
associated with industry restructuring, significant risks remain.
These include, but are not limited to: (i) the potential that
ultimately the settlements will not be implemented in the manner
anticipated by the Company, (ii) the possibility that a voter
referendum in November 1998 could overturn the Massachusetts
legislation, followed by materially adverse legislative or
regulatory actions, (iii) the possibility of federal legislation
that would increase the risks above those contained in the
settlements and the Massachusetts and Rhode Island statutes, (iv)
the potential for adverse stranded cost recovery decisions
involving wholesale customers with whom settlements have not yet
been reached and (v) the failure to complete the sale of the
generating business to USGen.
This report contains statements that may be considered forward
looking under the securities laws. Actual results may differ
materially for the reasons discussed in this Financial Review.
Upon the introduction of consumer choice, settlement agreements
related to recovery of stranded costs will limit the Company's
return on equity to approximately 9.4 percent, before mitigation
incentives, which is significantly lower than that earned by the
Company in recent years. Following completion of the sale of the
nonnuclear generating business, the Company's earnings will also
be affected by the return on the reinvestment of sale proceeds,
which is expected, at least in the near term, to be considerably
less than the return historically earned by the generating
business.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $420
million in net regulatory assets in compliance with FAS 71. This
amount excludes any effects related to the divestiture of NEEI's
oil and gas properties discussed above.
In response to concerns expressed by the staff of the SEC, the
Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board took under consideration how FAS 71 should be
applied in light of recent changes within the regulated utility
industry. In July 1997, the EITF concluded that a utility whose
ongoing generation operations would not permit the application of
<PAGE>
FAS 71, but had otherwise received approval to recover stranded
costs through regulated transmission and distribution rates,
would be permitted to continue to apply FAS 71 to the recovery of
the stranded costs.
The restructuring settlements and statutes each provide for
recovery of substantially all applicable stranded costs of
generating assets and oil and gas related assets (including
regulatory assets) not recoverable from the proceeds of the
divestiture of the Company's generating business. The cost of
these assets would be recovered as part of a cost-based
transition access charge imposed on all distribution customers.
Additionally, FERC Order No. 888 enables transmission companies
to recover their specific costs of providing transmission
service. Therefore, after the proposed divestiture,
substantially all of the Company's business, including the
recovery of its stranded costs, would remain under cost-based
rate regulation. The Company believes these factors and the
EITF conclusion will allow it to continue to apply FAS 71. As a
result of the FERC approval of the restructuring settlements in
November 1997, the Company was required to cease to apply FAS 71
to the 20 percent of its ongoing nuclear operations, as described
under "Divestiture of Generation Business," the impact of which
is expected to be immaterial.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations. In addition, write-downs of
plant assets under FAS 121 could be required, including a
write-off of any gain or loss from the divestiture of the
generating business.
Overview of Financial Results
Net income for 1997 decreased $8 million compared with 1996.
The decrease was primarily due to increased operation and
maintenance costs. The decrease was partially offset by a
transmission rate increase, decreased purchased electric energy
costs, excluding fuel, and decreased depreciation and
amortization.
Net income increased by $1 million in 1996. This increase
reflected a reduction in purchased electric energy, excluding
fuel and a reduction in operation and maintenance expense.
Partially offsetting these increases were decreases in allowance
for funds used during construction (AFDC) and increased property
taxes, both primarily due to the completion in the second half of
1995 of the Manchester Street generating station, as well as
increased integrated facilities credits to the Company's
affiliate, Narragansett Electric. The Company also experienced
reduced peak demand charge billings in 1996.
<PAGE>
Operating Revenue
The following table summarizes the changes in operating
revenue:
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Revenue
(In millions) 1997 1996
---- ----
<S> <C> <C>
Sales growth, peak demand charges, and
stranded investment recovery $ 2 $(4)
Fuel recovery 55 48
Narragansett integrated facilities credit 5 (9)
Other, including transmission revenues 16 (5)
--- ---
$78 $30
=== ===
</TABLE>
Sales decreased in 1997 primarily due to a decrease in peak
demand billing as a result of milder weather in the first quarter
of 1997, as well as reduced load due to retail wheeling pilot
programs instituted by Massachusetts Electric and Granite State
Electric. These decreases are more than offset by stranded
investment recovery, which represents amounts being recovered in
connection with these retail wheeling pilot programs, and with
the first phase of retail competition by Narragansett Electric.
For a discussion of fuel recovery revenues, see the fuel costs
discussion in the "Operating Expenses" section.
The entire output of Narragansett Electric's generating
capacity is made available to the Company. Narragansett Electric
receives a credit on its purchased power bill from the Company
for its fuel costs and other generation and transmission related
costs. The reduction in these credits in 1997 reflects a
reduction in dismantlement costs being incurred by Narragansett
Electric on a previously retired generating facility. The
increased credits in 1996 relate to costs associated with the
dismantlement of the previously retired South Street generating
facility and with Narragansett Electric's portion of costs
associated with the repowered Manchester Street generating
station that entered commercial operation in the second half of
1995.
The increase in other revenues in 1997 is primarily due to a
transmission rate increase that went into effect in mid-1996.
<PAGE>
Operating Expenses
The following table summarizes the changes in operating
expenses:
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Expenses
(In millions) 1997 1996
---- ----
<S> <C> <C>
Fuel costs $ 55 $ 52
Purchased energy excluding fuel (6) (28)
Other operation and maintenance 49 (22)
Depreciation and amortization (6) 1
Taxes (1) 8
---- ----
$ 91 $ 11
==== ====
</TABLE>
Fuel costs represent fuel for generation and the portion of
purchased electric energy permitted in the past to be recovered
through the Company's fuel adjustment clause. After the
divestiture of the nonnuclear generating business, the Company
will not require such a mechanism. The increase in fuel costs in
1997 and 1996 reflects increased power supply to other utilities,
increased replacement power costs due to the reduced generation
from partially owned nuclear units, and an increase in the cost
of short-term purchased power. The increase in 1996 is also due
to fixed pipeline demand charges that, prior to the completion of
the Manchester Street Station, were being partially deferred for
amortization and recovery after the unit went into service in the
second half of 1995.
The decrease in purchased power costs, excluding fuel, during
1997 reflects reduced charges from the Connecticut Yankee nuclear
power plant, which was permanently closed in December 1996. This
decrease was partially offset by increased charges from the Maine
Yankee nuclear power plant, which was permanently closed in mid-
1997. The decrease in 1996 reflected the expiration of certain
purchased power contracts.
The decrease in depreciation and amortization expense reflects
the completion of the amortization of the Company's pre-1988
investment in the Seabrook 1 nuclear unit and the Company's
investment in the canceled Seabrook 2 nuclear unit. In
accordance with 1995 settlement agreement, upon completion of the
amortization of Seabrook 1 and Seabrook 2, the Company agreed to
accelerate its amortization of previously deferred costs
associated with postretirement benefits other than pensions
(PBOPs). Upon completion of the PBOP amortization, which
occurred in July 1997, the Company was required to accelerate its
depreciation of its investment in the Millstone 3 nuclear unit.
This accelerated depreciation is recorded as a regulatory
liability.
<PAGE>
The increase in other operation and maintenance expenses in
1997 is due to an increase of $8 million in transmission wheeling
costs, increased maintenance costs of $14 million at the
partially owned Millstone 3 and Seabrook 1 nuclear facilities, an
$11 million increase in deferred PBOP amortization mentioned
above, an overall increase in general and administrative costs,
start-up costs associated with the new regional transmission
control organization, and the Company's share of costs associated
with the restoration to service of previously idled facilities
throughout New England in response to a tightening regional power
supply. The decrease in operation and maintenance in 1996
reflected reduced thermal and hydro generating plant overhaul
activity, partially offset by $13 million of costs to correct
deficiencies at the Millstone 3 nuclear unit, in which the
Company has a 12 percent ownership interest. The Company also
experienced a reduction in transmission wheeling costs, pension
costs, PBOPs, and other general and administrative costs.
Allowance for Funds Used During Construction (AFDC)
The decrease in AFDC in 1996 is due to the completion of the
Manchester Street plant repowering project.
Nuclear Units
Nuclear Units Permanently Shut Down
Three of the four regional nuclear generating companies in
which the Company has a minority interest own nuclear generating
units which have been permanently shut down. These three units
are as follows:
<TABLE>
<CAPTION>
NEP's Investment Future Estimated
Unit Percent Amount Date Retired Billings to NEP($)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 7 million Feb 1992 44 million
Connecticut Yankee 15 17 million Dec 1996 92 million
Maine Yankee 20 16 million Aug 1997 164 million
</TABLE>
In the case of each of these units, the Company has recorded
an estimate of the total future payment obligation as a liability
and an offsetting regulatory asset, reflecting estimated future
billings from the companies. In a 1993 decision, the FERC
allowed Yankee Atomic to recover its undepreciated investment in
the plant as well as unfunded nuclear decommissioning costs and
other costs. Connecticut Yankee and Maine Yankee have both filed
similar requests with the FERC. Several parties have intervened
in opposition to both filings. The Company's stranded cost
settlements allow it to recover all costs that the FERC allows
the Yankee companies to bill to the Company.
In October 1997, the Citizen's Awareness Network and Nuclear
Information and Resource Service filed a petition with the
Nuclear Regulatory Commission (NRC) that would require formal
<PAGE>
NRC approval of a plant decommissioning plan for the Connecticut
Yankee and Maine Yankee plants. In 1998, the petitioners
indicated their intention to file a request with the NRC designed
to overturn a current NRC rule on decommissioning. The Company
cannot predict what impact, if any, these activities will have on
the cost of decommissioning the plants.
At Maine Yankee, the NRC has identified numerous apparent
violations of its regulations, which may result in the assessment
of significant civil penalties.
In the 1970s, the Company and several other shareholders
(Sponsors) of Maine Yankee entered into 27 contracts (Secondary
Purchase Agreements) under which they sold portions of their
entitlement to Maine Yankee power output through 2002 to various
entities, primarily municipal and cooperative systems in New
England (Secondary Purchasers). Virtually all of the Secondary
Purchasers have ceased making payments under the Secondary
Purchase Agreements and have demanded arbitration, claiming that
such agreements excuse further payments upon plant shutdown. The
Company has notified the Secondary Purchasers that the shutdown
does not relieve them of their obligation to make payments under
the Secondary Purchase Agreements and that they are in default of
such agreements. The Company has asked the FERC to enforce the
Company's rights under the agreements. In the event that no
further payments are forthcoming from Secondary Purchasers, the
Company, as a primary obligor to Maine Yankee, would be required
to pay an additional $9 million of future shutdown costs. These
costs are not included in the $164 million estimate disclosed in
the table above. Shutdown costs are recoverable from customers
under the stranded cost settlements.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for
the plant decommissioning, the owners of Maine Yankee are jointly
and severally liable for the shortfall.
Operating Nuclear Units
The Company has minority interests in three other nuclear
generating units, Vermont Yankee, Millstone 3, and Seabrook 1.
In October 1996, the NRC issued letters to operators of nuclear
power plants requiring them to document that the plants are
operated and maintained within their design and licensing bases,
and that any deviations are reconciled in a timely manner. The
Seabrook 1 and Vermont Yankee nuclear power plants responded to
the NRC letters in February 1997. Millstone 3 is currently shut
down and has been placed on the NRC "Watch List," signifying that
its safety performance exhibits sufficient weakness to warrant
increased NRC attention. Millstone 3 may not restart without NRC
approval.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service
lives, availability, and costs. These uncertainties stem from a
combination of factors, including the acceleration of competitive
<PAGE>
pressures in the power generation industry and increased NRC
scrutiny. The Company performs periodic economic viability
reviews of operating nuclear units in which it holds ownership
interests.
Millstone 3
In April 1996, the NRC ordered Millstone 3, which has
experienced numerous technical and nontechnical problems, to
remain shut down pending verification that the unit's operations
are in accordance with NRC regulations and the unit's operating
license. Millstone 3 is operated by a subsidiary of Northeast
Utilities (NU). The Company is not an owner of the Millstone 1
and 2 nuclear generating units, which are also shut down under
NRC orders.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
an NRC assessment concluding a safety conscious work environment
exists, public meetings, and a vote of the NRC Commissioners.
The Company cannot predict when Millstone 3 will be allowed by
the NRC to restart, but believes restart of the unit is unlikely
prior to the summer of 1998.
Since April 1996, the Company has incurred an estimated $35
million in incremental replacement power costs, which it has been
recovering from customers through its fuel clause. During the
outage, the Company is incurring incremental replacement power
costs of approximately $2 million per month.
Several criminal investigations related to Millstone 3 are
ongoing. In December 1997, the NRC assessed civil penalties
totaling $2.1 million for numerous violations at the three
Millstone units. The Company's share of this fine was less than
$100,000. The Connecticut Department of Environmental Protection
and Connecticut Attorney General have filed suit against NU for
alleged wastewater discharge violations at the Millstone units,
which may result in the assessment of substantial civil
penalties.
In August 1997, the Company filed suit against NU in
Massachusetts Superior Court for damages resulting from the
tortious conduct of NU relating to Millstone 3. The Company is
seeking compensation for the losses it has suffered, including
the costs of lost power and costs necessary to assure that
Millstone 3 can safely return to operation. The Company also
seeks punitive damages. NU has filed for dismissal of the suit
and sought to consolidate it with suits filed by other joint
owners in Massachusetts Superior Court.
The Company also sent a demand for arbitration to Connecticut
Light & Power Company and Western Massachusetts Electric Company,
both subsidiaries of NU, seeking damages resulting from their
breach of obligations under an agreement with the Company and
others regarding the operation and ownership of Millstone 3.
<PAGE>
Brayton Point
In October 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to determine whether to
modify or revoke and reissue the Company's water discharge permit
for its Brayton Point 1,576 MW power plant. This action came two
years before the permit expiration date. The EPA stated it took
this step in response to a request from the Rhode Island
Department of Environmental Management (RIDEM). A RIDEM report
asserted a statistical correlation between the decline in the
fish population in Mount Hope Bay and a change in operations at
Brayton Point that occurred in the mid-1980s.
In April 1997, the Company signed a memorandum of agreement
negotiated with the various federal and state environmental
agencies under which the Company will voluntarily operate under
more stringent conditions than under its existing permit. The
agreement was in lieu of any immediate action on the permit, and
will remain in effect until a renewal permit is issued. On
January 16, 1998, the Company applied for a new water discharge
permit with both the EPA and the Massachusetts Department of
Environmental Protection. The Company cannot predict at this
time what permit changes will be required or the impact on
Brayton Point's operations and economics. However, permit
changes may substantially impact the plant's capacity and ability
to produce energy and/or require substantial capital expenditures
to construct equipment to address the concerns raised by the
environmental agencies.
Year 2000 Computer Issues
In the next two years, most large companies will face a
potentially serious information systems (computer) problem
because most software applications and operational programs
written in the past will not properly recognize calendar dates
beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The NEES companies
began the process of identifying the changes required to their
computer programs and hardware during 1996. The necessary
modifications to the NEES companies' centralized financial,
customer, and operational information systems are expected to be
completed by the end of 1998. Noncentralized systems are also
being reviewed for Year 2000 problems. The NEES companies
believe total costs associated with making the necessary
modifications to all centralized and noncentralized systems will
be approximately $25 million, of which approximately $8 million
has been incurred as of December 31, 1997. Most of the remaining
costs are expected to be incurred prior to December 31, 1998.
The Company's share of the total costs is expected to be
approximately $10 million.
<PAGE>
Utility Plant Expenditures and Financing
Cash expenditures for utility plant totaled $70 million for
1997. The funds necessary for utility plant expenditures during
the period were provided by net cash from operating activities,
after the payment of dividends. Cash expenditures for utility
plant for 1998 are estimated to be $55 million, principally
related to transmission functions. Internally generated funds
are expected to fully cover the Company's 1998 capital
expenditures in 1998.
In 1997, the Company retired $3 million of maturing long-term
debt. The Company also retired $35 million of mortgage bonds
prior to maturity and incurred premiums of $2.2 million
associated with the early retirement.
At December 31, 1997, the Company had $111 million of
short-term debt outstanding including $108 million of commercial
paper borrowings and $3 million of borrowings from affiliates.
At December 31, 1997, the Company had lines of credit and bond
purchase facilities with banks totaling $580 million which are
available to provide liquidity support for commercial paper
borrowings and for $372 million of the Company's outstanding
variable rate mortgage bonds in tax-exempt commercial paper mode
and for other corporate purposes. There were no borrowings under
these lines of credit at December 31, 1997.
New Accounting Standards
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
is currently evaluating the impact that these new accounting
standards will have on its future reporting requirements.
<PAGE>
New England Power Company
Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue, principally
from affiliates $1,677,903 $1,600,309 $1,570,539
Operating expenses:
Fuel for generation 372,734 342,545 279,849
Purchased electric energy 527,647 508,910 547,926
Other operation 241,506 203,456 211,872
Maintenance 89,820 79,118 92,954
Depreciation and amortization 98,024 104,209 102,758
Taxes, other than income taxes 67,311 66,416 58,716
Income taxes 90,009 91,894 91,051
---------- ---------- ----------
Total operating expenses 1,487,051 1,396,548 1,385,126
---------- ---------- ----------
Operating income 190,852 203,761 185,413
Other income:
Allowance for equity funds
used during construction - - 7,746
Equity in income of nuclear
power companies 5,189 5,159 5,721
Other income (expense), net (3,404) (1,851) (1,610)
---------- ---------- ----------
Operating and other income 192,637 207,069 197,270
---------- ---------- ----------
Interest:
Interest on long-term debt 42,277 45,111 46,797
Other interest 7,055 10,066 10,525
Allowance for borrowed funds used
during construction - credit (1,238) (591) (11,479)
---------- ---------- ----------
Total interest 48,094 54,586 45,843
---------- ---------- ----------
Net income $ 144,543 $ 152,483 $ 151,427
========== ========== ==========
Statements of Retained Earnings
Year ended December 31,
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Retained earnings at beginning
of year $ 400,610 $ 385,309 $ 372,763
Net income 144,543 152,483 151,427
Dividends declared on cumulative
preferred stock (2,075) (2,574) (3,433)
Dividends declared on common stock,
$21.00, $20.80, and $21.00
per share, respectively (135,448) (134,158) (135,448)
Premium on redemption of
preferred stock - (450) -
---------- --------- ----------
Retained earnings at end of year $ 407,630 $ 400,610 $ 385,309
========== ========= ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
New England Power Company
Balance Sheets
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at original cost $3,057,749 $2,991,797
Less accumulated provisions
for depreciation and amortization 1,196,972 1,118,340
---------- ----------
1,860,777 1,873,457
Construction work in progress 29,015 36,836
---------- ----------
Net utility plant 1,889,792 1,910,293
---------- ----------
Investments:
Nuclear power companies, at equity (Note D-1) 49,825 47,902
Nonutility property and other investments 34,723 30,591
---------- ----------
Total investments 84,548 78,493
---------- ----------
Current assets:
Cash 1,643 3,046
Accounts receivable:
Affiliated companies 233,308 201,370
Accrued NEEI revenues (Note D-3) 11,419 21,648
Others 26,638 23,219
Fuel, materials, and supplies, at average cost 47,492 58,709
Prepaid and other current assets 17,837 25,050
---------- ----------
Total current assets 338,337 333,042
---------- ----------
Accrued Yankee nuclear plant costs (Note D-2) 299,564 166,413
Deferred charges and other assets (Note B) 150,851 159,474
---------- ----------
$2,763,092 $2,647,715
========== ==========
Capitalization and Liabilities
Capitalization:
Common stock, par value $20 per share,
authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998
Premium on capital stock 86,779 86,779
Other paid-in capital 289,818 289,818
Retained earnings 407,630 400,610
Unrealized gain on securities, net 34 -
---------- ----------
Total common equity 913,259 906,205
Cumulative preferred stock, par value
$100 per share (Note H) 39,666 39,666
Long-term debt 647,720 733,006
---------- ----------
Total capitalization 1,600,645 1,678,877
---------- ----------
Current liabilities:
Long-term debt due in one year 50,000 3,000
Short-term debt (including $3,125
and $5,275 to affiliates) 111,250 93,600
Accounts payable (including $14,373
and $25,301 to affiliates) 109,121 127,226
Accrued liabilities:
Taxes 39 8,158
Interest 8,905 9,668
Other accrued expenses (Note G) 23,554 16,577
Dividends payable 35,474 27,412
---------- ----------
Total current liabilities 338,343 285,641
---------- ----------
Deferred federal and state income taxes 369,757 382,164
Unamortized investment tax credits 53,463 55,486
Accrued Yankee nuclear plant costs (Note D-2) 299,564 166,413
Other reserves and deferred credits 101,320 79,134
Commitments and contingencies (Note D)
---------- ----------
$2,763,092 $2,647,715
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
New England Power Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 144,543 $ 152,483 $ 151,427
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 101,186 108,338 108,384
Deferred income taxes and
investment tax credits, net (12,728) (7,458) 25,683
Allowance for funds used
during construction (1,238) (591) (19,225)
Decrease (increase) in
accounts receivable (25,128) 19,629 1,321
Decrease (increase) in fuel,
materials, and supplies 11,217 (4,045) 18,697
Decrease (increase) in prepaid
and other current assets 7,213 2,936 5,743
Increase (decrease) in accounts payable (18,105) (36,565) (15,970)
Increase (decrease) in other
current liabilities (1,905) 9,640 (2,150)
Other, net 19,919 28,582 (28,244)
--------- --------- ---------
Net cash provided by
operating activities $ 224,974 $ 272,949 $ 245,666
========== ========= =========
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $ (69,863) $ (65,981) $(162,766)
Other investing activities (4,040) (3,878) (3,614)
---------- --------- ---------
Net cash used in
investing activities $ (73,903) $ (69,859) $(166,380)
--------- --------- ---------
Financing activities:
Dividends paid on common stock $(127,386) $(138,995) $(103,198)
Dividends paid on preferred stock (2,075) (2,574) (3,433)
Changes in short-term debt 17,650 (31,550) (20,425)
Long-term debt - issues - 47,850 60,000
Long-term debt - retirements (38,500) (57,850) (10,000)
Preferred stock - retirements - (20,900) -
Premium on reacquisition of long-term debt (2,163) - -
Gain on redemption of preferred stock - 1,368 -
--------- --------- ---------
Net cash used in
financing activities $(152,474) $(202,651) $ (77,056)
--------- --------- ---------
Net increase (decrease) in
cash and cash equivalents $ (1,403) $ 439 $ 2,230
Cash and cash equivalents
at beginning of year 3,046 2,607 377
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,643 $ 3,046 $ 2,607
========= ========= =========
Supplementary Information:
Interest paid less amounts capitalized $ 46,033 $ 51,212 $ 41,557
--------- --------- ---------
Federal and state income taxes paid $ 109,109 $ 96,006 $ 57,948
--------- --------- ---------
Dividends received from
investments at equity $ 3,267 $ 4,313 $ 5,014
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
New England Power
Notes to Financial Statements
Note A - Significant Accounting Policies
1. Nature of operations:
The Company, a wholly owned subsidiary of New England Electric
System (NEES), is a Massachusetts corporation and is qualified to
do business in Massachusetts, New Hampshire, Rhode Island,
Connecticut, Maine, and Vermont. The Company is subject, for
certain purposes, to the jurisdiction of the regulatory
commissions of these six states, the Securities and Exchange
Commission (SEC), and the Federal Energy Regulatory Commission
(FERC). The Company's business is currently that of generating,
purchasing, transmitting, and selling electric energy in
wholesale quantities to other electric utilities, principally its
affiliates Granite State Electric Company (Granite State
Electric), Massachusetts Electric Company (Massachusetts
Electric), Nantucket Electric Company (Nantucket Electric), and
The Narragansett Electric Company (Narragansett Electric). See
Note B for a discussion of industry restructuring and Note C for
a discussion of the Company's planned divestiture of its
nonnuclear generating business.
2. System of accounts:
The accounts of the Company are maintained in accordance with
the Uniform System of Accounts prescribed by regulatory bodies
having jurisdiction.
In preparing the financial statements, management is required
to make estimates that affect the reported amounts of assets and
liabilities and disclosures of asset recovery and contingent
liabilities as of the date of the balance sheets, and revenues
and expenses for the period. These estimates may differ from
actual amounts if future circumstances cause a change in the
assumptions used to calculate these estimates.
3. Allowance for funds used during construction (AFDC):
The Company capitalizes AFDC as part of construction costs.
AFDC represents the composite interest and equity costs of
capital funds used to finance that portion of construction costs
not yet eligible for inclusion in rate base. AFDC is
capitalized in "Utility plant" with offsetting noncash credits to
"Other income" and "Interest." This method is in accordance with
an established rate-making practice under which a utility is
permitted a return on, and the recovery of, prudently incurred
capital costs through their ultimate inclusion in rate base and
in the provision for depreciation. The composite AFDC rates were
5.9 percent, 5.8 percent, and 7.5 percent, in 1997, 1996, and
1995, respectively.
<PAGE>
4. Depreciation and amortization:
The depreciation and amortization expense included in the
statements of income is composed of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation $80,260 $ 78,187 $ 66,309
Nuclear decommissioning costs (Note D-2) 2,638 2,629 2,629
Amortization:
Investment in Seabrook 1
pursuant to rate settlement - 15,210 23,074
Oil Conservation Adjustment (OCA) - - 4,467
Seabrook 2 property losses 113 6,279 6,279
Millstone 3 additional amortization,
pursuant to rate settlement 15,013 1,904 -
------- -------- --------
Total depreciation and
amortization expense $98,024 $104,209 $102,758
======= ======== ========
</TABLE>
Depreciation is provided annually on a straight-line basis.
The provision for depreciation as a percentage of weighted
average depreciable property was 2.9 percent in 1997 and 1996,
and 2.7 percent in 1995.
Revenues from the OCA were used to accelerate the amortization
of expenditures for coal conversion facilities at the Company's
Salem Harbor Station. In addition, Seabrook 1 costs under the
1988 rate settlement were fully amortized at December 31, 1996.
Property losses associated with the Company's investment in the
canceled Seabrook 2 nuclear unit were fully amortized by March
31, 1997.
5. Cash:
The Company classifies short-term investments with a maturity
of 90 days or less at time of purchase as cash.
6. New Accounting Standards:
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
is currently evaluating the impact that these new accounting
standards will have on its future reporting requirements.
Note B - Industry Restructuring
As the result of legislation enacted in the states served by
the NEES companies, most customers served by the NEES companies
will have the ability to choose their power supplier by the first
quarter of 1998. When customers are allowed to choose their
power supplier, utilities face the risk that market prices may
not be sufficient to recover the costs of the commitments
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs." As described below, the Company
has reached settlement agreements with all of its distribution
affiliates and with parties representing the distribution
customers of those affiliates. In each case, these settlements
provide for recovery of stranded costs. See the "Industry
Restructuring" section of Financial Review for a more in-depth
discussion of current developments in this area.
The settlements generally provide for the following:
- - introduction of choice of power supplier in Rhode Island,
Massachusetts, and New Hampshire by January 1, 1998, March 1,
1998, and July 1, 1998, respectively;
- - a transition rate, or "standard offer generation service,"
resulting in rate reductions of approximately 10 percent at
the date of commencement of retail choice;
- - termination of all-requirements contracts between the Company
and its distribution affiliates on terms which allow the
Company to recover its stranded costs through a transition
access charge, which the distribution affiliates will collect
from customers;
- - adjustments to stranded cost recovery to reflect the market
value of fossil-fueled and hydroelectric generating assets,
determined through divestiture of such assets.
Under the various settlements, the recovery of the Company's
stranded costs is divided into several categories. Unrecovered
costs associated with generating plants and regulatory assets
would be recovered over 12 years and would earn a return on
equity of approximately 9.4 percent. The above-market component
of purchased power contracts and nuclear decommissioning costs
would be recovered as incurred over the life of those
obligations, a period expected to extend beyond 12 years.
Initially, the transition access charge was set at 2.8 cents per
kilowatthour (kWh). The MDTE has approved a reduction of the
initial transition access charge to 2.7 cents per kWh for
Massachusetts Electric and Nantucket Electric, effective March 1,
1998. The Company's filing with the FERC to approve this
reduction is pending. The transition access charge would be
reduced further upon completion of the sale of the Company's
generating business, as described below. As the transition
access charge declines, the Company would earn incentives based
on successful mitigation of its stranded costs. These incentives
would supplement the Company's return on equity. The
Massachusetts and Rhode Island settlements were approved by the
FERC in November 1997, subject to a compliance filing to clarify
the impact of the settlements on nonsettling parties. The
<PAGE>
Massachusetts Settlement was also found by the Massachusetts
Department of Telecommunications and Energy (formerly the
Massachusetts Department of Public Utilities) to be in
substantial compliance with or consistent with the Massachusetts
restructuring statute. The New Hampshire settlement is pending
before the New Hampshire Public Utilities Commission and the
FERC.
In August 1997, the Company and Narragansett Electric entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation. The net
proceeds from the sale of its nonnuclear generating business to
USGen will be used to reduce the transition access charge to
approximately 1.5 cents per kWh. In addition, the FERC accepted
the NEES companies proposal in conjunction with their divestiture
filing that the recovery of the remaining above-market nuclear
generating plant costs and regulatory assets be fully recovered
by the end of the year 2000. (see Note C for a discussion of the
Company's planned divestiture of its nonnuclear generating
business).
Accounting implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates.
In response to concerns expressed by the staff of the SEC, the
Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board took under consideration how FAS 71 should be
applied in light of recent changes within the regulated utility
industry. In July 1997, the EITF concluded that a utility whose
ongoing generation operations would not permit the application of
FAS 71, but had otherwise received approval to recover stranded
costs through regulated transmission and distribution rates,
would be permitted to continue to apply FAS 71 to the recovery of
the stranded costs.
The restructuring settlements and statutes each provide for
recovery of substantially all applicable stranded costs of
generating assets and oil and gas related assets (including
regulatory assets) not recoverable from the proceeds of the
divestiture of the Company's generating business. The cost of
these assets would be recovered as part of a cost-based
transition access charge imposed on all distribution customers.
Additionally, FERC Order No. 888 enables transmission companies
to recover their specific costs of providing transmission
service. Therefore, after the proposed divestiture,
<PAGE>
substantially all of the Company's business, including the
recovery of its stranded costs, would remain under cost-based
rate regulation. The Company believes these factors and the EITF
conclusion will allow it to continue to apply FAS 71. As a
result of the FERC approval of the industry restructuring
settlements, the Company was required to cease to apply FAS 71 to
the 20 percent of its ongoing nuclear operations, as described in
Note C, the impact of which is expected to be immaterial.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations. In addition, write-downs of
plant assets under Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of (FAS 121) could be
required, including a write-off of any gain or loss from the
divestiture of the generating business. At December 31, 1997,
the Company had approximately $420 million in regulatory assets
in compliance with FAS 71, as detailed in the table below. This
amount excludes any effects related to the divestiture of New
England Energy Incorporated's (NEEI) (a wholly owned subsidiary
of NEES) oil and gas properties, discussed in Note C.
The components of regulatory assets are as follows:
<TABLE>
<CAPTION>
At December 31, (In Thousands) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Regulatory assets included in current
assets and liabilities:
Accrued NEEI losses (see Note D-3) $ 11,419 $ 21,648
Rate adjustment mechanisms (6,957) (4,790)
------- --------
4,462 16,858
Regulatory assets included in deferred charges
and other reserves and deferred credits:
Accrued costs - Yankee nuclear
plants (See Note D-2) 299,564 166,413
Unamortized losses on reacquired debt 31,197 31,353
Deferred FAS No. 106 costs (see Note E-2) - 13,680
Deferred FAS No. 109 costs (see Note F) 25,738 27,461
Purchased power contract termination costs 15,662 19,578
Deferred gas pipeline charges (see Note D-6) 52,570 59,733
Accelerated amortization - Millstone 3 (16,917) (1,904)
Other 4,837 4,884
------- --------
412,651 321,198
-------- --------
$417,113 $338,056
======== ========
</TABLE>
<PAGE>
Note C - Divestiture of Generating Business
As described above, in August 1997, the Company and
Narragansett Electric (collectively, the Sellers) reached an
agreement to sell their nonnuclear generating business to USGen.
The nonnuclear generating business includes three fossil-fueled
generating stations and 15 hydroelectric generating stations,
totaling approximately 4,000 megawatts (MW) of capacity, as well
as Narragansett Energy Resources Company's (NERC) partnership
interest in the Ocean State Power project, all of which has a
book value of $1.1 billion. USGen will pay the Sellers $1.59
billion in cash, of which $225 million will be contingent upon
the introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. USGen will
also reimburse the NEES companies for $85 million of costs
associated with early retirement and special severance programs
for employees affected by industry restructuring. Since the
early retirement program is contingent upon the divestiture, its
cost will not be accrued until that time. USGen will assume
responsibility for environmental conditions at the Sellers'
nonnuclear generating stations. USGen will also assume the
Sellers' obligations under long-term fuel and fuel
transportation contracts and certain collective bargaining
agreements for nonnuclear facilities.
In addition to the purchase of the generating stations, USGen
will purchase the Company's entitlement to approximately 1,100 MW
of power procured under long-term contracts. The Company will
make a monthly fixed contribution toward the above-market cost of
the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale and
conditionally approved most supporting filings. On February 27,
1998, the FERC approved the transfer of the hydroelectric
generating licenses to USGen. While the timing of receipt of
final regulatory approvals is uncertain, receipt of all approvals
is unlikely before mid-1998. Closing is contingent upon all
regulatory approvals being obtained by February 1999.
In order to meet the terms of the Company's mortgage
indenture, the Company will be required, prior to the
consummation of the sale, to either defease or call approximately
$278 million of its mortgage bonds. Any defeasance of bonds
would be by deposit of cash representing principal and interest
to the maturity date, or interest, principal, and general
redemption premium to an earlier redemption date. In addition,
the Company will retire approximately $372 million of mortgage
<PAGE>
bonds securing the issuance of a like amount of pollution control
revenue bonds (PCRBs) by various public agencies. However, the
Company expects that substantially all of the underlying PCRBs
will remain outstanding as unsecured obligations of the Company.
In addition, the long-term debt of NERC will be retired prior to
the closing.
As part of the divestiture plan, in February 1998, NEEI sold
its oil and gas properties for approximately $50 million. NEEI's
loss on the sale of approximately $120 million, before tax, has
been reimbursed by the Company.
At the divestiture date, any gain or loss from the divestiture
of nonnuclear generating assets and oil and gas assets will be
recorded as a regulatory asset or liability to be recovered as
part of the Company's stranded costs, through the ongoing
transition access charge, consistent with the settlement
agreements. The Company may be required to record a liability
for the monthly fixed contribution towards the above-market cost
of purchased power. In such an event, the Company would also
record a regulatory asset consistent with the settlement
agreements.
In addition, the Company will endeavor to sell, or otherwise
transfer, its minority interest in three nuclear power plants and
a 60 MW interest in a fossil-fueled generating station in Maine
to nonaffiliates. Until such time as the nuclear interests are
divested, the Company will share with customers 80 percent of the
revenues and operating costs related to the units, with
shareholders retaining the balance. In the event that the
Company determines that it has an impairment of its nuclear plant
balances under FAS 121, it will record any such impairment as a
regulatory asset.
Note D - Commitments and Contingencies
1. Yankee Nuclear Power Companies (Yankees):
The Company has minority interests in four Yankee Nuclear Power
Companies. These ownership interests are accounted for on the
equity method. The Company's share of the expenses of the
Yankees is accounted for in "Purchased electric energy" on the
statements of income.
<PAGE>
A summary of combined results of operations, assets, and
liabilities of the four Yankees is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue $ 660,742$ 697,054$ 695,781
=================================
Net income $ 29,959$ 27,567$ 31,657
=================================
Company's equity in net income $ 5,189$ 5,159$ 5,721
=================================
Net plant 204,689 401,049 443,967
Other assets 3,100,589 2,031,336 1,418,681
Liabilities and debt (3,036,845) (2,177,068) (1,612,843)
---------------------------------
Net assets $ 268,433$ 255,317$ 249,805
=================================
Company's equity in net assets $ 49,825$ 47,902$ 47,055
=================================
Company's purchased electric energy $ 107,140$ 110,778$ 115,647
=================================
</TABLE>
At December 31, 1997, $16 million of undistributed earnings of
the Yankees were included in the Company's retained earnings.
2. Nuclear Units
Nuclear Units Permanently Shut Down
Three of the four regional nuclear generating companies in
which the Company has a minority interest own nuclear generating
units which have been permanently shut down. These three units
are as follows:
<TABLE>
<CAPTION>
NEP's Investment Future Estimated
Unit Percent Amount Date Retired Billings to NEP($)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 7 million Feb 1992 44 million
Connecticut Yankee 15 17 million Dec 1996 92 million
Maine Yankee 20 16 million Aug 1997 164 million
- -----------------------------------------------------------------------------
</TABLE>
In the case of each of these units, the Company has recorded
an estimate of the total future payment obligation as a liability
and an offsetting regulatory asset, reflecting estimated future
billings from the companies. In a 1993 decision, the FERC
allowed Yankee Atomic to recover its undepreciated investment in
the plant as well as unfunded nuclear decommissioning costs and
other costs. Connecticut Yankee and Maine Yankee have both filed
similar requests with the FERC. Several parties have intervened
<PAGE>
in opposition to both filings. The Company's stranded cost
settlements allow it to recover all costs that the FERC allows
the Yankee companies to bill to the Company.
In October 1997, the Citizen's Awareness Network and Nuclear
Information and Resource Service filed a petition with the
Nuclear Regulatory Commission (NRC) that would require formal NRC
approval of a plant decommissioning plan for the Connecticut
Yankee and Maine Yankee plants. In 1998, the petitioners
indicated their intention to file a request with the NRC designed
to overturn a current NRC rule on decommissioning. The Company
cannot predict what impact, if any, these activities will have on
the cost of decommissioning the plants.
At Maine Yankee, the NRC has identified numerous apparent
violations of its regulations, which may result in the assessment
of significant civil penalties.
In the 1970s, the Company and several other shareholders
(Sponsors) of Maine Yankee entered into 27 contracts (Secondary
Purchase Agreements) under which they sold portions of their
entitlement to Maine Yankee power output through 2002 to various
entities, primarily municipal and cooperative systems in New
England (Secondary Purchasers). Virtually all of the Secondary
Purchasers have ceased making payments under the Secondary
Purchase Agreements and have demanded arbitration, claiming that
such agreements excuse further payments upon plant shutdown. The
Company has notified the Secondary Purchasers that the shutdown
does not relieve them of their obligation to make payments under
the Secondary Purchase Agreements and that they are in default of
such agreements. The Company has asked the FERC to enforce the
Company's rights under the agreements. In the event that no
further payments are forthcoming from Secondary Purchasers, the
Company, as a primary obligor to Maine Yankee, would be required
to pay an additional $9 million of future shutdown costs. These
costs are not included in the $164 million estimate disclosed in
the table above. Shutdown costs are recoverable from customers
under the stranded cost settlements.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for
the plant decommissioning, the owners of Maine Yankee are jointly
and severally liable for the shortfall.
Operating Nuclear Units
The Company has minority interests in three other nuclear
generating units, Vermont Yankee, Millstone 3, and Seabrook 1.
In October 1996, the NRC issued letters to operators of nuclear
power plants requiring them to document that the plants are
operated and maintained within their design and licensing bases,
and that any deviations are reconciled in a timely manner. The
Seabrook 1 and Vermont Yankee nuclear power plants responded to
the NRC letters in February 1997. Millstone 3 is currently shut
<PAGE>
down and has been placed on the NRC "Watch List," signifying that
its safety performance exhibits sufficient weakness to warrant
increased NRC attention. Millstone 3 may not restart without NRC
approval.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service
lives, availability, and costs. These uncertainties stem from a
combination of factors, including the acceleration of competitive
pressures in the power generation industry and increased NRC
scrutiny. The Company performs periodic economic viability
reviews of operating nuclear units in which it holds ownership
interests.
Millstone 3
In April 1996, the NRC ordered Millstone 3, which has
experienced numerous technical and nontechnical problems, to
remain shut down pending verification that the unit's operations
are in accordance with NRC regulations and the unit's operating
license. Millstone 3 is operated by a subsidiary of Northeast
Utilities (NU). The Company is not an owner of the Millstone 1
and 2 nuclear generating units, which are also shut down under
NRC orders.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
an NRC assessment concluding a safety conscious work environment
exists, public meetings, and a vote of the NRC Commissioners.
The Company cannot predict when Millstone 3 will be allowed by
the NRC to restart, but believes restart of the unit is unlikely
prior to the summer of 1998.
Since April 1996, the Company has incurred an estimated $35
million in incremental replacement power costs, which it has been
recovering from customers through its fuel clause. During the
outage, the Company is incurring incremental replacement power
costs of approximately $2 million per month.
Several criminal investigations related to Millstone 3 are
ongoing. In December 1997, the NRC assessed civil penalties
totaling $2.1 million for numerous violations at the three
Millstone units. The Company's share of this fine was less than
$100,000. The Connecticut Department of Environmental Protection
and Connecticut Attorney General have filed suit against NU for
alleged wastewater discharge violations at the Millstone units,
which may result in the assessment of substantial civil
penalties.
In August 1997, the Company filed suit against NU in
Massachusetts Superior Court for damages resulting from the
tortious conduct of NU relating to Millstone 3. The Company is
seeking compensation for the losses it has suffered, including
the costs of lost power and costs necessary to assure that
<PAGE>
Millstone 3 can safely return to operation. The Company also
seeks punitive damages. NU has filed for dismissal of the suit
and sought to consolidate it with suits filed by other joint
owners in Massachusetts Superior Court.
The Company also sent a demand for arbitration to Connecticut
Light & Power Company and Western Massachusetts Electric Company,
both subsidiaries of NU, seeking damages resulting from their
breach of obligations under an agreement with the Company and
others regarding the operation and ownership of Millstone 3.
Decommissioning Trust Funds
Each nuclear unit in which the Company has an ownership
interest has established a decommissioning trust fund or escrow
fund into which payments are being made to meet the projected
costs of decommissioning. Listed below is information on each
operating nuclear plant in which the Company has an ownership
interest.
The Company is liable for its share of decommissioning costs
for Millstone 3, Seabrook 1, and all of the Yankees.
Decommissioning costs include not only estimated costs to
decontaminate the units as required by the NRC, but also costs to
dismantle the uncontaminated portion of the units. The Company
records decommissioning costs on its books consistent with its
rate recovery. The Company is recovering its share of projected
decommissioning costs for Millstone 3 and Seabrook 1 through
depreciation expense. In addition, the Company is paying its
portion of projected decommissioning costs for all of the Yankees
through purchased power expense. Such costs reflect estimates of
total decommissioning costs approved by the FERC.
<PAGE>
<TABLE>
<CAPTION>
NEP's share of (millions of dollars)
------------------------------------
NEP's EstimatedDecommissioning
Ownership Net Decommissioning Fund License
Unit Interest (%)Plant Assets Cost (in 1997 $) Balances* Expiration
- ---- ----------- ------------ --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Vermont Yankee 20 35 77 34 2012
Millstone 3 12 366 66 18** 2025
Seabrook 1*** 10 54 47 9** 2026
<FN>
*Certain additional amounts are anticipated to be available through tax deductions.
**Fund balances are included in "Other investments" on the balance sheets. Any
differences from market value are not material.
***Proposed legislation in New Hampshire would make owners of Seabrook 1 proportional
guarantors for decommissioning costs in the event that an owner without a franchise
territory fails to fund its share of decommissioning costs.
</FN>
</TABLE>
There is no assurance that decommissioning costs actually
incurred by Vermont Yankee, Millstone 3, or Seabrook 1 will not
substantially exceed these amounts. For example, decommissioning
cost estimates assume the availability of permanent repositories
for both low-level and high-level nuclear waste; those
repositories do not currently exist. If any of the units were
shut down prior to the end of their operating licenses, which the
Company believes is likely, the funds collected for
decommissioning to that point would be insufficient. Under the
settlement agreements discussed in Note B, the Company will
recover decommissioning costs through transition access charges.
The Nuclear Waste Policy Act of 1982 establishes that the
federal government (through the Department of Energy (DOE)) is
responsible for the disposal of spent nuclear fuel. The federal
government requires the Company to pay a fee based on its share
of the net generation from the Millstone 3 and Seabrook 1 nuclear
units. The Company is recovering this fee through its fuel
clause. Similar costs are incurred by the Vermont Yankee nuclear
generating unit. These costs are billed to the Company and also
recovered from customers through the Company's fuel clause. In
November 1997, ruling on a lawsuit brought against the DOE by
numerous utilities and state regulatory commissions, the Court of
Appeals for the District of Columbia (Court) held that the DOE is
obligated to begin disposing of utilities' spent nuclear fuel by
January 31, 1998. The DOE failed to meet this deadline. The
utilities, including the operators of the units in which the
Company has an obligation, are assessing their future options.
In February 1998, Maine Yankee petitioned the Court to compel the
DOE to remove Maine Yankee's spent fuel from the site.
<PAGE>
Nuclear insurance
The Price-Anderson Act limits the amount of liability claims
that would have to be paid in the event of a single incident at a
nuclear plant to $8.9 billion (based upon 110 licensed reactors).
The maximum amount of commercially available insurance coverage
to pay such claims is $200 million. The remaining $8.7 billion
would be provided by an assessment of up to $79.3 million per
incident levied on each of the participating nuclear units in the
United States, subject to a maximum assessment of $10 million per
incident per nuclear unit in any year. The maximum assessment,
which was most recently adjusted in 1993, is adjusted for
inflation at least every five years. The Company's current
interest in the Yankees (excluding Yankee Atomic), Millstone 3,
and Seabrook 1 would subject the Company to a $58 million maximum
assessment per incident. The Company's payment of any such
assessment would be limited to a maximum of $7.3 million per
incident per year. As a result of the permanent cessation of
power operation of the Yankee Atomic plant, Yankee Atomic has
received from the NRC a partial exemption from obligations under
the Price-Anderson Act. However, Yankee Atomic must continue to
maintain $100 million of commercially available nuclear insurance
coverage. Connecticut Yankee and Maine Yankee have filed with
the NRC for similar exemptions.
Each of the nuclear units in which the Company has an
ownership interest also carries nuclear property insurance to
cover the costs of property damage, decontamination or premature
decommissioning, and workers' claims resulting from a nuclear
incident. These policies may require additional premium
assessments if losses relating to nuclear incidents at units
covered by this insurance occurring in a prior six-year period
exceed the accumulated funds available. The Company's maximum
potential exposure for these assessments, either directly, or
indirectly through purchased power payments to the Yankees, is
approximately $8 million per year.
3. Oil and gas operations:
The Company's affiliate, NEEI, participated in a
rate-regulated domestic oil and gas exploration, development, and
production program through a partnership with a nonaffiliated oil
company. Losses from this program, calculated under the full
cost method of accounting, have been charged to the Company, and
ultimately to distribution customers, in accordance with SEC and
FERC approvals. Such losses were $11 million, $22 million, and
$44 million in 1997, 1996, and 1995, respectively. In February
1998, after a competitive bidding process, NEEI sold all of its
remaining oil and gas properties held as of December 31, 1997 to
its partner for $50 million. The loss on such disposition,
approximately $120 million, before tax, has been charged to the
Company. The settlements provide for the recovery of the NEEI
loss as part of the Company's stranded costs. See Note B for a
discussion of industry restructuring and Note C for a discussion
of the Company's planned divestiture of its nonnuclear generating
business.
<PAGE>
4. Plant expenditures:
The Company's utility plant expenditures are estimated to be
approximately $55 million in 1998. At December 31, 1997,
substantial commitments had been made relative to future planned
expenditures.
5. Hydro-Quebec Interconnection and arbitration:
The Company is a participant in both the Hydro-Quebec Phase I
and Phase II projects. The Company's participation percentage in
both projects is approximately 18 percent. The Hydro-Quebec
Phase I and Phase II projects were established to transmit power
from Hydro-Quebec to New England. Three affiliates of the
Company were created to construct and operate transmission
facilities related to these projects. The participants,
including the Company, have entered into support agreements that
end in 2020, to pay monthly their proportionate share of the
total cost of constructing, owning, and operating the
transmission facilities. The Company accounts for these support
agreements as capital leases and accordingly recorded
approximately $65 million in utility plant at December 31, 1997.
Under the support agreements, the Company has agreed, in
conjunction with any Hydro-Quebec Phase II project debt
financings to guarantee its share of project debt. At December
31, 1997, the Company had guaranteed approximately $25 million of
project debt. In the event any Interconnection facilities are
abandoned for any reason, each participant is contractually
committed to pay its pro-rata share of the net investment in the
abandoned facilities. The Company's rights and obligations under
its support agreements will be transferred to USGen upon
completion of the sale of the Company's nonnuclear generating
business.
In 1996, various New England utilities which are members of
the New England Power Pool, including the Company, submitted a
dispute to arbitration regarding their Firm Energy Purchased
Power Contract with Hydro-Quebec. In June 1997, Hydro-Quebec
presented a damage claim of approximately $37 million for past
damages, of which the Company's share would have been
approximately $6 to $9 million. The claims involved a dispute
over the components of a pricing formula and additional costs
under the contract. With respect to on-going claims, the Company
had been paying Hydro-Quebec the higher amount (additional costs
of approximately $3 million per year) since July 1996 under
protest and subject to refund. In October 1997, an arbitrator
ruled in favor of the New England utilities in all respects. The
Company has made a demand for refund. Hydro-Quebec has not yet
refunded any monies and has appealed the decision. On November
9, 1997, the Company and the other utilities began a second
arbitration to enforce the first decision. Refunds received from
Hydro-Quebec will be passed on to customers.
<PAGE>
6. Natural gas pipeline capacity:
In connection with serving the Company's gas-fueled electric
generation facilities, the Company has entered into several
contracts for natural gas pipeline capacity and gas supply.
These agreements require minimum fixed payments that are
currently estimated to be $59 million to $62 million per year
from 1998 to 2002. Under these agreements, remaining fixed
payments from 2003 through 2014 total approximately $501 million.
In connection with managing its fuel supply, the Company uses
a portion of this pipeline capacity to sell natural gas.
Proceeds from the sale of natural gas and pipeline capacity of
$41 million, $50 million, and $71 million in 1997, 1996, and
1995, respectively, have been passed on to customers through the
Company's fuel clause. These proceeds have been reflected as an
offset to the related fuel expense in "Fuel for generation" in
the Company's statements of income. Natural gas sales decreased
in 1996 as a result of the Manchester Street plant entering
commercial operation in the second half of 1995.
See Note C for a discussion of the Company's planned
divestiture of its nonnuclear generating business.
7. Hazardous waste:
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous
substances. A number of states, including Massachusetts, have
enacted similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The Company currently has in place an
internal environmental audit program and an external waste
disposal vendor audit and qualification program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for
six sites at which hazardous waste is alleged to have been
disposed. Private parties have also contacted or initiated legal
proceedings against the Company regarding hazardous waste
cleanup. The Company is currently aware of other sites, and may
in the future become aware of additional sites, that it may be
held responsible for remediating.
<PAGE>
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. The NEES
companies have recovered amounts from certain insurers, and,
where appropriate, the Company intends to seek recovery from its
insurers and from other PRPs, but it is uncertain whether, and to
what extent, such efforts will be successful. The Company
believes that hazardous waste liabilities for all sites of which
it is aware are not material to its financial position.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These
new rules did not have a material effect on the Company's
financial position or results of operations.
8. Long-term contracts for the purchase of electricity:
The Company purchases a portion of its electricity
requirements pursuant to long-term contracts with owners of
various generating units. These contracts expire in various
years from 1998 to 2029.
Certain of these contracts require the Company to make minimum
fixed payments, even when the supplier is unable to deliver
power, to cover the Company's proportionate share of the capital
and fixed operating costs of these generating units. The fixed
portion of payments under these contracts totaled $114 million in
1997, $127 million in 1996, and $150 million in 1995, excluding
contracts with Yankee Atomic, Connecticut Yankee, and Maine
Yankee (see Note D-2) for all periods presented. These contracts
have minimum fixed payment requirements of $110 million annually
from 1998 through 2001, $120 million in 2002, and approximately
$950 million thereafter. Approximately 97 percent of the
payments under these contracts are to Vermont Yankee and OSP,
entities in which NEES subsidiaries hold ownership interests.
The Company's other contracts, principally with nonutility
generators, require the Company to make payments only if power
supply capacity and energy are deliverable from such suppliers.
The Company's payments under these contracts amounted to $265
million in 1997, $230 million in 1996, and $245 million in 1995.
See Note C for a discussion of the Company's planned
divestiture of its nonnuclear generating business.
9. Town of Norwood dispute:
In April 1997, the Town of Norwood, Massachusetts filed a
lawsuit against the Company in the United States District Court
for the District of Massachusetts. The Company is a wholesale
power supplier for Norwood pursuant to rates approved by the
FERC. Norwood alleges that the Company's proposed divestiture of
its power generation assets would violate the terms of a 1983
power contract which settled an antitrust lawsuit brought by
<PAGE>
Norwood against the Company. Norwood also alleges that the
Company's proposed divestiture plan and recovery of stranded
investment costs contravene federal antitrust laws. Norwood
seeks an injunction enjoining the divestiture and an unspecified
amount of treble damages (a specific claim for $450 million was
withdrawn). Norwood's motion for a preliminary injunction of the
divestiture was denied on September 8, 1997. On November 21,
1997, Norwood filed an amended complaint making new allegations
relating to the sale of the Company's generating assets and
naming as additional defendants, NEES, USGen and USGen's
affiliate, PG&E. The Company continues to believe that its
divestiture plan will promote competition in the wholesale power
generation market and that it has met and will continue to meet
its contractual commitments to Norwood. On January 9, 1998, the
defendants, including NEES and the Company, filed a motion to
dismiss the lawsuit. In March 1998, Norwood gave notice of its
intent to terminate its contract with the Company, without
accepting responsibility for its share of the Company's stranded
costs, and to begin taking power from another supplier. The
Company has filed with the FERC for permission to charge Norwood
a contract termination charge for its share of the Company's
stranded costs.
Note E - Employee Benefits
1. Pension plans:
The Company participates with other subsidiaries of NEES in
noncontributory, defined-benefit plans covering substantially all
employees of the Company. The plans provide pension benefits
based on the employee's compensation during the five years prior
to retirement. The Company's funding policy is to contribute
each year the net periodic pension cost for that year. However,
the contribution for any year will not be less than the minimum
contribution required by federal law or greater than the maximum
tax deductible amount.
<PAGE>
The Company's net pension cost for 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 2,887 $ 2,769 $ 2,231
Plus (less):
Interest cost on projected benefit obligation 7,003 6,669 6,406
Return on plan assets at expected long-term rate (7,842) (7,204) (6,488)
Amortization 61 270 131
------- ------- -------
Net pension cost $ 2,109 $ 2,504 $ 2,280
======= ======= =======
Actual return on plan assets $18,362 $12,672 $17,108
======= ======= =======
<CAPTION>
Year ended December 31, 1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assumptions used to determine pension cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Average rate of increase in
future compensation levels 4.13% 4.13% 4.13% 4.63%
Expected long-term rate of
return on assets 8.50% 8.50% 8.50% 8.75%
</TABLE>
<PAGE>
The funded status of the plans cannot be presented separately
for the Company as the Company participates in the plans with
other NEES subsidiaries. The following table sets forth the
funded status of the NEES companies' plans at December 31:
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Benefits earned
Actuarial present value of
accumulated benefit liability:
Vested $647 $640
Non-vested 18 19
---- ----
Total $665 $659
==== ====
Reconciliation of funded status
Actuarial present value of
projected benefit liability $757 $753
Unrecognized prior service costs (8) (9)
FAS No. 87 transition liability
not yet recognized (amortized) (1) (1)
Net gain (loss) not yet recognized (amortized) 61 40
---- ----
809 783
---- ----
Pension fund assets at fair value 834 812
FAS No. 87 transition asset
not yet recognized (amortized) (8) (10)
---- ----
826 802
---- ----
Accrued pension/(prepaid)
payments recorded on books $(17) $(19)
---- ----
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates from 1998 and 1997,
respectively, and the 1983 Group Annuity Mortality table.
Plan assets are composed primarily of corporate equity, debt
securities, and cash equivalents.
2. Postretirement Benefit Plans Other Than Pensions (PBOPs):
The Company provides health care and life insurance coverage
to eligible retired employees. Eligibility is based on certain
age and length of service requirements and in some cases retirees
must contribute to the cost of their coverage.
<PAGE>
The Company's total cost of PBOPs for 1997, 1996, and 1995 included the
following components:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 1,363 $ 1,407 $ 1,344
Plus (less):
Interest cost on accumulated
benefit obligation 3,545 3,580 4,013
Return on plan assets at expected
long-term rate (2,343) (1,832) (1,374)
Amortization 1,581 1,867 2,079
------- ------- -------
Net postretirement benefit cost $ 4,146 $ 5,022 $ 6,062
======= ======= =======
Actual return on plan assets $ 5,387 $ 3,572 $ 4,137
======= ======= =======
<CAPTION>
Year ended December 31 1998 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions used to determine
postretirement benefit cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Expected long-term rate of
return on assets 8.25% 8.25% 8.25% 8.50%
Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50%
Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50%
Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
</TABLE>
The following table sets forth the Company's benefits earned and the plans'
funded status:
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $29 $32
Fully eligible active plan participants 2 2
Other active plan participants 20 20
--- ---
Total benefits earned 51 54
Unrecognized transition obligation (38) (41)
Unrecognized net gain 21 13
--- ---
34 26
--- ---
Plan assets at fair value 34 29
--- ---
Prepaid postretirement benefit
costs recorded on books $ - $3
=== ===
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates in effect for 1998 and 1997,
respectively.
<PAGE>
The assumptions used in the health care cost trends have a
significant effect on the amounts reported. Increasing the
assumed rates by 1 percent in each year would increase the
accumulated postretirement benefit obligation as of December 31,
1997 by approximately $6 million and the net periodic cost for
1997 by approximately $0.8 million.
The Company funds the annual tax-deductible contributions.
Plan assets are invested in equity and debt securities and cash
equivalents.
Note F - Income Taxes
The Company and other subsidiaries participate with NEES in
filing consolidated federal income tax returns. The Company's
income tax provision is calculated on a separate return basis.
Federal income tax returns have been examined and reported on by
the Internal Revenue Service through 1993.
Total income taxes in the statements of income are as follows:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Income taxes charged to operations $90,009 $91,894 $91,051
Income taxes charged (credited) to
"Other income" (373) 555 353
------- ------- -------
Total income taxes $89,636 $92,449 $91,404
======= ======= =======
</TABLE>
Total income taxes, as shown above, consist of the following
components:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes $102,364 $99,907 $65,721
Deferred income taxes (10,705) (5,435) 27,188
Investment tax credits, net (2,023) (2,023) (1,505)
-------- ------- -------
Total income taxes $ 89,636 $92,449 $91,404
======== ======= =======
</TABLE>
Investment tax credits have been deferred and are being
amortized over the estimated lives of the property giving rise to
the credits.
<PAGE>
Total income taxes, as shown above, consist of federal and state
components as follows:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes $73,077 $76,656 $74,590
State income taxes 16,559 15,793 16,814
------- ------- -------
Total income taxes $89,636 $92,449 $91,404
======= ======= =======
</TABLE>
With regulatory approval from the FERC, the Company has
adopted comprehensive interperiod tax allocation (normalization)
for temporary book/tax differences.
Total income taxes differ from the amounts computed by
applying the federal statutory tax rates to income before taxes.
The reasons for the differences are as follows:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at statutory rate $81,963 $85,726 $84,991
Increases (reductions) in tax
resulting from:
Amortization of investment
tax credits (2,023) (2,023) (2,227)
State income taxes, net of
federal income tax benefit 10,763 10,265 10,929
All other differences (1,067) (1,519) (2,289)
------- ------- -------
Total income taxes $89,636 $92,449 $91,404
======= ======= =======
</TABLE>
<PAGE>
The following table identifies the major components of total
deferred income taxes:
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Plant related $ 87 $ 97
Investment tax credits 22 23
All other 44 46
----- -----
153 166
----- -----
Deferred tax liability:
Plant related (418) (415)
Equity AFDC (43) (45)
All other (62) (88)
----- -----
(523) (548)
----- -----
Net deferred tax liability $(370) $(382)
===== =====
</TABLE>
Note G - Short-term Borrowings and Other Accrued Expenses
At December 31, 1997, the Company had $111 million of
short-term debt outstanding including $108 million in commercial
paper borrowings and $3 million of borrowings from affiliates.
NEES and certain subsidiaries, including the Company, with
regulatory approval, operate a money pool to more effectively
utilize cash resources and to reduce outside short-term
borrowings. Short-term borrowing needs are met first by
available funds of the money pool participants. Borrowing
companies pay interest at a rate designed to approximate the cost
of outside short-term borrowings.
Companies which invest in the pool share the interest earned
on a basis proportionate to their average monthly investment in
the money pool. Funds may be withdrawn from or repaid to the
pool at any time without prior notice.
At December 31, 1997, the Company had lines of credit and
standby bond purchase facilities with banks totaling $375 million
which are available to provide liquidity support for commercial
paper borrowings and for $372 million of the Company's
outstanding variable rate mortgage bonds in tax-exempt commercial
paper mode (see Note I) and for other corporate purposes. There
were no borrowings under these lines of credit at December 31,
1997. Fees are paid on the lines and facilities in lieu of
compensating balances.
The weighted average rate on outstanding short-term borrowings
was 5.7 percent at December 31, 1997. The fair value of the
Company's short-term debt equals carrying value.
<PAGE>
The components of other accrued expenses are as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Accrued wages and benefits $ 9,838 $ 7,190
Capital lease obligations due within one year 4,333 4,328
Rate adjustment mechanisms 6,957 4,790
Other 2,426 269
------- -------
$23,554 $16,577
------- -------
</TABLE>
Note H - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1997
and 1996 is as follows (in thousands of dollars except for share
data):
<TABLE>
<CAPTION>
Shares
Authorized Dividends Call
and Outstanding Amount Declared Price
- ------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$100 Par value
6.00% Series 75,020 75,020 $ 7,502 $ 7,502 $ 451 $ 451 (a)
4.56% Series 100,000 100,000 10,000 10,000 456 456 $104.08
4.60% Series 80,140 80,140 8,014 8,014 368 368 $101.00
4.64% Series 41,500 41,500 4,150 4,150 192 328 $102.56
6.08% Series 100,000 100,000 10,000 10,000 608 608 $102.34
7.24% Series - - - - - 363 $103.06
- ------------------------------------------------------------------------------
Total 396,660 396,660 $39,666 $39,666 $2,075 $2,574
<FN>
(a) Noncallable.
</FN>
</TABLE>
The annual dividend requirement for total cumulative preferred
stock was $2,075,000 for 1997 and for 1996.
During 1997, the Company's parent, NEES, purchased preferred
stock of the Company with a par value of $29 million.
In August 1996, the Company repurchased $6 million of its 4.64
percent series of cumulative preferred stock. In May 1996, the
Company redeemed all ($15 million) of its 7.24 percent series of
cumulative preferred stock.
<PAGE>
Note I - Long-term Debt
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands)
Series Rate % Maturity 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General and Refunding Mortgage Bonds:
Y(94-3) 8.10 December 22, 1997 $3,000
W(93-2) 6.17 February 2, 1998 $4,300 4,300
W(93-4) 6.14 February 2, 1998 1,300 1,300
W(93-5) 6.17 February 3, 1998 5,000 5,000
W(93-7) 6.10 February 4, 1998 10,000 10,000
W(93-9) 6.04 February 4, 1998 29,400 29,400
Y(94-4) 8.28 December 21, 1999 10,000 10,000
W(93-6) 6.58 February 10, 2000 5,000 5,000
Y(95-1) 7.94 February 14, 2000 5,000 5,000
Y(95-2) 7.93 February 14, 2000 10,000 10,000
Y(95-3) 7.40 March 21, 2000 10,000 10,000
Y(95-4) 6.69 June 5, 2000 25,000 25,000
W(93-1) 7.00 February 3, 2003 25,000 25,000
Y(94-2) 8.33 November 8, 2004 10,000 10,000
K 7.25 October 15, 2015 38,500 38,500
X variable March 1, 2018 79,250 79,250
R variable November 1, 2020 135,850 135,850
S variable November 1, 2020 50,600 50,600
U 8.00 August 1, 2022 134,500 170,000
V variable October 1, 2022 106,150 106,150
Y(94-1) 8.53 September 20, 2024 5,000 5,000
Unamortized discounts (2,130) (2,344)
-------- --------
Total long-term debt 697,720 736,006
======== ========
Long-term debt due in one year (50,000) (3,000)
-------- --------
$647,720 $733,006
======== ========
</TABLE>
Substantially all of the properties and franchises of the Company
are subject to the lien of the mortgage indentures under which the
general and refunding mortgage bonds have been issued.
The Company will make cash payments of $50 million in 1998, $10
million in 1999, and $55 million in 2000 to retire maturing
mortgage bonds. There are no cash payments required in either 2001
or 2002.
The terms of $372 million of variable rate PCRBs collateralized
by the Company's mortgage bonds at December 31, 1997 require the
Company to reacquire the bonds under certain limited circumstances.
At December 31, 1997, interest rates on the Company's variable rate
bonds ranged from 3.70 percent to 4.85 percent. See Note C for
information on potential bond defeasance.
<PAGE>
At December 31, 1997, the Company's long-term debt had a carrying
value of $700,000,000 and had a fair value of approximately
$721,000,000. The fair value of debt that reprices frequently at
market rates approximates carrying value. For all other debt, the
fair market value of the Company's long-term debt was estimated
based on the quoted prices for similar issues or on the current
rates offered to the Company for debt of the same remaining
maturity.
Note J - Restrictions on Retained Earnings Available for Dividends
on Common Stock
Pursuant to the provisions of the Articles of Organization and
the By-Laws relating to the Dividend Series Preferred Stock,
certain restrictions on payment of dividends on common stock would
come into effect if the "junior stock equity" was, or by reason of
payment of such dividends became, less than 25 percent of "Total
capitalization." However, the junior stock equity at December 31,
1997 was 55 percent of total capitalization, including long-term
debt due in one year, and, accordingly, none of the Company's
retained earnings at December 31, 1997 were restricted as to
dividends on common stock under the foregoing provisions.
Under restrictions contained in the indentures relating to
general and refunding mortgage bonds (Series K), none of the
Company's retained earnings at December 31, 1997 were restricted as
to dividends on common stock. However, a portion of the Company's
retained earnings (less than $30 million) may be restricted due to
regulatory requirements related to hydroelectric licensed projects.
Note K - Supplementary Income Statement Information
Advertising expenses, expenditures for research and development,
and rents were not material and there were no royalties paid in
1997, 1996, or 1995. Taxes, other than income taxes, charged to
operating expenses are set forth by classes as follows:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Municipal property taxes $59,102 $58,942 $49,807
Federal and state payroll
and other taxes 8,209 7,474 8,909
------- ------- -------
$67,311 $66,416 $58,716
======= ======= =======
</TABLE>
New England Power Service Company, an affiliated service company
operating pursuant to the provisions of Section 13 of the Public
Utility Holding Company Act of 1935, furnished services to the
Company at the cost of such services. These costs amounted to
$91,985,000, $85,124,000, and $106,411,000, including capitalized
construction costs of $24,347,000, $19,412,000, and $24,671,000,
for each of the years 1997, 1996, and 1995, respectively.
<PAGE>
<TABLE>
<CAPTION>
New England Power Company
Selected Financial Information
Year ended December 31,
(In millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue:
Electric sales (excluding
fuel cost recovery) $ 921 $ 918 $ 941 $ 942 $ 939
Fuel cost recovery 696 642 594 563 576
Other 61 40 36 36 34
------ ------ ------ ------ ------
Total operating revenue $1,678 $1,600 $1,571 $1,541 $1,549
Net income $ 145 $ 152 $ 151 $ 149 $ 141
Total assets $2,763 $2,648 $2,648 $2,613 $2,441
Capitalization:
Common equity $ 913 $ 906 $ 889 $ 877 $ 850
Cumulative preferred stock 40 40 61 61 61
Long-term debt 648 733 735 695 667
------ ------ ------ ------ ------
Total capitalization $1,601 $1,679 $1,685 $1,633 $1,578
Preferred dividends declared $ 2 $ 3 $ 3 $ 3 $ 5
Common dividends declared $ 135 $ 134 $ 135 $ 119 $ 111
------ ------ ------ ------ ------
</TABLE>
Selected Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Operating revenue $438,048 $396,049 $443,774 $400,032
Operating income $ 50,652 $ 30,028 $ 64,535 $ 45,637
Net income $ 37,945 $ 19,515 $ 52,019 $ 35,064
1996
Operating revenue $400,460 $375,001 $431,420 $393,428
Operating income $ 55,277 $ 39,628 $ 63,782 $ 45,074
Net income $ 40,973 $ 26,768 $ 52,559 $ 32,183
</TABLE>
Per share data is not relevant because the Company's common stock is
wholly owned by New England Electric System.
A copy of New England Power Company's Annual Report on Form 10-K to
the Securities and Exchange Commission for the year ended December 31,
1997 will be available on or about April 1, 1998, without charge, upon
written request to New England Power Company, Shareholder Services
Department, 25 Research Drive, Westborough, Massachusetts 01582.
<PAGE>
<TABLE> EXHIBIT (21)
Subsidiaries of New England Power Company
-----------------------------------------
<CAPTION>
State of Incorporation or
Name of Company Organization
- --------------- -------------------------
<S> <C>
Connecticut Yankee Atomic Connecticut
Power Company
Maine Yankee Atomic Maine
Power Company
Vermont Yankee Nuclear Vermont
Power Corporation
Yankee Atomic Electric Company Massachusetts
</TABLE>
<PAGE>
EXHIBIT (24)
POWER OF ATTORNEY
-----------------
Each of the undersigned directors of New England Power Company (the
"Company"), individually as a director of the Company, hereby constitutes and
appoints John G. Cochrane, Robert K. Wulff, and Geraldine M. Zipser,
individually, as attorney-in-fact to execute on behalf of the undersigned the
Company's annual report on Form 10-K for the year ended December 31, 1997, to
be filed with the Securities and Exchange Commission, and to execute any
appropriate amendment or amendments thereto as may be required by law.
Dated this 17th day of March, 1998.
s/Lawrence E. Bailey s/Cheryl A. LaFleur
_________________________ _________________________
Lawrence E. Bailey Cheryl A. LaFleur
s/Alfred D. Houston
_________________________
Alfred D. Houston
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME,
RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND POWER COMPANY,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SUBSIDIARY>
<NAME> NEW ENGLAND POWER COMPANY
<NUMBER> 1
<CIK> 0000071337
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,889,792
<OTHER-PROPERTY-AND-INVEST> 84,548
<TOTAL-CURRENT-ASSETS> 338,337
<TOTAL-DEFERRED-CHARGES> 450,415 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,763,092
<COMMON> 128,998
<CAPITAL-SURPLUS-PAID-IN> 376,597
<RETAINED-EARNINGS> 407,630
<TOTAL-COMMON-STOCKHOLDERS-EQ> 913,259 <F3>
0
39,666
<LONG-TERM-DEBT-NET> 647,720
<SHORT-TERM-NOTES> 3,125
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 108,125
<LONG-TERM-DEBT-CURRENT-PORT> 50,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,001,197
<TOT-CAPITALIZATION-AND-LIAB> 2,763,092
<GROSS-OPERATING-REVENUE> 1,677,903
<INCOME-TAX-EXPENSE> 90,009
<OTHER-OPERATING-EXPENSES> 1,397,042
<TOTAL-OPERATING-EXPENSES> 1,487,051
<OPERATING-INCOME-LOSS> 190,852
<OTHER-INCOME-NET> 1,785
<INCOME-BEFORE-INTEREST-EXPEN> 192,637
<TOTAL-INTEREST-EXPENSE> 48,094
<NET-INCOME> 144,543
2,075
<EARNINGS-AVAILABLE-FOR-COMM> 142,468
<COMMON-STOCK-DIVIDENDS> 135,448
<TOTAL-INTEREST-ON-BONDS> 42,277
<CASH-FLOW-OPERATIONS> 224,974
<EPS-PRIMARY> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Per share data is not relevant because the Company's common stock is
wholly-owned by New England Electric System.
<F3> Total common stockholders equity includes the unrealized gain on
securities.
</FN>
<PAGE>
As Amended December 12, 1997
BY-LAWS
of
MASSACHUSETTS ELECTRIC COMPANY
ARTICLE I.
PLACE OF STOCKHOLDERS' MEETINGS.
All meetings of the stockholders shall be held in Massachusetts either
at the principal office of the corporation or at such other place as is stated
in the call.
ARTICLE II.
ANNUAL MEETING.
The annual meeting of the stockholders shall be held at the principal
office of the corporation or such other place in Massachusetts as is stated in
the call of the meeting on the third Wednesday of March in each year, if it be
not a legal holiday, and if it be a legal holiday, then on the next succeeding
day not a legal holiday. Purposes for which the annual meeting is to be held
additional to those prescribed by law, by the agreement of association and by
these by-laws may be specified by the board of directors or by writing signed
by the president or by a majority of the directors or by stockholders who hold
at least one-tenth of the aggregate par value of the capital stock generally
entitled to vote. If such annual meeting is omitted on the day herein
provided therefor, a special meeting may be held in place thereof, and any
business transacted or elections held at such meeting shall have the same
effect as if transacted or held at the annual meeting.
ARTICLE III.
SPECIAL MEETINGS OF STOCKHOLDERS.
Except as otherwise provided in Section 4 of Article XVIII, special
meetings of the stockholders may be called by the president or by a majority
of the directors, and shall be called by the clerk, or in the case of the
death, absence, incapacity or refusal of the clerk by any other officer of the
corporation, upon written application of stockholders who hold at least one-
tenth of the aggregate par value of the capital stock entitled to vote at the
meeting, stating the time, place and purpose of the meeting.
ARTICLE IV.
NOTICE OF STOCKHOLDERS' MEETINGS.
Except as otherwise provided in Section 4 of Article XVIII, a written or
printed notice of each meeting of stockholders, stating the place, day and
hour thereof and the purpose for which the meeting is called, shall be given
by the clerk, at least seven days before such meeting, to each stockholder
entitled to vote thereat, by leaving such notice with him or at his residence
or usual place of business, or by mailing it, postage prepaid and addressed to
such stockholder at his address as it appears upon the books of the
corporation. In the absence or disability of the clerk, such notice may be
given by a person designated either by the clerk or by the person or persons
calling the meeting or by the board of directors. No notice of the time,
place or purpose of any regular or special meeting of the stockholders shall
be required if every stockholder entitled to notice thereof is present in
person or is represented at the meeting by proxy or if every such stockholder,
or his attorney thereunto authorized, by a writing which is filed with the
records of the meeting, waives such notice.
<PAGE>
ARTICLE V.
QUORUM OF STOCKHOLDERS.
Except as otherwise provided in Section 4 of Article XVIII, at any
meeting of the stockholders, a majority in interest of all stock issued and
outstanding and entitled to vote upon a question to be considered at the
meeting shall constitute a quorum for the consideration of such question, but
a less interest may adjourn any meeting from time to time, and the meeting may
be held as adjourned without further notice. When a quorum is present at any
meeting, a majority of the stock represented thereat and entitled to vote
shall, except where a larger vote is required by law, by the agreement of
association or by these by-laws, decide any question brought before such
meeting.
ARTICLE VI.
PROXIES AND VOTING.
Stockholders who are entitled to vote shall have one vote for each share
of stock owned by them. Stockholders may vote either in person or by proxy in
writing dated not more than six (6) months before the meeting named therein,
which shall be filed with the clerk of the meeting before being voted. Such
proxies shall entitle the holders thereof to vote at any adjournment of such
meeting but shall not be valid after the final adjournment of such meeting.
ARTICLE VII.
BOARD OF DIRECTORS.
A board of not less than three directors shall be chosen by ballot at
the annual meeting of the stockholders or at the special meeting held in place
thereof, or as provided in Section 4 of Article XVIII. The number of
directors for each corporate year shall be fixed by vote at the meeting at
which they are elected but the stockholders may, at any special meeting held
for the purpose during any such year, increase or decrease (within the limit
above specified) the number of directors as thus fixed, and elect new
directors to complete the number so fixed, or remove directors to reduce the
number of directors to the number so fixed; provided, however, that while
there are four (4) full quarterly dividends in default on the Preferred Stock
and the Preferred Stock-Cumulative the number of such directors shall be fixed
in accordance with Section 4 of Article XVIII. No director need be a
stockholder.
Subject to law, to the agreement of association, to the terms of the
Preferred Stock and the Preferred Stock-Cumulative and to the other provisions
of these by-laws, each director shall hold office until the next annual
meeting of the stockholders and until his successor is chosen and qualified.
ARTICLE VIII.
POWERS OF DIRECTORS.
The board of directors shall have, and may exercise, all the powers of
the corporation, except such as are conferred upon the stockholders by law, by
the agreement of association and by these by-laws.
ARTICLE IX.
MEETINGS OF THE BOARD OF DIRECTORS.
Regular meetings of the board of directors may be held at such places
and at such times as the board may by vote from time to time determine, and if
so determined, no notice thereof need be given. A regular meeting of the
board of directors may be held without notice immediately after, and at the
same place as the annual meeting of the stockholders, or the special meeting
of the stockholders held in place of such annual meeting.
Special meetings of the board of directors may be held at any time and
at any place when called by the president, treasurer, or two or more
directors, reasonable notice thereof being given to each director, or at any
<PAGE>
time without call or formal notice, provided all the directors are present or
waive notice thereof by a writing which is filed with the records of the
meeting. In any case it shall be deemed sufficient notice to a director to
send notice by mail or telegram at least forty-eight hours before the meeting
addressed to him at his usual or last known business or residence address.
ARTICLE X.
QUORUM OF THE BOARD OF DIRECTORS.
A majority of the board of directors shall constitute a quorum for the
transaction of business, but a less number may adjourn any meeting from time
to time, and the meeting may be held as adjourned without further notice.
Except as otherwise provided, when a quorum is present at any meeting, a
majority of the members in attendance thereat shall decide any question
brought before such meeting.
ARTICLE XI.
VACANCIES IN BOARD OF DIRECTORS.
If the office of any director, one or more, elected by the stockholders
generally entitled to vote, becomes vacant by reason of death, resignation,
removal, disqualification or otherwise, the remaining directors so elected,
though less than a quorum, may, unless such vacancy shall have been filled by
the stockholders generally entitled to vote, choose by a majority vote of
their entire number, a successor or successors, who shall hold office for the
unexpired term. Any vacancy in the office of a director elected by holders of
the Preferred Stock and the Preferred Stock-Cumulative shall be filled as
provided in Section 4 of Article XVIII.
ARTICLE XII.
OFFICERS AND AGENTS.
The officers shall be a president, a clerk, a treasurer and such other
officers and agents as the board of directors may in their discretion appoint.
The treasurer and the clerk shall be chosen by ballot at the annual meeting of
the stockholders. The president shall be elected annually by the board of
directors after its election by the stockholders. The president shall be a
director. The clerk shall be a resident of Massachusetts. So far as is
permitted by law, any two or more offices may be filled by the same person.
Subject to law, to the agreement of association and to the other provisions of
these by-laws, the treasurer and clerk shall each hold office until the next
annual meeting of stockholders and until his successor is chosen and
qualified, the president shall hold office until the first meeting of
directors after the next annual meeting of stockholders and until his
successor is chosen and qualified and the other officers and agents shall hold
office during the pleasure of the board of directors or for such term as the
board of directors shall prescribe. Each officer shall, subject to these by-
laws, have in addition to the duties and powers herein set forth such duties
and powers as are commonly incident to his office, and such duties and powers
as the board of directors shall from time to time designate.
ARTICLE XIII.
PRESIDENT AND VICE PRESIDENTS.
Except as otherwise determined by the board of directors the president
shall be the chief executive officer of the corporation and shall preside at
all meetings of the stockholders and of the board of directors at which he is
present. The president shall have custody of the treasurer's bond.
Any vice president shall have such powers as the board of directors
shall from time to time designate.
<PAGE>
ARTICLE XIV.
CLERK.
The clerk shall keep an accurate record of the proceedings of all
meetings of the stockholders in books provided for the purpose, which books
shall be kept at the principal office of the corporation and shall be open at
all reasonable times to the inspection of any stockholder. In the absence of
the clerk or an assistant clerk at any such meeting a temporary clerk shall be
chosen, who shall record the proceedings of such meeting in the aforesaid
books. The clerk, any assistant clerk and such temporary clerk shall be
sworn.
The clerk or an assistant clerk shall also keep accurate minutes of all
meetings of the board of directors and in their absence from any such meeting
a temporary clerk shall be chosen, who shall be sworn and shall record the
proceedings of such meeting.
ARTICLE XV.
TREASURER.
The treasurer shall, subject to the direction and under the supervision
of the board of directors, have general charge of the financial concerns of
the corporation and the care and custody of the funds and valuable papers of
the corporation, except his own bond, and he shall have power to endorse for
deposit or collection all notes, checks, drafts, etc., payable to the
corporation or its order, and to accept drafts on behalf of the corporation.
He shall keep, or cause to be kept, accurate books of account which shall be
the property of the corporation. If required by the board of directors he
shall give bond for the faithful performance of his duty in such form, in such
sum, and with such sureties as the board of directors shall require.
Any assistant treasurer shall have such powers as the board of directors
shall from time to time designate.
ARTICLE XVI.
REMOVALS.
The stockholders generally entitled to vote may, at any special meeting
called for the purpose, by vote of a majority of the capital stock issued and
outstanding and generally entitled to vote, remove from office the treasurer,
clerk or any director elected by the stockholders generally entitled to vote,
and elect his successor. The board of directors may likewise, by vote of a
majority of their entire number, remove from office any officer or agent of
the corporation; provided, however, that the board of directors may remove the
treasurer or clerk for cause only.
ARTICLE XVII.
VACANCIES.
If the office of any officer or agent, one or more, becomes vacant by
reason of death, resignation, removal, disqualification or otherwise, the
directors may, unless such vacancy, if in the office of the treasurer or
clerk, shall have been filled by the stockholders generally entitled to vote,
choose by a majority vote of their entire number, a successor or successors,
who shall hold office for the unexpired term, subject to the provisions of
Article XVI.
ARTICLE XVIII.
CLASSES OF STOCK.
The capital stock of the corporation shall consist of Common Stock of
the par value of $25 a share and two classes of preferred stock, Preferred
Stock of the par value of $100 a share and Preferred Stock - Cumulative of the
par value of $25 a share, each having respectively preferences, voting rights,
restrictions and qualifications as follows:
<PAGE>
SECTION 1. Common Stock.
Each share of the Common Stock shall be equal to every other share
thereof in every respect. Except as required by law and except as hereafter
specifically provided in Section 2 of this Article XVIII, the holders of
Common Stock shall have the exclusive right to vote.
SECTION 2. Preferred Stock.
A. The shares of Preferred Stock may be issued, as the board of
directors may determine, in one or more series each bearing such designation
as to distinguish the shares thereof from the shares of all other series and
classes of capital stock of the corporation. All shares of Preferred Stock,
irrespective of series, shall constitute one and the same class of stock and
shall be of equal rank as to dividends and assets with each other and with the
Preferred Stock - Cumulative. Subject to any applicable provisions of law,
the shares of Preferred Stock of different series may vary, as determined by
the board of directors and, if required by law, by the stockholders, as to the
following rights and preferences:
(1) The annual dividend rate, or method of calculation thereof,
and the date from which the dividends on shares issued prior to the
record date for the first dividend shall be cumulative and the date for
the first dividend;
(2) The redemption price or prices, or method of calculation
thereof, and any restriction on the exercise by the corporation of its
right to redeem such series;
(3) The amount or amounts payable upon any liquidation or
dissolution or winding up;
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of shares; and
(5) The conversion, participation or other special rights.
B. Before any dividends on, or any distribution of assets (by
purchase of shares or otherwise) to holders of, the Common Stock or any other
stock ranking junior to the Preferred Stock as to dividends (both hereinafter
in this subsection B called "junior stock") shall be paid or set apart for
payment or otherwise provided for, the holders of the Preferred Stock shall be
entitled to receive, but only when and as declared by the board of directors,
out of any funds legally available for the declaration of dividends,
cumulative dividends at the annual dividend rate per share fixed for the
particular series payable quarterly on the first days of February, May, August
and November in each year commencing on a date specified for the first
dividend date as herein provided to stockholders of record on the respective
dates, not exceeding thirty (30) days preceding such dividend payment dates,
fixed in advance for the purpose by the board of directors prior to the
payment of each particular dividend. No dividends shall be declared on any
series of the Preferred Stock or on any other class of preferred stock ranking
on a parity therewith, as to dividends, in respect of any quarter-yearly
dividend period, unless there shall likewise be declared on all shares of all
series of the Preferred Stock and of any other class of such parity preferred
stock at the time outstanding, like proportionate dividends, ratably, in
proportion to the respective annual dividend rates fixed therefor, in respect
of the same quarter-yearly dividend period, to the extent that such shares are
entitled to receive dividends for such quarter-yearly dividend period. The
dividends on shares of all series of the Preferred Stock shall be cumulative.
In the case of all shares of each particular series, the dividends on shares
of such series shall be cumulative:
(1) On shares issued prior to the record date for the first
dividend on the shares of such series, from the date for the particular
series fixed therefor;
(2) On shares issued after a record date for a dividend, but
prior to the dividend payment date for such dividend, from said dividend
payment; and
<PAGE>
(3) Otherwise from the quarter-yearly dividend payment date next
preceding the date of issue of such shares;
so that dividends accrued on all outstanding shares of Preferred Stock to the
last preceding quarterly dividend payment shall have been paid in full or
declared and set apart for payment before there shall be any dividend or
distribution on, or purchase of, junior stock. The holders of the Preferred
Stock shall not be entitled to receive any dividends thereon other than the
dividends referred to in this subsection B and other than distributions
provided for in subsection D below. Whenever dividends accrued on all
outstanding shares of Preferred Stock to the last preceding quarterly dividend
payment date shall have been paid in full or declared and set apart for
payment, and subject to the limitations set forth in subsection H below and,
when applicable, in subsection E(2)(i) of Section 4 of this Article XVIII, the
board of directors may, without waiting for the expiration of the current
dividend period for the Preferred Stock, declare and pay dividends on any
junior stock out of funds legally available therefor.
As used in this Section 2, the expression "dividends accrued" shall mean
the sum of amounts with respect to all shares of Preferred Stock then
outstanding, which as to each share shall be an amount computed at the rate
per annum of the par value thereof fixed for the particular series from the
date from which dividends on such share become cumulative to the date with
reference to which the expression is used, irrespective of whether such amount
shall have been declared as dividends or there shall have existed any funds
legally available for the payment thereof, less the aggregate of all dividends
paid or declared payable on or before said last mentioned date and set aside
for such payment on such share.
C. The corporation, pursuant to action of its board of directors or
as provided in subsection A(11) of Section 4 of this Article XVIII, may redeem
the whole or any part of any series of the Preferred Stock at the time
outstanding, at any time or from time to time, by paying in cash as herein
provided the redemption price of the shares of the particular series fixed
therefor, together with dividends accrued to the date fixed for such
redemption, and by mailing, postage prepaid, at least thirty (30) days and not
more than ninety (90) days prior to the date fixed for said redemption a
notice specifying said redemption date to the holders of record of the
Preferred Stock to be redeemed, at their respective addresses as the same
shall appear on the books of the corporation; provided, however, that the
exercise by the corporation of its right to redeem shares of any particular
series may be subject to such restrictions as are determined for said series.
In case of the redemption of a part only of any series of the Preferred Stock
at the time outstanding, the corporation shall select by lot in such manner as
the board of directors determines, the shares so to be redeemed. If such
notice of redemption shall have been so mailed, and if on or before the
redemption date specified in such notice all funds necessary for such
redemption shall have been set aside by the corporation, so as to be and
continue to be available therefor, then, on and after said redemption date,
notwithstanding that any certificate for the shares of the Preferred Stock so
called for redemption shall not have been surrendered for cancellation, the
shares represented thereby shall no longer be deemed outstanding, the right to
receive dividends thereon shall cease to accrue, and all rights of the holders
thereof shall forthwith cease and terminate, except only the right of the
holders thereof to receive the amount payable upon redemption thereof, but
without interest; provided, however, that if, after mailing said notice as
aforesaid and prior to the date of redemption specified in such notice, said
funds shall be set aside by deposit in trust, for the account of the holders
of the Preferred Stock to be redeemed, with a bank or trust company in good
standing, organized under the laws of the United States of America or The
Commonwealth of Massachusetts, having a capital, undivided profits and surplus
aggregating at least $5,000,000, thereupon all shares of the Preferred Stock
with respect to which such deposit shall have been made shall no longer be
deemed to be outstanding, and all rights with respect to such shares of
Preferred Stock shall forthwith upon such deposit in trust cease and
terminate, except only the right of the holders thereof to receive from such
deposit the amount payable upon the redemption but without interest. In case
the holders of the Preferred Stock which shall have been redeemed shall not
within four years of the date of redemption thereof claim any amount so
deposited in trust for the redemption of such shares, such bank or trust
company shall, upon demand, pay over to the corporation any such unclaimed
<PAGE>
amount so deposited with it and shall thereupon be relieved of all
responsibility in respect thereof, and the corporation shall not be required
to hold the amount so paid over to it separate and apart from its other funds,
and thereafter the holders of such shares of Preferred Stock shall look only
to the corporation for payment of the redemption price thereof, but without
interest. If there are any dividends accrued to the last preceding quarterly
dividend payment date or dates on the outstanding Preferred Stock or any other
class of preferred stock ranking on a parity therewith as to assets, no
Preferred Stock or such parity stock shall be redeemed, purchased or otherwise
acquired by the corporation unless all series of Preferred Stock and such
parity stock which are redeemable shall be redeemed and unless an offer is
made to (a) purchase all Preferred Stock and such parity stock of any series
which is not redeemable at the time under limited restrictions then applicable
thereto at a price equal to the then redemption price for such series if such
restrictions were not applicable and (b) to purchase all Preferred Stock and
such parity stock of any series which is not redeemable at the time at a price
equal to the highest then redemption price on any outstanding shares of
Preferred Stock and such parity stock, after giving effect to the differences
in par value among classes of preferred stock, or unless a partial redemption
or any purchase or other acquisition shall have been ordered, approved or
permitted under the Public Utility Holding Company Act of 1935. All stock
redeemed or purchased under the provisions of this subsection C shall be
retired.
D. In the event of any liquidation, dissolution or winding up
(whether voluntarily or involuntarily) of the affairs of the corporation or
any distribution of its capital, then before any distribution shall be made to
the holders of Common Stock or any other stock ranking junior to the Preferred
Stock as to assets, the holders of each series of the Preferred Stock at the
time outstanding shall be entitled to be paid in cash the amount for the
particular series fixed therefor, together in each case with dividends accrued
thereon to the date fixed for payment of such distributive amounts, and no
more. No payments on account of such distributive amounts shall be made to
the holders of any series of the Preferred Stock or any other class of
preferred stock ranking on a parity therewith, as to assets, unless there
shall likewise be paid at the same time to the holders of each other series of
the Preferred Stock or such parity stock like proportionate distributive
amounts, ratably, in proportion to the full distributive amounts to which they
are respectively entitled. After such payment to the holders of Preferred
Stock or such parity stock, the remaining assets and funds of the corporation
shall be divided and distributed among the holders of Common Stock or any
other stock ranking junior to the Preferred Stock as to assets then
outstanding according to their respective rights. Neither the consolidation
nor the merger of the corporation with or into any other corporation shall be
deemed to be a liquidation, dissolution or winding up of the corporation.
E. Except as required by law and except as hereafter specifically
provided in this Section 4 of this Article XVIII, the holders of Preferred
Stock shall have no right to vote.
F. Except as otherwise expressly provided by law, no holder of
Preferred Stock shall be entitled as such as a matter of right to subscribe
for or purchase any part of any new or additional issue of stock or warrant
carrying rights to stock, or securities convertible into stock, of any class
whatever, whether now or hereafter authorized, and whether issued for cash,
property, services or otherwise. If it is expressly required by law that such
new or additional issue be offered proportionately to the stockholders, then,
unless otherwise provided by law, the holders of all classes of preferred
stock only shall be entitled to subscribe for new or additional preferred
stock of any class and the holders of common stock only shall be entitled to
subscribe for new or additional common stock; and notice of such increase as
required by law need be given and the new shares need be offered
proportionately only to the stockholders who are so entitled to subscribe.
G. Subject to the limitations, if any, contained in Sections 4 and 5
of this Article XVIII, the corporation may from time to time issue additional
capital stock divided into classes with such preferences as to dividends,
voting power and other incidents as may be determined in accordance with
applicable provisions of law and terms of outstanding capital stock. Without
limiting the generality of the foregoing, any such additional capital stock
may be an additional series of Preferred Stock or additional shares of the
initial or any other series of Preferred Stock.
<PAGE>
H. So long as any shares of the Preferred Stock of any series are
outstanding, the payment of dividends on Common Stock or on any other stock of
the corporation ranking junior to the Preferred Stock as to dividends or
assets (other than (i) dividends payable in stock ranking junior to the
Preferred Stock as to dividends and assets or (ii) dividends paid in cash if
immediately thereafter there shall be paid to the corporation in cash an
amount equal to such dividends for shares of or as a capital contribution with
respect to stock ranking junior to the Preferred Stock as to dividends or
assets) and the making of any distribution of assets to holders of stock
ranking junior to the Preferred Stock as to dividends or assets by purchase of
shares or otherwise (each of such actions being herein embraced within the
term "payment of junior stock dividends") shall be subject to the following
limitations:
(1) If and so long as the junior stock equity is, or as a result
of the proposed payment would become, less than twenty per cent (20%) of
total capitalization the payment of junior stock dividends, including
the proposed payment, during the twelve months ending with the last day
of the month in which the proposed payment is to be made shall not
exceed fifty per cent (50%) of the net income of the corporation
available for the payment of dividends on the stock ranking junior to
the Preferred Stock as to dividends and assets for the twelve full
calendar months immediately preceding the calendar month in which such
dividend is declared; and
(2) If and so long as the junior stock equity is, or as a result
of the proposed payment would become, less than twenty-five per cent
(25%) but is twenty per cent (20%) or more of total capitalization the
payment of junior stock dividends, including the proposed payment,
during the twelve months ending with the last day of the month in which
the proposed payment is to be made shall not exceed seventy-five per
cent (75%) of the net income of the corporation available for the
payment of dividends on the stock ranking junior to the Preferred Stock
as to dividends and assets for the twelve full calendar months
immediately preceding the calendar month in which such dividend is
declared.
For the purposes of this subsection H "net income" shall be determined
in accordance with generally accepted accounting principles, provided,
however, that the amount deducted for depreciation shall be an amount computed
in accordance with clause (c) of Section 4E hereof.
The term "junior stock equity" is defined in subsection E(2)(i) of
Section 4 of this Article XVIII. The term "total capitalization" as used in
this subsection H means the aggregate of (x) the junior stock equity, (y) the
par value of, or stated capital represented by, the outstanding shares of
Preferred Stock and any other stock ranking prior thereto or on a parity
therewith as to dividends or assets, and (z) the principal amount of all
outstanding indebtedness of the corporation represented by bonds, notes and
other evidences of indebtedness maturing by their terms more than one year
from the date of issue thereof.
I. No stockholder, director, officer or agent of the corporation
shall be held individually responsible for any action taken in good faith
though subsequently adjudged to be in violation of this Section 2.
J. The shares of Preferred Stock from time to time duly authorized
may be issued for such consideration as may be fixed from time to time either
by the board of directors or as otherwise provided by law. Any and all shares
of Preferred Stock upon receipt by the corporation of the consideration so
fixed shall be deemed fully paid stock and shall not be liable to any further
call or assessment thereon.
K. Every holder of Preferred Stock of the corporation by becoming
such shall be held to have consented to all of these provisions and to have
agreed to be bound thereby and to have waived to the full extent permitted by
law any right such holder may have either now or at any time in the future
contrary to these provisions.
SECTION 3. Preferred Stock - Cumulative.
<PAGE>
A. The shares of Preferred Stock - Cumulative may be issued, as the
board of directors may determine, in one or more series each bearing such
designation as to distinguish the shares thereof from the shares of all other
series and classes of capital stock of the corporation. All shares of
Preferred Stock - Cumulative, irrespective of series, shall constitute one and
the same class of stock and shall be of equal rank as to dividends and assets
with each other and with the Preferred Stock. Subject to any applicable
provisions of law, the shares of Preferred Stock - Cumulative of different
series may vary, as determined by the board of directors and, if required by
law, by the stockholders, as to the following rights and preferences:
(1) The annual dividend rate, or method of calculation thereof,
and the date from which the dividends on shares issued prior to the
record date for the first dividend shall be cumulative and the date for
the first dividend;
(2) The redemption price or prices, or method of calculation
thereof, and any restriction on the exercise by the corporation of its
right to redeem such series;
(3) The amount or amounts payable upon any liquidation or
dissolution or winding up;
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of shares; and
(5) The conversion, participation or other special rights.
B. Before any dividends on, or any distribution of assets (by
purchase of shares or otherwise) to holders of, the Common Stock or any other
stock ranking junior to the Preferred Stock - Cumulative as to dividends (both
hereinafter in this subsection B called "junior stock") shall be paid or set
apart for payment or otherwise provided for, the holders of the Preferred
Stock - Cumulative shall be entitled to receive, but only when and as declared
by the board of directors, out of any funds legally available for the
declaration of dividends, cumulative dividends at the annual dividend rate per
share fixed for the particular series payable quarterly on the first days of
February, May, August and November in each year commencing on a date specified
for the first dividend date as herein provided to stockholders of record on
the respective dates, not exceeding thirty (30) days preceding such dividend
payment dates, fixed in advance for the purpose by the board of directors
prior to the payment of each particular dividend. No dividends shall be
declared on any series of the Preferred Stock - Cumulative or on any other
class of preferred stock ranking on a parity therewith, as to dividends, in
respect of any quarter-yearly dividend period, unless there shall likewise be
declared on all shares of all series of the Preferred Stock - Cumulative and
of any other class of such parity preferred stock at the time outstanding,
like proportionate dividends, ratably, in proportion to the respective annual
dividend rates fixed therefor, in respect of the same quarter-yearly dividend
period, to the extent that such shares are entitled to receive dividends for
such quarter-yearly dividend period. The dividends on shares of all series of
the Preferred Stock - Cumulative shall be cumulative. In the case of all
shares of each particular series, the dividends on shares of such series shall
be cumulative:
(1) On shares issued prior to the record date for the first
dividend on the shares of such series, from the date for the particular
series fixed therefor;
(2) On shares issued after a record date for a dividend, but
prior to the dividend payment date for such dividend, from said dividend
payment; and
(3) Otherwise from the quarter-yearly dividend payment date next
preceding the date of issue of such shares;
so that dividends accrued on all outstanding shares of Preferred Stock -
Cumulative to the last preceding quarterly dividend payment shall have been
paid in full or declared and set apart for payment before there shall be any
dividend or distribution on, or purchase of, junior stock. The holders of the
Preferred Stock - Cumulative shall not be entitled to receive any dividends
<PAGE>
thereon other than the dividends referred to in this subsection B and other
than distributions provided for in subsection D below. Whenever dividends
accrued on all outstanding shares of Preferred Stock - Cumulative to the last
preceding quarterly dividend payment date shall have been paid in full or
declared and set apart for payment, and subject to the limitations set forth
in subsection H below and, when applicable, in subsection E(2)(i) of Section 4
of this Article XVIII, the board of directors may, without waiting for the
expiration of the current dividend period for the Preferred Stock -
Cumulative, declare and pay dividends on any junior stock out of funds legally
available therefor.
As used in this Section 3, the expression "dividends accrued" shall mean
the sum of amounts with respect to all shares of Preferred Stock - Cumulative
then outstanding, which as to each share shall be an amount computed at the
rate per annum of the par value thereof fixed for the particular series from
the date from which dividends on such share become cumulative to the date with
reference to which the expression is used, irrespective of whether such amount
shall have been declared as dividends or there shall have existed any funds
legally available for the payment thereof, less the aggregate of all dividends
paid or declared payable on or before said last mentioned date and set aside
for such payment on such share.
C. The corporation, pursuant to action of its board of directors or
as provided in subsection A(11) of Section 4 of this Article XVIII, may redeem
the whole or any part of any series of the Preferred Stock - Cumulative at the
time outstanding, at any time or from time to time, by paying in cash as
herein provided the redemption price of the shares of the particular series
fixed therefor, together with dividends accrued to the date fixed for such
redemption, and by mailing, postage prepaid, at least thirty (30) days and not
more than ninety (90) days prior to the date fixed for said redemption a
notice specifying said redemption date to the holders of record of the
Preferred Stock - Cumulative to be redeemed, at their respective addresses as
the same shall appear on the books of the corporation; provided, however, that
the exercise by the corporation of its right to redeem shares of any
particular series may be subject to such restrictions as are determined for
said series. In case of the redemption of a part only of any series of the
Preferred Stock - Cumulative at the time outstanding, the corporation shall
select by lot in such manner as the board of directors determines, the shares
so to be redeemed. If such notice of redemption shall have been so mailed,
and if on or before the redemption date specified in such notice all funds
necessary for such redemption shall have been set aside by the corporation, so
as to be and continue to be available therefor, then, on and after said
redemption date, notwithstanding that any certificate for the shares of the
Preferred Stock - Cumulative so called for redemption shall not have been
surrendered for cancellation, the shares represented thereby shall no longer
be deemed outstanding, the right to receive dividends thereon shall cease to
accrue, and all rights of the holders thereof shall forthwith cease and
terminate, except only the right of the holders thereof to receive the amount
payable upon redemption thereof, but without interest; provided, however, that
if, after mailing said notice as aforesaid and prior to the date of redemption
specified in such notice, said funds shall be set aside by deposit in trust,
for the account of the holders of the Preferred Stock - Cumulative to be
redeemed, with a bank or trust company in good standing, organized under the
laws of the United States of America or The Commonwealth of Massachusetts,
having a capital, undivided profits and surplus aggregating at least
$5,000,000, thereupon all shares of the Preferred Stock - Cumulative with
respect to which such deposit shall have been made shall no longer be deemed
to be outstanding, and all rights with respect to such shares of Preferred
Stock - Cumulative shall forthwith upon such deposit in trust cease and
terminate, except only the right of the holders thereof to receive from such
deposit the amount payable upon the redemption but without interest. In case
the holders of the Preferred Stock - Cumulative which shall have been redeemed
shall not within four years of the date of redemption thereof claim any amount
so deposited in trust for the redemption of such shares, such bank or trust
company shall, upon demand, pay over to the corporation any such unclaimed
amount so deposited with it and shall thereupon be relieved of all
responsibility in respect thereof, and the corporation shall not be required
to hold the amount so paid over to it separate and apart from its other funds,
and thereafter the holders of such shares of Preferred Stock - Cumulative
shall look only to the corporation for payment of the redemption price
thereof, but without interest. If there are any dividends accrued to the last
preceding quarterly dividend payment date or dates on the outstanding
<PAGE>
Preferred Stock - Cumulative or any other class of preferred stock ranking on
a parity therewith as to assets, no Preferred Stock - Cumulative or such
parity stock shall be redeemed, purchased or otherwise acquired by the
corporation unless all series of Preferred Stock - Cumulative and such parity
stock which are redeemable shall be redeemed and unless an offer is made to
(a) purchase all Preferred Stock - Cumulative and such parity stock of any
series which is not redeemable at the time under limited restrictions then
applicable thereto at a price equal to the then redemption price for such
series if such restrictions were not applicable and (b) to purchase all
Preferred Stock - Cumulative and such parity stock of any series which is not
redeemable at the time at a price equal to the highest then redemption price
on any outstanding shares of Preferred Stock - Cumulative and such parity
stock, after giving effect to the differences in par value among classes of
preferred stock, or unless a partial redemption or any purchase or other
acquisition shall have been ordered, approved or permitted under the Public
Utility Holding Company Act of 1935. All stock redeemed or purchased under
the provisions of this subsection C shall be retired.
D. In the event of any liquidation, dissolution or winding up
(whether voluntarily or involuntarily) of the affairs of the corporation or
any distribution of its capital, then before any distribution shall be made to
the holders of Common Stock or any other stock ranking junior to the Preferred
Stock - Cumulative as to assets, the holders of each series of the Preferred
Stock - Cumulative at the time outstanding shall be entitled to be paid in
cash the amount for the particular series fixed therefor, together in each
case with dividends accrued thereon to the date fixed for payment of such
distributive amounts, and no more. No payments on account of such
distributive amounts shall be made to the holders of any series of the
Preferred Stock - Cumulative or any other class of preferred stock ranking on
a parity therewith, as to assets, unless there shall likewise be paid at the
same time to the holders of each other series of the Preferred Stock -
Cumulative or such parity stock like proportionate distributive amounts,
ratably, in proportion to the full distributive amounts to which they are
respectively entitled. After such payment to the holders of Preferred Stock -
Cumulative or such parity stock, the remaining assets and funds of the
corporation shall be divided and distributed among the holders of Common Stock
or any other stock ranking junior to the Preferred Stock - Cumulative as to
assets then outstanding according to their respective rights. Neither the
consolidation nor the merger of the corporation with or into any other
corporation shall be deemed to be a liquidation, dissolution or winding up of
the corporation.
E. Except as required by law and except as hereafter specifically
provided in this Section 4 of this Article XVIII, the holders of Preferred
Stock - Cumulative shall have no right to vote.
F. Except as otherwise expressly provided by law, no holder of
Preferred Stock - Cumulative shall be entitled as such as a matter of right to
subscribe for or purchase any part of any new or additional issue of stock or
warrant carrying rights to stock, or securities convertible into stock, of any
class whatever, whether now or hereafter authorized, and whether issued for
cash, property, services or otherwise. If it is expressly required by law
that such new or additional issue be offered proportionately to the
stockholders, then, unless otherwise provided by law, the holders of all
classes of preferred stock only shall be entitled to subscribe for new or
additional preferred stock of any class and the holders of common stock only
shall be entitled to subscribe for new or additional common stock; and notice
of such increase as required by law need be given and the new shares need be
offered proportionately only to the stockholders who are so entitled to
subscribe.
G. Subject to the limitations, if any, contained in Sections 4 and 5
of this Article XVIII, the corporation may from time to time issue additional
capital stock divided into classes with such preferences as to dividends,
voting power and other incidents as may be determined in accordance with
applicable provisions of law and terms of outstanding capital stock. Without
limiting the generality of the foregoing, any such additional capital stock
may be an additional series of Preferred Stock - Cumulative or additional
shares of the initial or any other series of Preferred Stock - Cumulative.
<PAGE>
H. So long as any shares of the Preferred Stock - Cumulative of any
series are outstanding, the payment of dividends on Common Stock or on any
other stock of the corporation ranking junior to the Preferred Stock -
Cumulative as to dividends or assets (other than (i) dividends payable in
stock ranking junior to the Preferred Stock - Cumulative as to dividends and
assets or (ii) dividends paid in cash if immediately thereafter there shall be
paid to the corporation in cash an amount equal to such dividends for shares
of or as a capital contribution with respect to stock ranking junior to the
Preferred Stock - Cumulative as to dividends or assets) and the making of any
distribution of assets to holders of stock ranking junior to the Preferred
Stock - Cumulative as to dividends or assets by purchase of shares or
otherwise (each of such actions being herein embraced within the term "payment
of junior stock dividends") shall be subject to the following limitations:
(1) If and so long as the junior stock equity is, or as a result
of the proposed payment would become, less than twenty per cent (20%) of
total capitalization the payment of junior stock dividends, including
the proposed payment, during the twelve months ending with the last day
of the month in which the proposed payment is to be made shall not
exceed fifty per cent (50%) of the net income of the corporation
available for the payment of dividends on the stock ranking junior to
the Preferred Stock - Cumulative as to dividends and assets for the
twelve full calendar months immediately preceding the calendar month in
which such dividend is declared; and
(2) If and so long as the junior stock equity is, or as a result
of the proposed payment would become, less than twenty-five per cent
(25%) but is twenty per cent (20%) or more of total capitalization the
payment of junior stock dividends, including the proposed payment,
during the twelve months ending with the last day of the month in which
the proposed payment is to be made shall not exceed seventy-five per
cent (75%) of the net income of the corporation available for the
payment of dividends on the stock ranking junior to the Preferred Stock
- Cumulative as to dividends and assets for the twelve full calendar
months immediately preceding the calendar month in which such dividend
is declared.
For the purposes of this subsection H "net income" shall be determined
in accordance with generally accepted accounting principles, provided,
however, that the amount deducted for depreciation shall be an amount computed
in accordance with clause (c) of subsection I(2) hereof.
The term "junior stock equity" is defined in subsection E(2)(i) of
Section 4 of this Article XVIII.
The term "total capitalization" as used in this subsection H means the
aggregate of (x) the junior stock equity, (y) the par value of, or stated
capital represented by, the outstanding shares of Preferred Stock - Cumulative
and any other stock ranking prior thereto or on a parity therewith as to
dividends or assets, and (z) the principal amount of all outstanding
indebtedness of the corporation represented by bonds, notes and other
evidences of indebtedness maturing by their terms more than one year from the
date of issue thereof.
I. No stockholder, director, officer or agent of the corporation
shall be held individually responsible for any action taken in good faith
though subsequently adjudged to be in violation of this Section 3.
J. The shares of Preferred Stock - Cumulative from time to time duly
authorized may be issued for such consideration as may be fixed from time to
time either by the board of directors or as otherwise provided by law. Any
and all shares of Preferred Stock - Cumulative upon receipt by the corporation
of the consideration so fixed shall be deemed fully paid stock and shall not
be liable to any further call or assessment thereon.
K. Every holder of Preferred Stock - Cumulative of the corporation by
becoming such shall be held to have consented to all of these provisions and
to have agreed to be bound thereby and to have waived to the full extent
permitted by law any right such holder may have either now or at any time in
the future contrary to these provisions.
<PAGE>
SECTION 4. Certain Rights of Preferred Stock and
Preferred Stock - Cumulative.
A. (1) "Equal Preference Stock" as used in this subsection A shall
mean the Preferred Stock, the Preferred Stock - Cumulative, and any
other class of preferred stock ranking on a parity therewith as to
dividends.
If dividends accrued to the last preceding quarterly dividend
payment date or dates on the outstanding Equal Preference Stock shall at
any time and from time to time equal or exceed an amount equivalent to
four (4) full quarterly dividends on any shares of any series of the
Equal Preference Stock at the time outstanding, then until all dividends
in default on the Equal Preference Stock shall have been paid, the
holders of Equal Preference Stock, voting separately as one class, shall
have the right to elect the smallest number of directors necessary to
constitute a majority of the full board of directors, and the holders of
the stock generally entitled to vote, voting separately as one class,
shall have the right to elect the remaining members of the board of
directors. If and when all dividends in default on the Equal Preference
Stock shall be paid (and, except when prevented from so doing by any
applicable restriction of law or contained in any agreement relating to
indebtedness of the corporation, such dividends shall be declared and
paid out of any funds legally available therefor as soon as reasonably
practicable unless, by a majority vote of the directors elected by the
holders of stock generally entitled to vote, such directors determine
such payment not to be in the best interests of the corporation), the
Equal Preference Stock shall thereupon be divested of such special right
to elect any member of the board of directors, but subject always to the
same provisions for the vesting of such special right in the Equal
Preference Stock in case of further like default or defaults.
(2) Upon accrual of the right of the holders of the Equal
Preference Stock to elect a majority of the board of directors as above
provided in this subsection A, the president, a vice president or the
clerk of the corporation shall call a special meeting of the
stockholders of the corporation for the purpose of electing a new board
of directors to be held not less than forty-five (45) nor more than
sixty (60) days after the accrual of such right; provided, however, that
no such special meeting shall be called if the date of such accrual of
such right shall be less than one hundred twenty (120) days but not less
than forty-five (45) days prior to the date otherwise fixed by the by-
laws of the corporation for the next annual meeting of the stockholders,
in which event said annual meeting shall be held on the date specified
in the by-laws or a special meeting in lieu thereof called to be held
within three (3) days thereafter. If said officers fail to call such
meeting, or fail to hold such annual meeting or special meeting in lieu
thereof within three (3) days of the date provided therefor in the by-
laws, any holder or holders of Equal Preference Stock holding in the
aggregate one thousand (1,000) shares may call a special meeting for
such purpose.
(3) The notice of any such special meeting, any annual meeting
of the corporation or any special meeting in lieu thereof, at which the
holders of the Equal Preference Stock shall have the right to elect
directors, shall be mailed by the corporation not less than thirty (30)
days prior to the meeting and state (x) that by reason of the fact that
dividends payable on the Equal Preference Stock are or have been in
default in an amount equal to or in excess of four (4) full quarterly
dividends, the holders of the Equal Preference Stock, voting together as
a class, are entitled to elect the smallest number of directors
necessary to constitute a majority of the full board of directors, (y)
that any holder of the Equal Preference Stock has the right at any
reasonable time to inspect and make copies of the list or lists of the
holders of Equal Preference Stock maintained at the principal office of
the corporation or at the office of any transfer agent for the Equal
Preference Stock, and (z) the substance of the next succeeding paragraph
with respect to the number of shares of Equal Preference Stock required
to be represented at any meeting or adjournment thereof for the election
of directors of the corporation at which such holders have the right to
elect directors.
<PAGE>
(4) At any such special or annual meeting at which the holders
of the Equal Preference Stock shall have the right to elect directors,
the presence in person or by proxy of the holders of a majority of the
outstanding stock generally entitled to vote shall be required to
constitute a quorum of such class for the election of directors and the
presence in person or by proxy of the holders of a majority of the
outstanding Equal Preference Stock shall be required to constitute a
quorum of such class for the election of directors; provided, however,
that in the absence of such a quorum of the holders of the Equal
Preference Stock, no election of directors shall be held but a majority
of the holders of the Equal Preference Stock who are present in person
or by proxy shall have the power to adjourn the meeting for election of
directors to a date not less than twenty-five (25) nor more than sixty
(60) days for the date of such original meeting. At such adjourned
meeting the presence in person or by proxy of the holders of thirty-five
per cent (35%) of the outstanding Equal Preference Stock shall
constitute a quorum of such class for the election of directors.
In the calculation of any quorum, majority, or percentage, of the
Equal Preference Stock, each share of stock bearing $100 par value shall
be counted as one and each share of stock bearing $25 par value shall be
counted as one-quarter. The Equal Preference Stock, when voting as
such, shall vote as a single class.
(5) In the event any such special or annual meeting of
stockholders shall be adjourned as aforesaid, the president, any vice
president or the clerk of the corporation shall, within ten (10) days
after the date of the original meeting, cause notice of the adjourned
meeting to be given to all stockholders of the corporation entitled to
vote thereat. Such notice shall contain substantially the statements
hereinabove required with respect to the original meeting, and shall
further state that the required quorum of the holders of the Equal
Preference Stock was not present at such original meeting and that the
holders of thirty-five per cent (35%) of the outstanding Equal
Preference Stock will constitute a quorum of such class for the election
of directors at such adjourned meeting.
(6) If the requisite quorum of holders of the Equal Preference
Stock shall not be present at such adjourned meeting, then, in case the
original meeting was a special meeting called as aforesaid, the
directors of the corporation then in office shall remain in office until
the next annual meeting of the stockholders of the corporation and until
their successors have been elected and shall qualify; or if such
original meeting was an annual meeting of the stockholders or special
meeting in lieu thereof, all members of the board of directors to be
elected at such meeting shall be elected by a vote of the holders of a
majority of the shares of the stock generally entitled to vote present
in person or represented by proxy at such adjourned meeting.
(7) Upon reversion, pursuant to subsection A(1), of the voting
powers to their status prior to default, a special or annual meeting of
stockholders generally entitled to vote shall be held for the purpose of
electing directors. Notice thereof shall be given promptly by the
corporation and in any case within fifteen (15) days after such
reversion, such notice to be mailed by the corporation not less than
seven (7) nor more than ten (10) days prior to such meeting to all
stockholders generally entitled to vote at their respective addresses
appearing upon the books of the corporation, unless such notice shall
have been waived either before or after the holding of such meeting by
all such stockholders. If the corporation fails to call such meeting or
fails to hold such annual meeting within three (3) days of the date
provided therefor in the by-laws, any holder or holders of stock
generally entitled to vote holding in the aggregate one thousand (1,000)
shares may call a special meeting for such purpose.
(8) Forthwith upon the election of a majority of the board of
directors of the corporation by the holders of Equal Preference Stock
pursuant to subsection A(1) hereof, the terms of office of all persons
who may be directors of the corporation at the time shall terminate,
whether or not the holders of stock generally entitled to vote shall
then have elected the remaining members of the board of directors, and,
<PAGE>
if the holders of stock generally entitled to vote shall not have
elected the remaining members of the board of directors, then the
directors of the corporation in office just prior to the election of the
majority of the board of directors by the holders of Equal Preference
Stock shall appoint the remaining directors of the corporation pending
such election by the holders of stock generally entitled to vote. Any
director elected by holders of Equal Preference Stock shall hold office
until the next annual meeting of the holders of Equal Preference Stock
and until his successor is chosen and qualified, except that upon the
reversion, pursuant to subsection A(1), of the voting powers to their
status prior to default, then forthwith upon the election of new
directors by the holders of stock generally entitled to vote, the terms
of office of the directors elected by the holders of Equal Preference
Stock shall terminate.
(9) During any period in which the holders of Equal Preference
Stock have the right to elect a majority of the board of directors,
pursuant to subsection A(1), the number of directors constituting the
full board of directors shall be the number constituting the full board
of directors immediately prior to said period unless it be changed at an
annual meeting of stockholders by a two-thirds vote of the holders of
Equal Preference Stock and by a two-thirds vote of the holders of stock
generally entitled to vote to such number as shall have been stated in
the notice of said annual meeting.
(10) In case of any vacancy in the office of a director elected
by the holders of Equal Preference Stock pursuant to the foregoing
provisions of this subsection A, the remaining directors elected by the
holders of Equal Preference Stock by affirmative vote of a majority
thereof, or the remaining director so elected if there be but one, may
elect a successor or successors to hold office for the unexpired term of
the director or directors whose place or places shall be vacant. The
holders of the Equal Preference Stock, at a special meeting called for
the purpose by the holders of an aggregate of not less than one thousand
(1,000) shares of the Equal Preference Stock, upon notice mailed not
less than thirty (30) days prior to such meeting to all stockholders
entitled to vote thereat, by a vote of a majority of the Equal
Preference Stock issued and outstanding, may remove from office a
director elected by the holders of Equal Preference Stock and may elect
a successor for the remainder of his term.
(11) Under all circumstances, however, the directors elected by
the holders of stock generally entitled to vote shall have the right,
and neither the holders of Equal Preference Stock nor any directors
elected under these provisions by the holders of Equal Preference Stock
shall have any right, to vote upon the question of calling for
redemption, or of purchasing, all of the Equal Preference Stock at the
time outstanding.
(12) Except when some mandatory provision of law shall be
controlling or as otherwise provided in this Section 4 and, with respect
to any special rights of (i) the Preferred Stock as a class, or (ii) the
Preferred Stock - Cumulative as a class, or (iii) any series of either
such class as a series, in the provisions of the by-laws or articles of
organization controlling said class or in the votes creating said
series, neither the Preferred Stock nor the Preferred Stock - Cumulative
shall be entitled to vote as a separate class, and no outstanding series
of either such class shall be entitled to vote as a separate series, on
any matter and all shares of the Preferred Stock of all series and all
shares of the Preferred Stock - Cumulative of all series shall be deemed
to constitute but one class for any purpose for which a vote of the
stockholders of the corporation by classes may now or hereafter be
required.
B. So long as any shares of the Preferred Stock of any series are
outstanding, the corporation shall not, without the vote at a meeting called
for that purpose of the holders of at least two-thirds of the total number of
shares of the Preferred Stock of all series then outstanding make any change
in the provisions relative to the Preferred Stock, or of any series thereof,
which would change the express terms and provisions of such stock (other than
the express terms and provisions thereof set forth in subsections A, D, and E
of this Section 4) in any manner prejudicial to the holders thereof except
<PAGE>
that if such change is prejudicial to the holders of one or more, but not all
of such series, only to the vote of the holders of two-thirds of the total
number of shares of all series so affected and then outstanding shall be
required.
C. So long as any shares of the Preferred Stock - Cumulative of any
series are outstanding, the corporation shall not, without the vote at a
meeting called for that purpose of the holders of at least two-thirds of the
total number of shares of the Preferred Stock - Cumulative of all series then
outstanding make any change in the provisions relative to the Preferred Stock
- - Cumulative, or of any series thereof, which would change the express terms
and provisions of such stock (other than the express terms and provisions
thereof set forth in subsections A, D, and E of this Section 4) in any manner
prejudicial to the holders thereof except that if such change is prejudicial
to the holders of one or more, but not all, of such series, only the vote of
the holders of two-third of the total number of shares of all series so
affected and then outstanding shall be required.
D. So long as any shares of the Preferred Stock or the Preferred
Stock - Cumulative of any series are outstanding, the corporation shall not,
without the vote at a meeting called for that purpose of the holders of at
least two-thirds of the total number of shares of the Preferred Stock and the
Preferred Stock - Cumulative of all series then outstanding:
(1) Make any change in the provisions of this Section 4, which
would change the express terms and provisions of subsections A, D, or E,
or such stock in any manner prejudicial to the holders of the Preferred
Stock and the Preferred Stock - Cumulative, except that if such change
is prejudicial to the holders of one class, but not both, only the vote
of the holders of two-thirds of the total number of shares of the class
so affected and then outstanding shall be required; or
(2) Create or authorize any class of stock which shall be
preferred as to dividends or assets over the Preferred Stock, the
Preferred Stock - Cumulative or any security convertible into either
class.
No preferred stock so preferred as to dividends or assets over the Preferred
Stock or the Preferred Stock - Cumulative (other than either of such preferred
stocks issued upon conversion of another security) shall be issued more than
six months after the above referred to vote creating or authorizing such class
of stock unless within six months prior to such issue approval thereof has
been obtained, at a meeting called for the purpose, by vote of at least two-
thirds of the total number of shares of Preferred Stock and Preferred Stock -
Cumulative of all series outstanding.
E. So long as any shares of the Preferred Stock or the Preferred
Stock - Cumulative of any series are outstanding, the corporation shall not,
without the vote at a meeting called for that purpose of the holders of at
least a majority of the total number of shares of the Preferred Stock and
Preferred Stock - Cumulative of all series then outstanding:
(1) Issue shares of Preferred Stock or the Preferred Stock -
Cumulative of any series if after such issue the aggregate combined
outstanding par value of all series thereof would exceed $120 million.
(2) Issue additional shares of any series of Preferred Stock or
the Preferred Stock - Cumulative or of any other stock ranking prior
thereto or on a parity therewith as to dividends or assets, except for
refunding an equal par or stated value of Preferred Stock or Preferred
Stock - Cumulative, or other such prior or parity preferred stock, of
the corporation theretofore outstanding:
(i) Unless the junior stock equity to be outstanding
immediately after such issue shall be at least equal to the
aggregate amount payable on involuntary liquidation, dissolution
or winding up of the affairs of the corporation upon all Preferred
Stock and Preferred Stock - Cumulative of all series and of any
other such prior or parity stock to be outstanding immediately
after such issue; provided, however, that if for the purpose of
meeting this requirement it shall have been necessary to take into
consideration any portion of the earned surplus of the
<PAGE>
corporation, the corporation shall not (until such junior stock
equity exclusive of such portion of earned surplus shall equal
such aggregate) pay any dividends or make any distribution on
shares of its stock ranking junior to the Preferred Stock and
Preferred Stock - Cumulative as to dividends or assets which would
result in reducing such junior stock equity to an amount less than
such aggregate amount payable on involuntary liquidation,
dissolution or winding up of the affairs of the corporation; and
(ii) Unless the gross income of the corporation after taxes
available for interest on its indebtedness and for dividends on
the Preferred Stock, the Preferred Stock - Cumulative and any
other such prior or parity stock, determined in accordance with
generally accepted accounting principles, for a period of twelve
(12) consecutive calendar months within the fifteen (15) calendar
months immediately preceding the calendar month in which such
additional stock is issued, or in which a contract for the
issuance and sale thereof is made, is at least one and one-half (1
1/2) times the aggregate of the annual interest charges and
dividend requirements on all interest bearing indebtedness and all
series of Preferred Stock, Preferred Stock - Cumulative and such
prior or parity stock to be outstanding immediately after the
proposed issue. In said computations under this subsection (ii):
(a) Interest on indebtedness and dividends on stock
in each case to be retired with the proceeds of the proposed
issue and similar charges on indebtedness and stock retired
or to be retired prior to the proposed issue from the
proceeds of any junior stock issued by the corporation are
to be excluded;
(b) Such gross income, similarly determined for said
twelve (12) months period, from any property acquired by
purchase, merger or otherwise during or after said period or
to be acquired in connection with the proposed issue, may be
included; and
(c) The amount deducted for depreciation shall be
the amount charged by the corporation on its books for
depreciation during such period but not less than the
greater of (x) two and one-tenth per cent (2.1%) of the
arithmetical average of the gross plant investment in
depreciable property on the books of the corporation on the
first and last days of such period or (y) the largest
minimum depreciation requirement for such period of any
mortgage indenture to which the corporation is a party
during such period.
"Junior stock equity" as used in this subsection E and in subsections H of
Sections 2 and 3 of this Article XVIII means the aggregate of the par value
of, or stated capital represented by, the outstanding shares of stock ranking
junior to the Preferred Stock as to dividends and assets, of the premium on
capital stock and of the surplus (including earned surplus, capital surplus
and surplus invested in plant) of the corporation less the excess, if any, of
the aggregate amount payable on involuntary liquidation, dissolution or
winding up of the affairs of the corporation upon all outstanding preferred
stock of the corporation over the aggregate par or stated value thereof and
less, unless the amounts or items are being amortized or are being provided
for by reserves, (a) any amounts recorded on the books of the corporation in
adjustment accounts for utility plant and other plant in excess of the
original cost thereof, (b) unamortized debt discount and expense and capital
stock discount and expense, and (c) the excess, if any, during the period from
January 1, 1954 to the end of a month within ninety (90) days preceding the
date as of which junior stock equity is determined, over the amount charged by
the corporation on its books during such period for depreciation of an amount
determined as follows:
(x) For the calendar year 1954 and for each full calendar year
thereafter, an amount equal to two and one-tenth per cent
(2.1%) of the arithmetical average of the gross plant
investment in depreciable property on the books of the
corporation on January 1 and December 31 of such calendar
year; and
<PAGE>
(y) For any other period, an amount equal to one-twelfth (1/12)
of two and one-tenth per cent (2.1%) of the gross plant
investment in depreciable property on the books of the
corporation on the first day of the calendar year in such
period multiplied by the number of full calendar months in
such period.
(3) Merge or consolidate with or into any other corporation or
corporations or sell, lease or dispose of all or substantially all its
assets, unless such merger, consolidation, sale, lease or disposition,
or the issuance and assumption of all securities to be issued or assumed
in connection therewith, shall have been ordered, approved or permitted
under the provisions of the Public Utility Holding Company Act of 1935
or by any successor commission or regulatory authority of the United
States of America having jurisdiction in the premises under said Act or
by any court of the United States having such jurisdiction.
F. No stockholder, directors, officer or agent of the corporation
shall be held individually responsible for any action taken in good faith
though subsequently adjudged to be in violation of this Section 4.
The voting rights set forth in subsections B, C, and D shall not be
effective if, in connection with any matter specified therein, provision is
made for the purchase, redemption or retirement of all the Preferred Stock and
Preferred Stock - Cumulative at the time outstanding, or it is provided that
the proposed action shall not be effective unless such provision is made.
In the calculations in subsections D and E of "at least two-thirds of
the total number of shares of Preferred Stock and the Preferred Stock -
Cumulative" or of "at least a majority of the total number" of such shares,
each share of Preferred Stock bearing $100 par value shall be counted as one
and each share of Preferred Stock - Cumulative bearing $25 par value shall be
counted as one- quarter.
SECTION 5. Maximum Issues of Preferred Stock and Preferred Stock
- Cumulative.
The corporation shall not, without the vote at a meeting called for the
purpose of at least a majority of the shares of stock generally entitled to
vote, issue shares of any series of Preferred Stock or Preferred Stock -
Cumulative if after such issue the aggregate outstanding par value of all such
series would exceed $120 million.
SECTION 6. Terms Applicable to Specific Series of the Preferred
Stock.
A. The first series of the Preferred Stock of the corporation shall
be designated "Cumulative Preferred Stock, 4.44% Series"; the annual dividend
rate per share shall be four and forty-four hundredths per cent (4.44%) of the
par value thereof (such dividends on shares of the initial issue of said first
series to be cumulative from November 18, 1953, and the first dividend date to
be February 1, 1954); the redemption prices therefor shall be as follows:
If the redemption date is: Redemption
Price
On or prior to December 31, 1958............................... $106.568
January 1, 1959 through December 31, 1961...................... 106.068
January 1, 1962 through December 31, 1964...................... 105.568
January 1, 1965 through December 31, 1967...................... 105.068
January 1, 1968 through December 31, 1970...................... 104.568
After December 31, 1970........................................ 104.068
together in each case with accrued dividends; and the amounts payable upon any
liquidation, dissolution or winding up, if voluntary, shall be equal to said
redemption prices plus accrued dividends and, if involuntary, shall be $100.00
per share plus accrued dividends.
<PAGE>
B. The second series of the Preferred Stock of the corporation shall
be designated "Cumulative Preferred Stock, 4.76% Series"; the annual dividend
rate per share shall be four and seventy-six hundredths per cent (4.76%) of
the par value thereof (such dividends on shares of the initial issue of said
second series to be cumulative from August 27, 1962, and the first dividend
date to be November 1, 1962); the redemption prices therefor shall be as
follows:
If the redemption date is: Redemption
Price
On or prior to October 31, 1967..................................$106.58
November 1, 1967 through October 31, 1972........................ 105.63
November 1, 1972 through October 31, 1977........................ 104.68
After October 31, 1977........................................... 103.73
together in each case with accrued dividends; and the amounts payable upon any
liquidation, dissolution or winding up, if voluntary, shall be equal to said
redemption prices plus accrued dividends and, if involuntary, shall be $100.00
per share plus accrued dividends.
C. The third series of the Preferred Stock of the corporation shall
be designated "Cumulative Preferred Stock, 9.44% Series"; the annual dividend
rate per share shall be nine and forty-four hundredths per cent (9.44%) of the
par value thereof (such dividends on shares of the initial issue of said third
series to be cumulative from October 19, 1970, and the first dividend date to
be February 1, 1971); the redemption prices therefor shall be as follows:
If the redemption date is: Redemption
Price
On or prior to January 31, 1976................................. $110.95
February 1, 1976 through January 31, 1981....................... 108.59
February 1, 1981 through January 31, 1986....................... 106.23
After January 31, 1986.......................................... 103.87
together in each case with accrued dividends, provided, however, that none of
the Cumulative Preferred Stock, 9.44% Series, shall be so redeemed prior to
October 1, 1975, if such redemption is for the purpose or in anticipation of
refunding such Preferred Stock through the use directly or indirectly of funds
obtained by the issuance of debt securities at an effective interest cost to
the corporation or other preferred stocks at an effective dividend cost to the
corporation (both as computed in accordance with generally accepted financial
practice) of less than 9.44% per annum; and the amounts payable upon any
liquidation, dissolution or winding up, if voluntary, shall be equal to said
redemption prices plus accrued dividends and, if involuntary, shall be $100.00
per share plus accrued dividends.
D. The fourth series of the Preferred Stock of the corporation shall
be designated "Cumulative Preferred Stock, 7.80% Series"; the annual dividend
rate per share shall be seven and eighty hundredths per cent (7.80%) of the
par value thereof (such dividends on shares of the initial issue of said
fourth series to be cumulative from December 14, 1971, and the first dividend
date to be February 1, 1972); the redemption prices therefor shall be as
follows:
If the redemption date is: Redemption
Price
On or prior to January 31, 1977................................. $109.10
February 1, 1977 through January 31, 1982....................... 107.15
February 1, 1982 through January 31, 1987....................... 105.20
After January 31, 1987.......................................... 103.25
together in each case with accrued dividends, provided, however, that none of
the Cumulative Preferred Stock, 7.80% Series, shall be so redeemed prior to
December 1, 1976, if such redemption is for the purpose or in anticipation of
refunding such Preferred Stock through the use directly or indirectly of funds
obtained by the issuance of debt securities at an effective interest cost to
the corporation or other preferred stocks at an effective dividend cost to the
corporation (both as computed in accordance with generally accepted financial
practice) of less than 7.80% per annum; and the amounts payable upon any
<PAGE>
liquidation, dissolution or winding up, if voluntary, shall be equal to said
redemption prices plus accrued dividends and, if involuntary, shall be $100.00
per share plus accrued dividends.
E. The fifth series of the Preferred Stock of the corporation shall
be designated "Cumulative Preferred Stock, 7.84% Series"; the annual dividend
rate per share shall be seven and eighty-four hundredths per cent (7.84%) of
the par value thereof (such dividends on shares of the initial issue of said
fifth series to be cumulative from October 31, 1973, and the first dividend
date to be February 1, 1974); the redemption prices therefor shall be as
follows:
If the redemption date is: Redemption
Price
On or prior to October 31, 1978................................. $109.00
November 1, 1978 through October 31, 1983....................... 107.04
November 1, 1983 through October 31, 1988....................... 105.08
November 1, 1988 through October 31, 1993....................... 103.12
After October 31, 1993.......................................... 101.95
together in each case with accrued dividends, provided, however, that none of
the Cumulative Preferred Stock, 7.84% Series, shall be so redeemed prior to
October 1, 1978, if such redemption is for the purpose or in anticipation of
refunding such Preferred Stock through the use, directly or indirectly, of
funds obtained by the issuance of debt securities at an effective interest
cost to the corporation or other preferred stocks at an effective dividend
cost to the corporation (both as computed in accordance with generally
accepted financial practice) of less than 7.83% per annum; and the amounts
payable upon any liquidation, dissolution, or winding up, if voluntary, shall
be equal to said redemption prices plus accrued dividends and, if involuntary,
shall be $100.00 per share plus accrued dividends.
F. The sixth series of Preferred Stock of the Company be designated
"Cumulative Preferred Stock, 6.99% Series"; the annual dividend rate per share
be six and ninety-nine hundredths percent (6.99%) of the par value thereof
(such dividends on shares of the initial issue of said sixth series to be
cumulative from August 12, 1993, and the first dividend date to be November 1,
1993); that none of said sixth series will be redeemable until after August 1,
2003; that redemption prices per share if redeemed during the twelve-month
periods beginning August 1 in each of the years indicated in the table below
be as follows:
Year Redemption Price
---- ----------------
2003 103.50
2004 103.15
2005 102.80
2006 102.45
2007 102.10
2008 101.75
2009 101.40
2010 101.05
2011 100.70
2012 100.35
2013 and thereafter $100.00
together in each case with accrued dividends; and that the amounts payable
upon liquidation, dissolution or winding up, if voluntary, shall be equal to
said redemption prices plus accrued dividends, and, if involuntary, shall be
$100.00 per share plus accrued dividends.
SECTION 7. Terms Applicable to Specific Series of the Preferred
Stock-Cumulative
The first series of Preferred Stock-Cumulative of the Company be
designated "Preferred Stock-Cumulative, 6.84% Series"; the annual dividend
rate per share be six and eighty-four hundredths percent (6.84%) of the par
value thereof (such dividends on shares of the initial issue of said first
series to be cumulative from the date of such initial issue, and the first
dividend date to be November 1, 1993); that none of said first series will be
<PAGE>
redeemable until after October 1, 1998; that the redemption price per share be
$25.80 plus accrued dividends; and that the amount payable upon liquidation,
dissolution or winding up, if voluntary, shall be equal to said redemption
price plus accrued dividends, and, if involuntary, shall be $25.00 per share
plus accrued dividends.
ARTICLE XIX.
CERTIFICATES OF STOCK.
Each stockholder shall be entitled to a certificate of capital stock of
the corporation owned by him in such form as shall, in conformity to law, be
prescribed from time to time by the board of directors. Such certificate
shall be signed by the president or a vice president and by the treasurer or
an assistant treasurer, and shall bear the seal of the corporation; provided,
however, that the signature of the president or a vice president or of the
treasurer or an assistant treasurer of the corporation, or both such
signatures, or the seal of the corporation, or either or both of such
signatures and such seal, upon such certificate may be facsimile, and such
certificate shall be as valid and effectual for all purposes as if signed by
such officer or officers, or sealed with the seal of the corporation, as the
case may be. The fact that a person signing has ceased to be an officer shall
not invalidate any such certificate.
ARTICLE XX.
TRANSFER OF SHARES OF STOCK.
Subject to the restrictions, if any, imposed by the agreement of
association, title to a certificate of stock and to the shares represented
thereby shall be transferred only by delivery of the certificate properly
endorsed, or by delivery of the certificate accompanied by a written
assignment of the same, or a written power of attorney to sell, assign, or
transfer the same or the shares represented thereby, properly executed; but
the person registered on the books of the corporation as the owner of shares
shall have the exclusive right to receive dividends thereon and to vote
thereon as such owner, and except only as may be required by law, may in all
respects be treated by the corporation as the exclusive owner thereof.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
ARTICLE XXI.
TRANSFER BOOKS.
The treasurer or such agent or agents as may be employed by the
treasurer with the approval of the board of directors shall keep the stock and
transfer books of the corporation and a record of all certificates of stock
issued and of all transfers of stock and a register of all the stockholders,
their addresses and the number of shares held by each. For the purpose of
determining stockholders who are entitled to receive payment of any dividend,
to vote or act at a meeting and any adjournment thereof or to receive any
offering of additional stock, or for any other purpose permitted by law, the
board of directors may from time to time close the transfer books for such
period, not exceeding thirty days, as the board may determine or, without
closing said books, may fix a record date, not more than thirty days in
advance of such payment, meeting, offering or other action, as of which
stockholders entitled to such dividend, vote, offering or other right shall be
determined.
ARTICLE XXII.
LOSS OF CERTIFICATES.
In case of the alleged loss or destruction, or the mutilation of a
certificate of stock, a duplicate certificate may be issued in place thereof,
upon such reasonable terms as the board of directors may prescribe.
<PAGE>
ARTICLE XXIII.
SEAL.
The seal of the corporation shall, subject to alteration by the board of
directors, consist of a flat-faced circular die with the words "MASSACHUSETTS
ELECTRIC COMPANY -- CORPORATE SEAL" cut or engraved thereon.
ARTICLE XXIV.
EXECUTION OF PAPERS.
Except as the board of directors may generally or in particular cases
authorize the execution thereof in some other manner, all deeds, leases,
transfers, contracts, bonds, notes, checks, drafts and other obligations made,
accepted or endorsed by the corporation, shall be signed by the president, any
vice president, the treasurer or any assistant treasurer.
ARTICLE XXV.
FISCAL YEAR.
Except as from time to time otherwise provided by the board of
directors, the fiscal year of the corporation shall be the calendar year.
ARTICLE XXVI.
AMENDMENTS.
Subject to the provisions of law and of the Preferred Stock and the
Preferred Stock-Cumulative, these by-laws may be amended, altered or repealed
by a vote of a majority of the outstanding capital stock generally entitled to
vote at any meeting of such stockholders, provided notice of the proposed
amendment, alteration or repeal is given in the notice of said meeting.
ARTICLE XXVII.
LIABILITY AND INDEMNIFICATION.
No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such
liability, except with respect to any matter as to which such liability shall
have been imposed (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under section sixty-one or sixty-two of chapter one hundred and fifty-six B of
the General Laws of Massachusetts, or (iv) for any transaction from which the
director derived an improper personal benefit.
The corporation shall indemnify each of its directors and officers
against any loss, liability or expense, including amounts paid in satisfaction
of judgments, in compromise or as fines and penalties, and counsel fees,
imposed upon or reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, including but not limited to derivative suits (to the extent
permitted by law), in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having
been a director or officer, except with respect to any matter as to which he
shall have been adjudicated in such action, suit or proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interests of the corporation, or, to the extent that such matter relates to
service with respect to any employee benefit plan, as in the best interests of
the participants or beneficiaries of such plan. As to any matter disposed of
by a compromise payment by a director or officer, pursuant to a consent decree
or otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless such compromise shall be approved as in the
best interests of the corporation, after notice that it involves such
indemnification, if no change in control has occurred (a) by a disinterested
majority of the directors then in office, (b) by a majority of the
disinterested directors then in office, provided that there has been obtained
an opinion in writing of independent legal counsel to the effect that such
<PAGE>
director or officer appears to have acted in good faith in the reasonable
belief that his action was in the best interests of the corporation, or (c) by
the vote, at a meeting duly called and held, of the holders of a majority of
the shares outstanding and entitled to vote thereon, exclusive of any shares
owned by any interested director or officer or, if a change in control shall
have occurred, by an opinion in writing of independent legal counsel to the
effect that such director or officer appears to have acted in good faith in
the reasonable belief that his action was in the best interests of the
corporation.
Expenses incurred with respect to the defense or disposition of any
action, suit or proceeding heretofore referred to in this Article shall be
advanced by the corporation prior to the final disposition of such action,
suit or proceeding, upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification, which undertaking shall be accepted without
reference to the financial ability of the recipient to make such repayment.
If in an action, suit or proceeding brought by or in right of the corporation,
a director is held not liable, whether because relieved of liability under the
first paragraph of this Article or otherwise, he shall be deemed to have been
entitled to indemnification for expenses incurred in defense of said action,
suit or proceeding.
As used in this Article:
(i) The term "officer" includes (a) persons who serve at the
request of the corporation as directors, officers, or trustees of
another organization and (b) employees of the corporation and its
affiliates who serve in any capacity with respect to benefit plans for
the corporation's employees.
(ii) An "interested" director or officer is one against whom in
such capacity the proceeding in question or another proceeding on the
same or similar grounds is then pending.
(iii) A "change in control" occurs when: (a) any individual,
corporation, association, partnership, joint venture, trust or other
entity or association thereof acting in concert (excluding any employee
benefit plan, dividend reinvestment plan or similar plan of the
corporation, or any trustee thereof acting in such capacity) acquires
more than 20% of the corporation's outstanding stock having general
voting rights or more than 20% of the common shares of any entity owning
more than 50% of the corporation's outstanding stock having general
voting rights, whether in whole or in part, by means of an offer made
publicly to the holders of all or substantially all of such outstanding
stock or shares to acquire stock or shares for cash, other property, or
a combination thereof or by any other means, unless the transaction is
consented to by vote of a majority of the continuing directors; or (b)
continuing directors cease to constitute a majority of the board.
(iv) The term "continuing director" shall mean any director of the
corporation who (a) was a member of the board of directors of the
corporation on the later of January 1, 1987, or the date the director or
officer seeking indemnification first became such, or (b) was
recommended for his initial term of office by a majority of continuing
directors in office at the time of such recommendation.
Nothing contained in this Article shall (i) limit the power of the
corporation to indemnify employees and agents of the corporation or its
subsidiaries other than directors and officers on any terms it deems
appropriate not prohibited by law, (ii) limit the power of the corporation to
indemnify directors and officers for expenses incurred in suits, actions, or
other proceedings initiated by such director or officer or (iii) affect any
rights to indemnification to which corporation personnel other than directors
and officers may be entitled by contract or otherwise. The rights provided in
this Article shall not be exclusive of or affect any other right to which any
director or officer may be entitled and such rights shall inure to the benefit
of its or his successors, heirs, executors, administrators and other legal
representatives. Such other rights shall include all powers, immunities and
rights of reimbursement allowable under the laws of The Commonwealth of
Massachusetts.
<PAGE>
The provisions of this Article shall not apply with respect to any act
or omission occurring prior to June 25, 1987. No amendment to or repeal of
this Article shall apply to or have any effect upon the liability, exoneration
or indemnification of any director or officer for or with respect to any acts
or omissions of the director or officer occurring prior to such amendment or
repeal.
<PAGE>
AMENDED AND RESTATED
WHOLESALE STANDARD OFFER SERVICE AGREEMENT
WHOLESALE STANDARD OFFER
SERVICE AGREEMENT
among
MASSACHUSETTS ELECTRIC COMPANY,
NANTUCKET ELECTRIC COMPANY,
and
USGEN NEW ENGLAND, INC.
Dated as of October 29, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE 1. BASIC UNDERSTANDINGS........................................... 1
ARTICLE 2. DEFINITIONS.................................................... 2
ARTICLE 3. TERM AND REGULATORY APPROVAL................................... 5
3.1 Term..................................................... 5
3.2 Obtaining and Maintaining Required Permits............... 5
ARTICLE 4. SALE AND PURCHASE.............................................. 5
ARTICLE 5. PRICE AND BILLING.............................................. 6
5.1 Price.................................................... 6
5.2 Payment.................................................. 6
5.3 Taxes, Fees and Levies................................... 7
ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND REPORTING
OF HOURLY LOADS................................................ 8
6.1 Delivery................................................. 8
6.2 Losses................................................... 8
6.3 Determination and Reporting of Hourly Loads.............. 8
ARTICLE 7. DEFAULT AND TERMINATION........................................ 9
7.1 Material Breach and Termination.......................... 9
ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES........................ 11
8.1 Notices.................................................. 11
8.2 Authority of Representative.............................. 11
ARTICLE 9. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES........ 12
9.1 Limitation on Consequential, Incidental and Indirect
Damages.................................................. 12
9.2 Recovery of Direct Damages Permitted..................... 12
9.3 Indemnification.......................................... 13
9.4 Independent Contractor Status............................ 14
ARTICLE 10. ASSIGNMENT..................................................... 14
10.1 Assignment.............................................. 14
ARTICLE 11. SUCCESSORS AND ASSIGNS......................................... 15
ARTICLE 12. FORCE MAJEURE.................................................. 15
12.1 Force Majeure Standard.................................. 15
12.2 Force Majeure Definition................................ 15
12.3 Obligation to Diligently Cure Force Majeure............. 15
ARTICLE 13. WAIVERS........................................................ 16
ARTICLE 14. REGULATION..................................................... 16
14.1 Laws and Regulations.................................... 16
14.2 NEPOOL Requirements..................................... 16
ARTICLE 15. INTERPRETATION, DISPUTE RESOLUTION............................. 17
15.1 Interpretation.......................................... 17
15.2 Dispute Resolution...................................... 17
ARTICLE 16. SEVERABILITY................................................... 17
ARTICLE 17. MODIFICATIONS.................................................. 17
ARTICLE 18. SUPERSESSION................................................... 17
<PAGE>
ARTICLE 19. COUNTERPARTS................................................... 18
ARTICLE 20. HEADINGS....................................................... 18
Appendix A. Incremental Revenues...........................................A-1
Appendix B. Estimation of Supplier Hourly Loads............................B-1
Appendix C. Arbitration Agreement..........................................C-1
<PAGE>
AMENDED AND RESTATED WHOLESALE
STANDARD OFFER SERVICE AGREEMENT
This AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT
("Agreement") is dated as of October 29, 1997 and is by and among
MASSACHUSETTS ELECTRIC COMPANY, a Massachusetts corporation, NANTUCKET
ELECTRIC COMPANY, a Massachusetts corporation (these two parties being
referred to collectively as "MECO"), and USGen New England, Inc. (formerly
named USGen Acquisition Corporation), a Delaware corporation ("Seller"), and
amends and restates and, together with the MECO Wholesale Standard Offer
Service Agreement II dated as of the date hereof between MECO and Seller,
supersedes in its entirety the Wholesale Standard Offer Service Agreement
dated as of August 5, 1997 between NECO and Seller. This Agreement provides
for the purchase by MECO and the sale by Seller of Wholesale Standard Offer
Service, as defined in this Agreement.
ARTICLE 1. BASIC UNDERSTANDINGS
MECO purchases all of its requirements of electricity for resale to its
retail electric customers from its affiliate, New England Power Company
("NEP").
NEP, MECO and other parties have entered into an agreement in settlement
of regulatory proceedings before the Federal Energy Regulatory Commission and
the Massachusetts Department of Public Utilities (the "Massachusetts
Restructuring Agreement") that, among other things, permits MECO to terminate
wholesale purchases from NEP, permits current retail customers of MECO to
purchase electricity from other suppliers on and after a date defined therein
as the "Retail Access Date," or, for a limited time, to purchase Standard
Offer Service from MECO, obligates NEP to supply MECO with power sufficient to
meet the latter's obligations to supply Standard Offer Service, and obligates
NEP to transfer its interests in the electric generating business to another
party or parties.
NEP and Seller have entered an agreement under which Seller will acquire
certain NEP generating assets.
NEP and Seller desire that Seller shall supply electric capacity and
energy to MECO to fulfill a portion of NEP's power supply obligations under
the Massachusetts Restructuring Agreement.
Under the Massachusetts Restructuring Agreement, MECO is obligated to
afford wholesale power suppliers other than NEP the opportunity to commit to
supply MECO with power sufficient to meet MECO's obligation to supply retail
Standard Offer Service after the Retail Access Date.
This Agreement sets forth the terms under which Seller will supply
Wholesale Standard Offer Service to MECO, for a period beginning on the
Closing Date, to enable MECO to meet the needs of its retail customers for
electricity, including all or a portion of the needs of customers receiving
retail Standard Offer Service after the Retail Access Date.
1. DEFINITIONS
The following words and terms shall be understood to have the following
meanings when used in this Agreement, or in any associated documents entered
into in conjunction with this Agreement. In addition, except as otherwise
expressly provided, where terms used in this Agreement are defined in the
NEPOOL Agreement and not otherwise defined herein, such definitions are
expressly incorporated into this Agreement by reference.
AFFILIATE OF MECO - Any company that is a subsidiary of New England Electric
System and its successors.
<PAGE>
CLOSING DATE - The date upon which the Seller acquires ownership of generating
assets it purchases from NEP.
COMMISSION OR FERC - The Federal Energy Regulatory Commission or such
successor federal regulatory agency as may have jurisdiction over this
Agreement.
CONTRACT TERMINATION DATE - The date established by the Massachusetts
Restructuring Agreement when the respective obligations of NEP and MECO under
NEP's FERC Electric Tariff, Original Volume No. 1, to sell and purchase
wholesale electric requirements service shall cease. The Contract Termination
Date shall occur on the earlier of the Retail Access Date or the Wholesale
Access Date.
DEPARTMENT - The Massachusetts Department of Public Utilities.
GWh - Gigawatt hour.
ISO - The Independent System Operator to be established in accordance with the
NEPOOL Agreement and the Interim Independent System Operator Agreement as
amended, superseded or restated from time to time.
kWh - Kilowatt- hour.
MASSACHUSETTS RESTRUCTURING AGREEMENT - The Offer of Settlement dated May 28,
1997, entered into by and among the Office of the Attorney General of
Massachusetts, American National Power, American Tractebel Corporation,
Conservation Law Foundation, Division of Energy Resources, KCS Power
Marketing, Inc., Low-Income Intervenors, Massachusetts Community Action
Directors Association, Massachusetts Energy Directors Association,
Massachusetts High Technology Council, Northeast Energy and Commerce
Association, Northeast Energy Efficiency Council, Inc., The Energy Consortium,
Union of Concerned Scientists, U.S. Generating Company, Massachusetts Electric
Company and Nantucket Electric Company, and New England Power Company, as
amended and accepted or approved by the Department and the FERC.
MECO'S SERVICE TERRITORY - The geographic area in which MECO provided electric
service to retail customers on August 6, 1996.
MECO's System - The electrical system of MECO and/or the electrical system of
any Affiliate of MECO.
MMBTU - Million British thermal units.
NEP - New England Power Company, an Affiliate of MECO.
NEPEX - The New England Power Exchange.
NEPOOL - The New England Power Pool.
NEPOOL AGREEMENT - The New England Power Pool Agreement dated as of September
1, 1971, as amended and as may be amended or restated from time to time.
PRICE - The price set forth in SECTION 5.1, below.
PRIME RATE - The prime (or comparable) rate announced from time to time as its
prime rate by the Bank of Boston or its successor, which rate may differ from
the rate offered to its more substantial and creditworthy customers.
PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL
Agreement.
RETAIL ACCESS DATE - The date so defined under the Massachusetts Restructuring
Agreement, as the later of January 1, 1998, or the date when retail access is
made available to all customers of investor-owned utilities in Massachusetts;
provided, however, in the event that retail access is not yet available to all
<PAGE>
customer of the investor-owned utilities in Massachusetts by January 1, 1998,
MECO in its sole discretion shall have the option to accelerate the Retail
Access Date and implement retail access for its customers by providing the
Commission and the Signatories to the Massachusetts Restructuring Agreement
with 90 days' advance notice in writing; and provided further, MECO agrees not
to accelerate, without Seller's consent, the Retail Access Date unless
customers representing 89% of the retail consumption in Massachusetts
currently served by investor-owned utilities or 50% of the retail consumption
in New England (both including the consumption represented by MECO's
customers) have access to retail choice.
STANDARD OFFER AUCTION - The solicitation by MECO of offers from wholesale
power suppliers, including, at their option, NEP and Seller, of electric
energy and associated capacity and ancillary services necessary to meet the
needs of ultimate customers of MECO eligible for and accepting retail Standard
Offer Service on or after the Retail Access Date, and any wholesale electric
supply contracts resulting from that solicitation. The solicitation and any
contract(s) entered into as a result thereof shall not be on terms that are
materially different from those described by MECO in the Massachusetts
Restructuring Agreement, the RFQ dated April 3, 1997, and the letter to
potential asset purchasers dated June 16, 1997, or result in a material
adverse impact on Seller. MECO shall not, without Seller's consent, conduct
the Standard Offer Auction more than once or more than six (6) months prior to
and in no event later than the Retail Access Date, which date shall be as
reasonably determined by MECO.
STANDARD OFFER SERVICE - The electric service provided by MECO pursuant to the
Massachusetts Restructuring Agreement: (i) to retail customers in MECO's
Service Territory during the period, if any, during the term of this Agreement
preceding the Retail Access Date; and (ii) to all of MECO's retail customers
on the Retail Access Date that do not elect to obtain their electric supply
from an alternative supplier on or after the Retail Access Date through
December 31, 2004.
WHOLESALE ACCESS DATE - The date so defined under the Massachusetts
Restructuring Agreement, as the date on which MECO in its sole discretion
decides to terminate its purchase from NEP of wholesale requirements service
pursuant to NEP's FERC Electric Tariff, Original Volume No. 1, by providing
the Commission and the Signatories to the Massachusetts Restructuring
Agreement with 90 days advance notice in writing, said date not to be earlier
than January 1, 1998.
WHOLESALE STANDARD OFFER SERVICE - The generation and delivery, to any
location on the NEPOOL PTF system or MECO's system, of the portion of the
electric capacity, energy and ancillary services required by MECO to meet the
needs of MECO's ultimate customers taking Standard Offer Service, excluding,
after the Retail Access Date, any portion of such requirements that MECO
obtains or has contracted to obtain through the Standard Offer Auction,
determined in accordance with ARTICLE 4. Seller, as the supplier of Wholesale
Standard Offer Service capacity and energy, will be responsible for all
present, or future requirements and associated costs for installed capability,
operable capability, energy, operating reserves, automatic generation control,
including tie benefit payments, losses and any congestion charges associated
with Seller's supply of Wholesale Standard Offer Service and any other
requirements imposed by NEPOOL or the ISO, as they may be in effect from time
to time. To the extent that any NEPOOL, ISO or any successor entity expenses
or uplift costs are allocated to wholesale suppliers, the portion of such
costs associated with Seller's supply of Standard Offer Service will also be
the responsibility of Seller. To the extent any costs contemplated by this
paragraph are applicable to MECO and recoverable by MECO from its customers,
MECO shall be responsible for such costs.
2. TERM AND REGULATORY APPROVAL
a. Term
<PAGE>
The term of this Agreement shall begin at 12:01 am on the Closing Date
and continue until the earlier of: (a) 11:59 pm on December 31, 2004; or (b)
the first date that MECO has no requirements for electric capacity and energy
to supply Standard Offer Service that are not satisfied by contracts resulting
from the Standard Offer Auction.
b. Obtaining and Maintaining Required Permits
i. Performance under this Agreement is conditioned upon all
Parties securing and maintaining such federal, state or local approvals,
grants or permits as may be necessary for the sale and purchase of Wholesale
Standard Offer Service, which shall not include any approvals, grants, or
permits necessary for the operation of any particular generating facility.
Each Party shall use reasonable efforts to acquire and maintain such
approvals, grants or permits. If the acquisition or maintenance of a
particular approval, grant, or permit requires a modification to this
Agreement, then the Parties agree to negotiate in good-faith to reach a
mutually agreeable modification of the Agreement. The Parties are not
required to reach such a mutually acceptable modification.
ii. Seller will file this Agreement with FERC (and any other
regulatory agency as may have jurisdiction over the Agreement) in accordance
with the provisions of applicable laws, rules and regulations. Seller will be
responsible for any filing fees for filing this Agreement with FERC (and any
other regulatory agency as may have jurisdiction over the Agreement) and for
any regulatory assessments associated with sales under this Agreement. FERC
approval of this Agreement shall be a condition to the obligations of the
Parties hereunder.
3. SALE AND PURCHASE
Seller shall sell and deliver to the Delivery Points, as defined in
ARTICLE 6, SECTION 6.1, and MECO shall purchase 90.78% of MECO's requirements
for Wholesale Standard Offer Service. MECO's requirements for Wholesale
Standard Offer Service shall be determined on the basis of ARTICLE 6, SECTION
6.3, below, and the price for such sale and purchase shall be as set forth in
ARTICLE 5, SECTION 5.1, below.
4. PRICE AND BILLING
a. Price
For each kilowatt hour of Wholesale Standard Offer Service that Seller
delivers to the Delivery Points, in accordance with ARTICLE 6, SECTION 6.3,
below, MECO shall pay Seller a price equal to the following amounts for each
period during the term of this Agreement:
Period Price in Cents per kWh
1998 3.2 Cents
1999 3.5 Cents
2000 3.8 Cents
2001 3.8 Cents
2002 4.2 Cents
2003 4.7 Cents
2004 5.1 Cents
In addition, in the event of substantial increases in the market price
of No. 6 residual fuel oil (1% sulphur) and natural gas after 1999 as
described in Appendix A, MECO shall pay Seller a percentage of any incremental
revenues received by MECO as a result of MECO's Customer Rate Fuel Adjustment,
described in Appendix A, attached and incorporated herein by reference. Such
percentage, with respect to the billing month, shall equal the percentage of
MECO's total Standard Offer Service requirements during the month that Seller
delivers under this Agreement.
<PAGE>
a. Payment
i. On or before the tenth (10th) day of each month during the
term of this Agreement, MECO shall: (i) calculate the amount
due and payable to Seller pursuant to this ARTICLE 5 with
respect to the preceding month; and (ii) advise Seller of
the schedule upon which it shall pay the amount so
calculated, which schedule shall comply with paragraph (b),
below. The amount payable shall be calculated by
multiplying the Price specified in the first paragraph of
ARTICLE 5, SECTION 5.1, above, for the applicable Contract
Period by the quantity of Wholesale Standard Offer Service
delivered by Seller to the Delivery Points for MECO's
Standard Offer Service customers in the month, as determined
in accordance with ARTICLE 6, SECTION 6.3, below. Because
quantities determined under SECTION 6.3 are estimated,
subject to a reconciliation process described in SECTION
6.3(d), quantities used in calculations under this paragraph
(a) shall be subject to adjustment, whether positive or
negative, in subsequent months' calculations, to reflect
that reconciliation process, and any adjusted quantities
shall be applied to the Price applicable during the month of
the calculation being adjusted. Seller's proportional share
of Customer Rate Fuel Adjustment incremental revenue shall
be added to such amount.
ii. MECO shall pay Seller any amounts due and payable on or
before the twenty-fifth (25th) day after the date a
calculation is made pursuant to paragraph (a), provided
that, if and to the extent MECO pays Seller any portion of
the amount due and payable before the twenty-fifth (25th)
day after a calculation is made, it shall be entitled,
without interest or penalty, to defer payment of an equal
portion of the amount due and payable for that month by the
lesser of: (i) the same number of days that the early
payment preceded the twenty-fifth day after the calculation;
and (ii) twenty-five (25) days. If all or any part of any
amount due and payable pursuant to paragraph (a) shall
remain unpaid thereafter, interest shall thereafter accrue
and be payable to Seller on such unpaid amount at a rate per
annum equal to two percent (2%) above the Prime Rate in
effect on the date of such bill; provided, however, if the
amount due and payable is disputed, interest shall accrue
and be payable to Seller on the unpaid amount finally
determined to be due and payable at a rate per annum equal
to the Prime Rate in effect on the date of the calculation
pursuant to paragraph (a); and provided, further, no
interest shall accrue in favor of Seller or MECO on amounts
that are added to or credited against a calculation due to
the adjustment of estimated quantities in accordance with
paragraph (a) and ARTICLE 6, SECTION 6.3.
iii. With respect to reconciliation adjustments pursuant to
SECTION 6.3(d) or any error in a calculation (whether the
amount is paid or not), any overpayment, underpayment, or
reconciliation adjustment will be refunded or paid up, as
appropriate. Interest shall accrue from the date of the
error or adjustment on the unpaid or overpaid amount finally
determined to be due and shall be calculated pursuant to
Section 35.19a of the Commission regulations.
b. Taxes, Fees and Levies
Seller shall be obligated to pay all present and future taxes, fees and
levies which may be assessed upon Seller by any entity upon the purchase or
sale of electricity covered by the Agreement. To the extent such taxes, fees,
and levies are allowed to be, and are actually, recoverable by MECO from its
customers, MECO shall reimburse Seller for such taxes, fees, and levies paid
by Seller.
<PAGE>
5. DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS
a. Delivery
All electricity shall be delivered to MECO in the form of three-phase
sixty-hertz alternating current at any location on the NEPOOL PTF system or
MECO's System ("Delivery Points"). Title shall pass to MECO at the Delivery
Point and Seller shall incur no expense or risk beyond the Delivery Point
other than those described in SECTION 6.2. If the NEPOOL control area
experiences congestion, Seller will be responsible for any congestion costs
incurred in delivering power across the PTF system to MECO to the extent such
costs are imposed by NEPOOL or the ISO on suppliers. Seller shall be
responsible for all transmission and distribution costs associated with the
use of transmission systems outside of NEPOOL and any local point to point
charges and distribution charges needed to deliver the power to the NEPOOL
PTF.
b. Losses
Seller shall be responsible for all transmission and distribution losses
associated with the delivery of electricity supplied under this Agreement to
the meters of ultimate customers of MECO receiving retail Standard Offer
Service, provided, however, that losses do not include service to unmetered
facilities for which estimates of kWh use are available and provided, further,
that Seller shall not be responsible for unmetered use or consumption of
electricity by MECO's Affiliates. Seller shall provide MECO at the Delivery
Points with additional quantities of electricity and ancillary services to
cover such losses, but Seller shall not be entitled to payment under ARTICLE 5
of this Agreement for such additional quantity. The quantities required for
this purpose in each hour of a billing period shall be determined in
accordance with NEPOOL's, NEP's and MECO's filed procedures for loss
determination.
c. Determination and Reporting of Hourly Loads
i. To meet its NEPOOL obligations, Seller, or a NEPOOL member
having an own-load dispatch or settlement account with the
NEPOOL billing system with whom Seller has a load inclusion
agreement, must report to NEPOOL or the ISO the Standard
Offer Service load for which Seller is providing Wholesale
Standard Offer Service pursuant to this Agreement, including
losses. To accomplish this, MECO will estimate its total
hourly Standard Offer Service load based upon average load
profiles developed for each MECO customer class and MECO's
actual total hourly load. Appendix B, attached and
incorporated herein by reference, provides a general
description of the estimation process that MECO will
initially employ (the "Estimation Process"). MECO reserves
the right, subject to the approval of appropriate regulatory
authorities having jurisdiction, to modify the Estimation
Process in the future, provided that any such modification
be designed to improve the accuracy of its results and
provided further that MECO shall consult with Seller and
other similarly situated sellers to the maximum extent
permitted by any applicable standards of conduct. MECO will
report to NEPOOL, on behalf of Seller or such other NEPOOL
member, Seller's hourly Standard Offer Service load, which
shall equal the portion of MECO's estimated total Standard
Offer Service hourly load for which Seller is responsible
for supplying Wholesale Standard Offer Service under this
Agreement.
ii. MECO will report to NEPOOL or the ISO Seller's hourly
adjusted Standard Offer Service loads by 12:00 noon of the
second following business day. This adjusted load should be
added by NEPOOL or the ISO to the other NEPOOL load of
Seller or such other NEPOOL member.
<PAGE>
iii. At the end of each month, MECO shall aggregate Seller's
hourly loads for the month as determined by the Estimation
Process. For purposes of SECTION 5.1, above, the result of
the Estimation Process, less losses to the Standard Offer
Service customers' meters determined as specified in ARTICLE
6 SECTION 6.2, above, will be deemed to be the quantity of
Wholesale Standard Offer Service delivered by Seller to the
Delivery Points in a month.
iv. To refine the estimates of Seller's monthly Standard Offer
Service load developed by the Estimation Process, a monthly
calculation will be performed to reconcile the original
estimate of Seller's Standard Offer Service loads to actual
customer usage based on meter reads. MECO will apply any
resulting billing adjustment (debit or credit) to Seller's
account no later than the last day of the third month
following the billing month. Appendix B, attached and
incorporated herein by reference, also provides a general
description of this reconciliation process.
6. DEFAULT AND TERMINATION
a. Material Breach and Termination
i. (1) If MECO fails in any material respect to comply with,
observe or perform any covenant, warranty or
obligation under this Agreement (except due to causes
excused by force majeure or attributable to Seller's
wrongful act or wrongful failure to act); and
(2) After receipt of written notice from Seller such
failure continues for the Cure Period (as defined
below), or, if such failure cannot be reasonably cured
within the Cure Period, such further period as shall
reasonably be required to effect such cure (except in
the case of a payment default), provided that MECO
commences within the Cure Period to effect such cure
and at all times thereafter proceeds diligently to
complete such cure as quickly as possible; then
(3) Seller shall have the right to terminate this
Agreement, subject to paragraph (c) below. For
purposes of this Section 7.1(a), the Cure Period shall
mean five days in the case of a failure by MECO to
fulfill its payment obligations pursuant to Section
5.2 and forty-five (45) days in the case of a failure
by MECO to comply with, observe or perform any other
covenant, warranty or obligation under this Agreement.
If an unexcused failure to pay continues for fifteen
(15) days Seller shall have the right to suspend
service until payment is made in full and appropriate
security is posted for future payments or terminate
this Agreement.
ii. (1) If Seller fails in any material respect to comply
with, observe, or perform any covenant, warranty or
obligation under this Agreement (except due to causes
excused by force majeure or attributable to MECO's
wrongful act or wrongful failure to act); and
(2) After receipt of written notice from MECO such failure
continues for a period of forty-five (45) days, or, if
such failure cannot be reasonably cured within such
forty-five (45) day period, such further period as
shall reasonably be required to effect such cure,
provided that Seller commences within such forty-five
(45) day period to effect such cure and at all times
thereafter proceeds diligently to complete such cure
as quickly as possible; then
<PAGE>
(3) MECO shall have the right to terminate this Agreement,
subject to paragraph (c) below.
iii. Any termination arising out of the exercise of the
termination rights specified in paragraphs (a) or (b) above
(with the exception of termination for a payment default)
may not take effect unless and until an arbitrator (pursuant
to ARTICLE 15, SECTION 15.2 of this Agreement) has made a
ruling that the exercise of such termination right was
valid. The fact that one party alleged to be in material
breach of this Agreement ("Alleged Breaching Party")
complies with the request of the other to cure an alleged
material breach shall not be considered by the arbitrator as
an admission against the Alleged Breaching Party or evidence
that such party was or was not in material breach.
iv. Nothing in this SECTION 7.1 shall be construed to limit the
right of any party to seek any remedies for damages, as
limited by ARTICLE 9 of this Agreement, even if a cure of an
alleged breach is made within the periods of time specified
for curing any such breach stated above. The provisions of
this SECTION 7.1 are intended only to provide the exclusive
process through which one party may exercise and effectuate
its right to terminate this Agreement as a result of a
material breach of this Agreement.
7. NOTICES, REPRESENTATIVES OF THE PARTIES
a. Notices
Any notice, demand, or request required or authorized by this Agreement
to be given by one party to another party shall be in writing. It shall
either be sent by facsimile (confirmed by telephone), overnight courier,
personally delivered and acknowledged in writing or by registered or certified
mail, (return receipt requested) postage prepaid, to the representative of the
other party designated in this ARTICLE 8. Any such notice, demand, or request
shall be deemed to be given (i) when sent by facsimile confirmed by telephone,
(ii) when actually received if delivered by courier or personal deliver or
(iii) three (3) days after deposit in the United States mail, if sent by first
class mail.
Notices and other communications by Seller to MECO shall be addressed
to:
Michael J. Hager
Massachusetts Electric Company
25 Research Drive
Westborough MA 01582
Fax (508) 389-3001
Notices and other communications by MECO to Seller shall be addressed
to:
USGen New England, Inc.
7500 Old Georgetown Road, 13th Floor
Bethesda, MD 20814
Attention: Stephen A. Herman, Esq.
Fax: (301) 718-6913
Any party may change its representative by written notice to the others.
b. Authority of Representative
The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall
have full authority to act for their respective principals in all technical
matters relating to the performance of this Agreement. They shall not,
however, have the authority to amend, modify, or waive any provision of this
Agreement unless they are authorized officers of their respective entities.
<PAGE>
8. LIABILITY, INDEMNIFICATION, AND RELATIONSHIP OF PARTIES
a. Limitation on Consequential, Incidental and Indirect Damages
To the fullest extent permissible by law, neither MECO nor Seller, nor
their respective officers, directors, agents, employees, parent or affiliates,
successor or assigns, or their respective officers, directors, agents, or
employees, successors, or assigns, shall be liable to the other party or its
parent, subsidiaries, affiliates, officers, directors, agents, employees,
successors or assigns, for claims, suits, actions or causes of action for
incidental, indirect, special, punitive, multiple or consequential damages
(including attorney's fees or litigation costs) connected with or resulting
from performance or non-performance of this Agreement, or any actions
undertaken in connection with or related to this Agreement, including without
limitation any such damages which are based upon causes of action for breach
of contract, tort (including negligence and misrepresentation), breach of
warranty, strict liability, Massachusetts Gen. Laws ch 93A, statute, operation
of law, or any other theory of recovery. The provisions of this SECTION 9.1
shall apply regardless of fault and shall survive termination, cancellation,
suspension, completion or expiration of this Agreement.
b. Recovery of Direct Damages Permitted
Notwithstanding the provisions of ARTICLE 9, SECTION 9.1, subject to the
duty to mitigate damages as provided under common law of damages recovery,
both MECO and Seller shall be entitled to recover their actual, direct damages
(i) incurred as a result of the other party's breach of this Agreement or (ii)
incurred as a result of any other claim arising out of any action undertaken
in connection with or related to this Agreement. For purposes of avoiding any
disputes about the difference between direct damages and consequential
damages, the parties agree as follows:
i. (1) To the extent that MECO is found to be in breach of
this Agreement or liable under another cause of
action; and
(b) as a result of such breach or event giving rise to
the cause of action, Seller suffers loss of profits
that Seller reasonably expected to have received from
MECO under this Agreement had MECO performed under
this Agreement; then
(c) Seller shall be entitled to recover any lost
profits that Seller can demonstrate it lost or will
lose as a result of MECO's breach, subject to the duty
to mitigate.
ii. (1) To the extent that Seller fails to provide MECO
Wholesale Standard Offer Service Power under the terms
of this Agreement; and
(b) as a result, Seller is found to be in material
breach of this Agreement or liable under another cause
of action; and
(c) subject to the duty to mitigate, MECO purchases
(as a result of Seller's failure) power from a third
party at a price that is higher than what MECO would
have paid under the terms of this Agreement, MECO may
recover the difference between the price MECO paid to
such third party and the price it would have paid had
Seller performed; provided, however, Seller shall not
be liable to MECO for lost profits associated with any
expected revenue streams from the sale of power to
third parties or lost profits from any other contracts
or sales.
<PAGE>
iii. Except as provided in paragraphs (a) and (b) above, neither
MECO nor Seller shall be liable to the other for lost
profits arising out of performance, or non-performance of
this Agreement, whether such lost profits may be categorized
as direct, incidental, indirect, or consequential damages
and irrespective of whether such claims are based upon
warranty, tort, strict liability, contract, statute
(including Mass. G.L. ch 93A), operation of law or
otherwise.
c. Indemnification
i. Seller agrees to defend, indemnify and save MECO, its
officers, directors, employees, agents, successors, assigns,
and Affiliates and their officers, directors, employees, and
agents harmless from and against any and all claims, suits,
actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by Seller, its
officers, directors, employees, agents or affiliates or
caused by or sustained on its facilities, except to the
extent caused by an act of negligence or willful misconduct
by an officer, director, agent, employee or Affiliate of
MECO or their successors or assigns.
ii. MECO agrees to defend, indemnify and save Seller, its
officers, directors, employees, agents, successors, assigns,
and affiliates and their officers, directors, employees, and
agents harmless from and against any and all claims, suits,
actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by MECO, its
officers, directors, employees, agents or affiliates or
caused by or sustained on its facilities, except to the
extent caused by an act of negligence or willful misconduct
by an officer, director, agent, employee or Affiliate of
Seller or their successors or assigns.
iii. If any party intends to seek indemnification under this
ARTICLE from the other party with respect to any action or
claim, the party seeking indemnification shall give the
other party notice of such claim or action within fifteen
(15) days of the commencement of, or actual knowledge of,
such claim or action. Such party seeking indemnification
shall have the right, at its sole cost and expense, to
participate in the defense of any such claim or action. The
party seeking indemnification shall not compromise or settle
any such claim or action without the prior consent of the
other party, which consent shall not be unreasonably
withheld.
d. Independent Contractor Status
Nothing in this Agreement shall be construed as creating any
relationship between MECO and Seller other than that of independent
contractors for the sale and purchase of electricity provided as Wholesale
Standard Offer Service.
9. ASSIGNMENT
a. Assignment
This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party
hereto, including by operation of law without the prior written consent of the
other party, nor is this Agreement intended to confer upon any other Person
except the parties hereto any rights or remedies hereunder. Notwithstanding
<PAGE>
the foregoing, (i) MECO may, without Seller's prior written consent, (A)
assign all or a portion of its rights and obligations under this Agreement to
any Affiliate of MECO or (B) assign its rights and obligations hereunder, or
transfer such rights and obligations by operation of law, to any corporation
or other entity with which or into which MECO shall merge or consolidate or to
which MECO shall transfer all or substantially all of its assets, provided
that such Affiliate or other entity agrees to be bound by the terms thereof;
provided, in either case, that the assignee or transferor shall have senior
securities rated investment grade or better; (ii) the Seller may assign all of
its rights and obligations hereunder to any wholly owned Subsidiary (direct or
indirect) of PG&E Corporation and upon the MECO's receipt of notice from
Seller of any such assignment, the Seller will be released from all
liabilities and obligations hereunder, accrued and unaccrued, such assignee
will be deemed to have assumed, ratified, agreed to be bound by and perform
all such liabilities and obligations, and all references herein to "Seller"
shall thereafter be deemed references to such assignee, in each case without
the necessity for further act or evidence by the parties hereto or such
assignee; provided, however, that no such assignment and assumption shall
release the Buyer from its liabilities and obligations hereunder unless the
assignee shall have acquired all or substantially all of the Buyer's assets;
provided, further, however, that no such assignment and assumption shall
relieve or in any way discharge PG&E Corporation from the performance of its
duties and obligations under the Guaranty dated as of the date of this
Agreement executed by PG&E Corporation, and (iii) the Seller or its permitted
assignee may assign, transfer, pledge or otherwise dispose of its rights and
interests hereunder to a trustee or lending institution(s) for the purposes of
financing or refinancing the Purchased Assets, including upon or pursuant to
the exercise of remedies under such financing or refinancing, or by way of
assignments, transfers, conveyances or dispositions in lieu thereof; provided,
however, that no such assignment or disposition shall relieve or in any way
discharge the Seller or such assignee from the performance of its duties and
obligations under this Agreement. MECO agrees to execute and deliver such
documents as may be reasonably necessary to accomplish any such assignment,
transfer, conveyance, pledge or disposition of rights hereunder so long as
MECO's rights under this Agreement are not thereby altered, amended,
diminished or otherwise impaired.
10. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the parties hereto and their respective permitted successors and assigns.
11. FORCE MAJEURE
a. Force Majeure Standard
The parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise, if and
only to the extent that they are unable to so perform or are prevented from
performing by an event of force majeure.
b. Force Majeure Definition
An event of force majeure includes, without limitation, storm, flood,
lightning, drought, earthquake, fire, explosion, equipment failure, civil
disturbance, labor dispute, act of God or the public enemy, action of a court
or public authority, or any other cause beyond a party's control but only if
and to the extent that the event directly affects the availability of the
transmission or distribution facilities of NEPOOL, MECO or an Affiliate of
MECO necessary to deliver Wholesale Standard Offer Service to MECO's
customers. Events affecting the availability or cost of operating any
generating facility shall not be events of force majeure.
c. Obligation to Diligently Cure Force Majeure
<PAGE>
If any party shall rely on the occurrence of an event or condition
described in ARTICLE 12, SECTION 12.2, above, as a basis for being excused
from performance of its obligations under this Agreement, then the party
relying on the event or condition shall:
a. provide written notice to the other parties promptly but in
no event later than 5 days of the occurrence of the event or
condition giving an estimation of its expected duration and
the probable impact on the performance of its obligations
hereunder;
b. exercise all reasonable efforts to continue to perform its
obligations hereunder;
c. expeditiously take reasonable action to correct or cure the
event or condition excusing performance; provided that
settlement of strikes or other labor disputes will be
completely within the sole discretion of the party affected
by such strike or labor dispute;
d. exercise all reasonable efforts to mitigate or limit damages
to the other parties to the extent such action will not
adversely affect its own interests; and
e. provide prompt notice to the other parties of the cessation
of the event or condition giving rise to its excuse from
performance.
12. WAIVERS
The failure of either party to insist in any one or more instance upon
strict performance of any of the provisions of this Agreement or to take
advantage of any of its rights under this Agreement shall not be construed as
a general waiver of any such provision or the relinquishment of any such
right, but the same shall continue and remain in full force and effect, except
with respect to the particular instance or instances.
13. REGULATION
a. Laws and Regulations
This Agreement and all rights, obligations, and performances of the
parties hereunder, are subject to all applicable Federal and state laws, and
to all duly promulgated orders and other duly authorized action of
governmental authority having jurisdiction.
b. NEPOOL Requirements
This Agreement must comply with all NEPOOL Criteria, Rules, and Standard
Operating Procedures ("Rules"). If, during the term of this Agreement, the
NEPOOL Agreement is terminated or amended in a manner that would eliminate or
materially alter a Rule affecting a right or obligation of a party hereunder,
or if such a Rule is eliminated or materially altered by NEPOOL, the parties
agree to negotiate in good faith in an attempt to amend this Agreement to
incorporate a replacement Rule ("Replacement Rule"). The intent of the
parties is that any such Replacement Rule reflect, as closely as possible, the
intent and substance of the Rule being replaced as such Rule was in effect
prior to such termination or amendment of the NEPOOL Agreement or elimination
or alteration of the Rule. If the parties are unable to reach agreement on
such an amendment, the parties agree to submit the matter to arbitration under
the terms of Appendix C, attached and incorporated herein by reference, and to
seek a resolution of the matter consistent with the above stated intent.
<PAGE>
14. INTERPRETATION, DISPUTE RESOLUTION
a. Interpretation
The interpretation and performance of this Agreement shall be in
accordance with and controlled by the laws of The Commonwealth of
Massachusetts.
b. Dispute Resolution
All disputes between MECO and Seller arising out of or relating to this
Agreement which are defined as "Arbitrable Claims" in SECTION 2 of Appendix C,
attached and incorporated herein by reference, shall be resolved by binding
arbitration and be governed by the terms of such Arbitration Agreement. Any
arbitration of an Arbitrable Claim that is substantially related to an
arbitrable claim under a Wholesale Standard Offer Service Agreement between
Seller and The Narragansett Electric Company shall be conducted jointly with
the arbitration of the latter claim, before the same panel of arbitrators,
with MECO and The Narragansett Electric Company jointly exercising their
rights regarding the selection of arbitrators. Any decisions of the
arbitrators shall be final and binding upon the parties.
15. SEVERABILITY
If any provision or provisions of this Agreement shall be held invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
16. MODIFICATIONS
No modification to this Agreement will be binding on any party unless it
is in writing and signed by all parties.
17. SUPERSESSION
This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and its execution supersedes any other
agreements, written or oral, between the parties concerning such subject
matter.
18. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
executed counterpart shall have the same force and effect as an original
instrument.
19. HEADINGS
Article and Section headings used throughout this Agreement are for the
convenience of the parties only and are not to be construed as part of this
Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.
<PAGE>
MASSACHUSETTS ELECTRIC COMPANY
BY:
Its
NANTUCKET ELECTRIC COMPANY
BY:
Its
USGEN NEW ENGLAND, INC.
BY:
Its
<PAGE>
APPENDIX A. INCREMENTAL REVENUES
From MECO Customer Rate Fuel Adjustment
In the event of substantial increases in the market prices of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999, incremental
revenues received by MECO as a result of MECO's Customer Rate Fuel Adjustment,
described below, will be fully allocated among suppliers of Wholesale Standard
Offer Service Power in proportion to the percentage of MECO's total Standard
Offer Service requirements during the month that such supplier delivers under
its respective agreement with MECO.
MECO's Customer Rate in effect for a given billing month is multiplied
by a "Fuel Adjustment" that is set equal to 1.0 and thus has no impact on the
Customer Rate unless the "Market Gas Price" plus "Market Oil Price" for the
billing month exceeds the "Fuel Trigger Point" then in effect, where:
The MECO Customer rate for retail customers who elect Standard Offer
Service by choice or inaction is the following predetermined, flat rate
for energy consumed:
Calendar Year Price per Kilowatt hour
1998 2.8 cents
1999 3.1 cents
2000 3.4 cents
2001 3.8 cents
2002 4.2 cents
2003 4.7 cents
2004 5.1 cents
Market Gas Price is the average of the values of "Gas Index" for the
most recent available twelve months, where:
Gas Index is the average of the daily settlement prices for the
last three days that the NYMEX Contract (as defined below) for the
month of delivery trades as reported in the "Wall Street Journal",
expressed in dollars per MMBtu. NYMEX Contract shall mean the New
York Mercantile Exchange Natural Gas Futures Contract as approved
by the Commodity Futures Trading Commission for the purchase and
sale of natural gas at Henry Hub;
Market Oil Price is the average of the values of "Oil Index" for the
most recent available twelve months, where:
Oil Index is the average for the month of the daily low quotations
for cargo delivery of 1.0% sulphur No. 6 residual fuel oil into
New York harbor, as reported in "Platt's Oilgram U.S. Marketscan"
in dollars per barrel and converted to dollars per MMBtu by
dividing by 6.3; and
If the indices referred to above should become obsolete or no longer
suitable, MECO shall file alternate indices with the Massachusetts Department
of Public Utilities.
Fuel Trigger Point is the following amounts, expressed in dollars per
MMBtu, applicable for all months in the specified calendar year:
2000 $5.35/MMBtu
2001 $5.35
2002 $6.09
2003 $7.01
2004 $7.74
In the event that the Fuel Trigger Point is exceeded, the Fuel
Adjustment value for the billing month is determined based according to the
following formula:
<PAGE>
Fuel = (Market Gas Price +$.60/MMBtu)+(Market Oil Price +$.04/MMBtu)
-------------------------------------------------------------
Adjustment Fuel Trigger Point+$.60+$.04/MMBtu
Where:
Market Gas Price, Market Oil Price and Fuel Trigger Point are as
defined above. The values of $.60 and $.04/MMBtu represent for
gas and oil respectively, estimated basis differentials or market
costs of transportation from the point where the index is
calculated to a proxy power plant in the New England market.
For example if at a point in the year 2002 the Market Gas Price and
Market Oil Price total $6.50 ($3.50/MMBtu plus $3.00/MMBtu respectively), the
Fuel Trigger Point of 6.09 would be exceeded. In this case the Fuel
Adjustment value would be:
($3.50+$.60/MMBtu)+($3.00+$.04/MMBtu) = 1.0609
-------------------------------------
$6.09+$.60+$.04/MMBtu
The Customer Rate paid to MECO is increased by this Fuel Adjustment factor for
the billing month, becoming 4.4548 cents/kWh (4.2 x 1.0609).
In subsequent months the same comparisons are made and, if applicable, a
Fuel Adjustment determined.
<PAGE>
APPENDIX B. ESTIMATION OF SUPPLIER HOURLY LOADS
OVERVIEW
Generating units operated by suppliers are dispatched by the power pool
to meet the region's electrical requirements reliably, and at the lowest
possible cost. As a result, a supplier's electricity production may not match
the demand of its customers. In each hour some suppliers with low cost
production units are net sellers of electricity to the pool, while other
suppliers are purchasing power from the pool to meet the demand of their
customers. To determine the extent to which suppliers are net buyers or
sellers on an hourly basis, it is necessary to estimate the hourly aggregate
demand for all of the customers served by each supplier ("own-load"). MECO
will estimate Seller's Wholesale Standard Offer Service "own-load" within
MECO's service territory and report the hourly results to NEPOOL or the ISO on
a daily basis.
The estimation process is a cost effective approach to producing results
that are reliable, unbiased and reasonably accurate. The hourly load
estimates will be based on rate class load profiles which will be developed
from statistically designed samples. Each day, the class load shapes will be
scaled to the population of customers served by each supplier contracting with
MECO as a result of the Standard Offer Auction ("Standard Offer Auction
Supplier"), Seller, and any other entity providing Wholesale Standard Offer
Service. In cases where telemetered data on individual customers are
available, they will be used in place of the estimated shapes. On a monthly
basis, the estimates will be refined by incorporating actual usage data
obtained from meter readings. In both processes, the sum of all suppliers'
estimated Standard Offer Service loads will match the total load delivered
into the distribution system. A description of the estimation process
follows.
DAILY ESTIMATION OF SUPPLIERS' OWN LOAD
The daily process estimates the hourly load for each Standard Offer
Auction Supplier, Seller, and any other entity providing Wholesale Standard
Offer Service, for the previous day. There are four components in this
process:
- Select a proxy date from the previous year with characteristics
which best match the day for which the hourly demand estimates are
being produced. Extract class load shapes for the selected proxy
date from the load research data base.
- Scale the class load shapes appropriately for each individual
customer based on the usage level of the customer relative to the
class average usage level.
- Calculate a factor for each customer which reflects their relative
usage level and includes an adjustment for losses ("load
adjustment factor"). Aggregate the load adjustment factors across
the customers served by each supplier in each class.
- Produce a preliminary estimate of each supplier's hourly loads by
combining the proxy day class load shapes with the supplier's
total load adjustment factors. Aggregate the loads across the
classes for each supplier.
- Adjust the preliminary hourly supplier estimates so that their sum
is equal to MECO's actual hourly metered loads (as metered at the
point of delivery to the distribution system) by allocating any
differences to suppliers in proportion to their estimated load.
MONTHLY RECONCILIATION PROCESS
The monthly process will improve the estimates of Standard Offer Service
supplier loads by incorporating the most recent customer usage information,
which will be available after the monthly meter readings are processed. A
<PAGE>
comparison will be made between customers' estimated and actual usage, by
billing cycle, then summed across billing cycles for each supplier. The ratio
between the actual kWh and the estimated kWh reflects the kWh amount for which
the supplier may have been overcharged or undercharged by NEPOOL or the ISO
during the month. This ratio will be used to develop a kWh adjustment amount
for each supplier for the calendar month. The sum of the adjustments will be
zero because the total kWh will still be constrained to equal MECO's actual
hourly metered Standard Offer Service loads during the month.
<PAGE>
APPENDIX C. ARBITRATION AGREEMENT
ARBITRATION AGREEMENT
This Arbitration Agreement, dated as of _______________________ (date of
Wholesale Standard Offer Service Agreement), is entered into between
Massachusetts Electric Company and Nantucket Electric Company, both
Massachusetts corporations (referred to collectively as MECO") and
________________________, a __________ (describe entity) ("Seller").
Reference is made to that certain Wholesale Standard Offer Service Agreement
dated as of ____________________, 199_ (the "Service Agreement") between MECO
and Seller. Unless otherwise specified or apparent from the context of this
Arbitration Agreement, the term "Party" shall mean either MECO or Seller, or
both of them.
WHEREAS, MECO and Seller wish to avoid the burden, time, and expense of
court proceedings with respect to any disputes that may arise from or relate
to the Service Agreement, and to submit such disputes to mandatory binding
arbitration if they cannot first be resolved through negotiation and
mediation.
NOW, THEREFORE, MECO and SELLER AGREE AS FOLLOWS:
(i) Mediation
Before resorting to mediation or arbitration under this Arbitration
Agreement, the Parties will try to resolve promptly through negotiation any
Arbitrable claim, as defined below. If the Arbitrable Claim has not been
resolved through negotiation within ten (10) days after the existence of the
Arbitrable Claim has been brought to the attention of the other Party in a
writing, any Party may request in writing to resolve the Arbitrable Claim
through mediation conducted by a mediator selected by agreement of the
Parties. The mediation procedure shall be determined by the Parties in
consultation with the mediator. Any medication pursuant hereto shall be kept
confidential in accordance with Mass. G.L. c. 233, sec. 23C. The fees and
expenses of the mediator shall be borne equally by the Parties. If the Parties
are unable to agree upon the identity of a mediator or a mediation procedure
within ten (10) days after a Party has requested mediation in writing or if
the Arbitrable Claim has not been resolved to the satisfaction of either MECO
or Seller within forty (40) days after the Parties have selected a mediator
and agreed upon a mediation procedure, either Party may invoke arbitration
pursuant to the following sections by notifying the other Party of such
selection in writing consistent with Section 3(c), below.
(ii) Mandatory Arbitration
(1) Except as provided in paragraph (b) of this Section 2 and in
Section 8, below, any case, controversy or claim arising out of or
relating to the Service Agreement, its breach, or any other
disputes arising out of the business relationship created by the
Service Agreement, of whatever nature, including but not limited
to any claim based in contract, in law, in equity, any statute,
regulation, or theory of law now in existence or which may come
into existence in the future, whether known or unknown, including
without limitation, claims based upon deceit, fraudulent
inducement, misrepresentation, 18 U.S.C sec. 1962 and 1964 (RICO),
and Mass. G.L. c. 93A, the federal and state antitrust laws
(collectively, the "Arbitrable Claims"), which cannot be resolved
by negotiation or mediation, as provided in Section 1 above, shall
be submitted to mandatory, binding, and final arbitration in
accordance with procedures set forth in this Agreement, which
shall constitute the exclusive remedy for any and all Arbitrable
Claims.
<PAGE>
(2) Notwithstanding paragraph (a) above, physical accidents or
events giving rise to negligence or intentional tort claims for
the recovery of property damages and/or damages for personal
injury and failure to make payments due under Section 5.2 of the
Service Agreement shall not be considered "Arbitrable Claims."
However disputes regarding the interpretation or scope of any
indemnification clauses in the Service Agreement shall be subject
to arbitration, even if the dispute relates to whether one Party
must indemnify the other for property damages and/or damages for
personal injury, the recovery of which was or will be determined
in a court of law.
(1) Each Party agrees that it will not attempt to circumvent
this Arbitration Agreement by coordinating or cooperating
with their respective parent companies of affiliates or
guarantors in the filing of a legal action in the name of
any of the parent companies or affiliates or guarantors of
the Parties to this Arbitration Agreement regarding claims
that otherwise are subject to this Arbitration Agreement.
Any Party failing to comply with this provision shall
indemnify the other Party against, and hold the other
harmless from, the costs (including reasonable litigation
costs) incurred by the other in defending any and all claims
brought by a parent company or affiliate or guarantor of the
other in a court of law regarding claims that otherwise
would be Arbitrable Claims under this Arbitration Agreement.
(i) Selection and Qualification of Arbitrators
1) Any arbitration shall be conducted by a panel
of three neutral arbitrators, consisting of (i)
a practicing lawyer admitted to practice in the
Commonwealth of Massachusetts; (ii) a person
with professional experience in and substantial
knowledge of the power generation industry in
any one or more of the New England States, who
may be, but need not be a lawyer, and (iii) a
person with professional experience in and
substantial knowledge of power markets in any
one or more of the New England States, who may,
but need not be, a lawyer (collectively, the
"Arbitration Panel"). For purposes of this
Arbitration Agreement, an arbitrator or
candidate shall be considered "neutral" only if
the arbitrator or candidate has not previously
served as an arbitrator for a Party or one of
its affiliates or guarantors and is not a
present or former lawyer, employee or consultant
of a Party or any of its affiliates or
guarantors.
2) Any Party entitled to commence arbitration
hereunder shall do so by serving a written
Notice of Arbitration briefly describing the
Arbitrable Claims and the Agreements under which
they are brought. Service of such Notice of
Arbitration shall be complete upon receipt by
the person designated for each party at the
addresses specified in Section 12 below.
3) Within twenty (20) days after service of a
Notice of Arbitration, each Party shall serve
upon the other Party a list of seven neutral
candidates for each of the three panel members
described in subparagraph (a) above.
<PAGE>
4) Within twenty (20) days after service of the
lists referred to in subparagraph (c), MECO and
Seller shall then strike from the other's lists
any two candidates from each of the lists, for
any reason whatsoever. For the remaining
candidates each Party shall rank each candidate
on its three lists from one to five and shall do
the same for the other Party's lists.
5) The candidates in each of the three
categories with the lowest total score shall be
invited to serve as panel members. In the event
that the candidate in any of the three
categories with the lowest total score is unable
or unwilling to serve, or has a potential
conflict of interest not consented to by each
Party, then the candidate with the next lowest
score in that category shall be invited to
serve, subject to full disclosure by each
candidate of, and consent by each Party to any
potential conflicts of interests. This process
shall be repeated until a full arbitration Panel
is selected or the list of candidates for that
category is exhausted. If the list of
candidates for a category is exhausted the
Parties shall exchange a new list of candidates
for that category and the procedures set forth
above shall be repeated a second time.
6) If the parties cannot select a full
Arbitration Panel in accordance with these
procedures than any Party may request that a
court of competent jurisdiction appoint the
remaining members subject to their
qualifications, willingness and ability to serve
as provided above.
7) The American Arbitration Association shall be
appointed to facilitate and administer the
parties' compliance with the procedures set
forth above.
(iii) Time Schedule
The Arbitration shall be conducted as expeditiously as possible. The
Arbitration Panel shall schedule a pre-hearing conference and hearings as it
deems advisable and shall use its best efforts to schedule consecutive days of
hearings. Hearings shall be limited to a total of ten (10) days. The
Arbitration Panel shall issue its final decision and award within thirty (30)
days of the close of the hearings, which shall be accompanied by a written,
reasoned opinion.
(iv) Remedies
(1) The Arbitration Panel shall not award punitive or multiple
damages or any other damages not measured by the prevailing Party's actual
damages - except that the Arbitration Panel, in its sole discretion, may shift
all or a portion of the costs of the Arbitration to any Party.
(2) Any award of damages by the Arbitration Panel shall be
determined, limited and controlled by the damages limitation clauses of the
Service Agreement applicable to the dispute before the Arbitration Panel.
(3) The Arbitration Panel may, in its discretion, award pre-award
and post-award interest on any damages award; provided, however, that the rate
of pre-award or post-award interest shall not exceed a rate equal to the rate
provided for post-judgment interest by 28 U.S.C. sec. 1961 as published from
time to time by the Administrative Office of the United States Courts based on
the equivalent coupon issue yield for auctions of 52-week Treasury bills.
<PAGE>
(iv) Confidentiality
In accordance with Mass. G.L. c. 233 sec. 23C. the existence, contents,
or results of any mediation or arbitration hereunder may not be disclosed
without the prior written consent of both Parties; provided, however, either
Party may make disclosures as may be necessary to fulfill regulatory
obligations to any regulatory bodies having jurisdiction, and may inform their
lenders, affiliates, auditors and insurers, as necessary, under pledge of
confidentiality and can consult with experts as required in connection with
the arbitration under pledge of confidentiality. If any Party seeks
preliminary injunctive relief from any court to preserve the status quo or
avoid irreparable harm pending mediation or arbitration, the Parties agree to
use best efforts to keep the court proceedings confidential, to the maximum
extent permitted by law.
(v) FERC Jurisdiction over Certain Disputes
1) Nothing in this Arbitration Agreement shall preclude, or be
construed to preclude, any Party from filing a petition or complaint with the
Federal Energy Regulatory Commission ("FERC") with respect to any Arbitrable
Claim. In such case, the other Party may request FERC to reject or to waive
jurisdiction. If the FERC rejects or waives jurisdiction, with respect to all
or a portion of the claim, the portion of the claim not so accepted by FERC
shall be resolved through arbitration, as provided in this Arbitration
Agreement. To the extent that FERC asserts or accepts jurisdiction over the
claim, the decision, finding of fact, or order of FERC shall be final and
binding, and any arbitration proceedings that may have commenced prior to the
assertion or acceptance of jurisdiction by FERC shall be stayed, pending the
outcome of the FERC proceedings.
2) The Arbitration Panel shall have no authority to modify, and
shall be conclusively bound by, any decision, finding of fact, or order of
FERC. However, to the extent that a decision finding of fact, or order of
FERC does not provide a final or complete remedy to the Party seeking relief,
such Party may proceed to arbitration under this Arbitration Agreement to
secure such remedy, subject to the FERC decision, finding or order.
(vi) Preliminary Injunctive Relief
Nothing in this Arbitration Agreement shall preclude, or be construed to
preclude, the resort by either Party to a court of competent jurisdiction
solely for the purposes of securing a temporary or preliminary injunction to
preserve the status quo or avoid irreparable harm pending mediation or
arbitration pursuant to this Arbitration Agreement.
(vii) Governing Law
This Arbitration Agreement shall be construed, enforced in accordance
with, and governed by, the laws of the Commonwealth of Massachusetts.
(viii) Location of Arbitration
Any arbitration hereunder shall be conducted in Boston, Massachusetts.
(ix) Severability
If any section, subsection, sentence, or clause of this Arbitration
Agreement is adjudged illegal, invalid, or unenforceable, such illegality,
invalidity, or enforceability shall not affect the legality, validity, or
enforceability of the Arbitration Agreement as a whole or of any section,
subsection, sentence or clause hereof not so adjudged.
(x) Notices
Any notices required to be given pursuant to this Arbitration Agreement
shall be in writing and sent to the receiving party by (i) certified mail,
return receipt requested, (ii) overnight delivery service, or (iii) facsimile
transmission (confirmed by telephone), addressed to the receiving party at the
address shown below or such other address as a party may subsequently
<PAGE>
designate in writing. Any such notice shall be deemed to be given (i) three
days after deposit in the United States mail, if sent by mail, (ii) when
actually received if sent by overnight delivery service, or (iii) when sent,
if sent by facsimile and confirmed by telephone.
If to MECO: Massachusetts Electric Company
25 Research Drive
Westborough, Massachusetts 01582
Attention: General Counsel
Facsimile: (508) 389-2463
If to Seller
Attention:
Facsimile: ( )
In addition, the parties shall send copies of any notices required by
the terms of any of the Agreements, in accordance with the terms of each
Agreement.
IN WITNESS WHEREOF, Each Party has caused its duly authorized officers
to execute this Arbitration Agreement on the dates set forth below.
MASSACHUSETTS ELECTRIC COMPANY
BY:
Its
NANTUCKET ELECTRIC COMPANY
BY:
Its
USGEN NEW ENGLAND, INC.
BY:
Its
<PAGE>
<TABLE>
<CAPTION>
MASSACHUSETTS ELECTRIC COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Income $ 65,758 $37,926 $29,101 $34,726 $23,779
- ----------
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes 34,244 25,867 9,437 (6,762) 5,606
Deferred federal income taxes 912 (6,052) 6,156 24,932 3,430
Investment tax credits - net (1,103) (1,118) (1,132) (1,228) (1,228)
Massachusetts franchise tax 7,514 4,479 3,935 4,681 3,348
Interest on long-term debt 27,612 27,089 25,901 20,967 23,403
Interest on short-term debt and other 7,214 6,473 6,784 6,366 3,638
-------- ------- ------- ------- -------
Net earnings available for fixed charges $142,151 $94,664 $80,182 $83,682 $61,976
-------- ------- ------- ------- -------
Fixed charges:
Interest on long-term debt $ 27,612 $27,089 $25,901 $20,967 $23,403
Interest on short-term debt and other 7,214 6,473 6,784 6,366 3,638
-------- ------- ------- ------- -------
Total fixed charges $ 34,826 $33,562 $32,685 $27,333 $27,041
======== ======= ======= ======= =======
Ratio of earnings to fixed charges 4.08 2.82 2.45 3.06 2.29
- ----------------------------------
</TABLE>
<PAGE>
Annual Report 1997
Massachusetts Electric Company
A Subsidiary of
New England Electric System
[LOGO] Massachusetts Electric
A NEES Company
<PAGE>
Massachusetts Electric Company
25 Research Drive,
Westborough, Massachusetts 01582
Directors
(As of March 18, 1998)
Cheryl A. LaFleur
Senior Vice President, General Counsel, and Secretary of New
England Electric System
Robert L. McCabe
Chairman of the Company and of certain affiliates
Lydia M. Pastuszek
Senior Vice President of the Company
and of certain affiliates
Lawrence J. Reilly
President and Chief Executive Officer of the Company and of
certain affiliates
Christopher E. Root
Senior Vice President of the Company
and of certain affiliates
Richard P. Sergel
President and Chief Executive Officer of New England Electric
System
Dennis E. Snay
Senior Vice President of the Company and of an affiliate
Officers
(As of March 18, 1998)
Robert L. McCabe
Chairman of the Company and of certain affiliates
Lawrence J. Reilly
President and Chief Executive Officer of the Company and of
certain affiliates
Lydia M. Pastuszek
Senior Vice President of the
Company and of certain affiliates
Christopher E. Root
Senior Vice President of the Company and of certain affiliates
Dennis E. Snay
Senior Vice President of the Company
and of an affiliate
John C. Amoroso
Vice President of the Company and of an affiliate
William J. Flaherty
Vice President of the Company
<PAGE>
Andrea Foley-Stapleford
Vice President of the Company
Richard W. Frost
Vice President of the Company and of certain affiliates
Charles H. Moser
Vice President of the Company
Joseph D. Newman*
Vice President of the Company
Kwong O. Nuey
Vice President of the Company
Nancy H. Sala
Vice President of the Company
John G. Upham II
Vice President of the Company
John G. Cochrane
Treasurer of the Company and of certain affiliates, Assistant
Treasurer of an affiliate, Vice President of an affiliate and
Treasurer of New England Electric System
Thomas G. Robinson
Assistant Clerk and General Counsel of the Company
Robert King Wulff
Clerk of the Company and of certain affiliates, Secretary or
Assistant Clerk of certain affiliates and Assistant Secretary of
an affiliate
Howard W. McDowell
Assistant Treasurer and Controller of the Company and of certain
affiliates, Treasurer or Controller of certain affiliates and
Assistant Secretary of an affiliate
* Effective April 1, 1998
Transfer Agent, Dividend Paying Agent, and Registrar of Preferred
Stock State Street Bank and Trust Company, Boston, Massachusetts
This report is not to be considered an offer to sell or buy or
solicitation of an offer to sell or buy any security.
<PAGE>
Massachusetts Electric Company
Massachusetts Electric Company (the Company) is a wholly owned
subsidiary of New England Electric System (NEES) operating in
Massachusetts. The Company's business is the distribution of
electricity at retail. Electric service is provided to
approximately 970,000 customers in 146 cities and towns having a
population of approximately 2,160,000 (1990 Census). The
Company's service area covers approximately 43 percent of
Massachusetts. The cities and towns served by the Company
include the highly diversified commercial and industrial cities
of Worcester, Lowell, and Quincy, the Interstate 495 high
technology belt, and many suburban communities and rural towns.
The principal industries served include computer manufacturing
and related businesses, electrical and industrial machinery,
plastic goods, fabricated metals and paper, and chemical
products. In addition, a broad range of professional, banking,
medical, and educational institutions is served. In November
1997, legislation was enacted in the Commonwealth of
Massachusetts which provides the Company's customers with choice
of power supplier beginning on March 1, 1998.
The properties of the Company consist principally of
substations and distribution lines interconnected with
transmission and other facilities of New England Power Company
(NEP), the Company's generation and transmission affiliate. The
Company purchased all of its electrical requirements from NEP
under a contract which obligated NEP to furnish such requirements
at its standard resale rate. In accordance with a settlement
reached in February 1997 and approved in November 1997, this
contract has been amended, effective March 1, 1998. The
amendment both terminates the all-requirements provision of the
contract and allows NEP to recover its above-market generation
commitments through a transition access charge, which the Company
will collect from its customers.
For further information, please refer to the "Industry
Restructuring" section of Financial Review.
<PAGE>
Report of Independent Accountants
Massachusetts Electric Company, Westborough, Massachusetts:
We have audited the accompanying balance sheets of
Massachusetts Electric Company (the Company), a wholly owned
subsidiary of New England Electric System, as of December 31,
1997 and 1996 and the related statements of income, retained
earnings, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
March 2, 1998
<PAGE>
Massachusetts Electric Company
Financial Review
Industry Restructuring
Historically, electric utilities have provided their customers
bundled electric service within exclusive service territories.
As a result of a number of trends, including a disparity in
electric rates among regions of the country and new regulations
and legislation intended to foster competition, distribution
customers are being allowed to choose their power supplier, with
incumbent utilities required to deliver that electricity over
their transmission and distribution systems.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments (generation related)
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs." The Company and NEP reached a
settlement agreement with parties representing all of the
Company's distribution customers (the Massachusetts Settlement).
The Massachusetts Settlement provides for the recovery of
stranded costs.
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1,
1998. The legislation requires electric companies to provide
customers who do not choose a power supplier with a transition
rate (or "standard offer generation service") which results in a
10 percent rate reduction, with the discount increasing to 15
percent on or before September 1, 1999. The legislation also
provides a mechanism for the recovery of stranded costs resulting
from the introduction of customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) (formerly the Massachusetts
Department of Public Utilities (MDPU)) found that the
Massachusetts Settlement substantially complies with or is
consistent with the Massachusetts statute. The Massachusetts
Settlement was also conditionally approved by the Federal Energy
Regulatory Commission (FERC) in November 1997, subject to a
compliance filing to clarify the impact of the settlement on
nonsettling parties.
In accordance with the Massachusetts Settlement, NEP's
wholesale contract with the Company has been amended effective
March 1, 1998. The Massachusetts Settlement provides that NEP's
stranded costs (the Company's share is 73 percent) will be
recovered from distribution customers through a transition access
charge, which will be collected by the Company. Under the
Massachusetts Settlement, the recovery of NEP's stranded costs is
divided into several categories. Unrecovered costs associated
with generating plants and regulatory assets would be recovered
over 12 years and would earn a return on equity of 9.4 percent.
The above-market component of purchased power contracts and
<PAGE>
nuclear decommissioning costs would be recovered as incurred over
the life of those obligations, a period expected to extend beyond
12 years. Initially, the transition access charge was set at 2.8
cents per kilowatthour (kWh). The MDTE has approved a reduction
of the initial transition access charge to 2.7 cents per kWh.
NEP's filing with the FERC to approve this reduction is pending.
The Company has already reflected the lower transition access
charge amount in its rates. The transition access charge would
be reduced further upon completion of the sale of NEP's
nonnuclear generating business, as described below.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, NEP and the Company's Rhode Island affiliate, The
Narragansett Electric Company (Narragansett Electric), entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation. See
"Divestiture of Generating Business" below. The net proceeds
from the sale of the nonnuclear generating business to USGen will
be used to reduce the transition access charge to approximately
1.5 cents per kWh. In addition, the FERC accepted the NEES
companies' proposal in conjunction with their divestiture filing
that the recovery of the remaining above-market nuclear
generating plant investment and regulatory assets be completed by
the end of the year 2000.
The Massachusetts Settlement also establishes distribution
rates for the Company. On March 1, 1998, the Company's
distribution rates were set at a level approximately $45 million
above the level embedded in its previously bundled rates, with
such rates then frozen through the year 2000. This increase
reflects changes to the distribution cost of service that include
an $11 million increase in annual depreciation expense, a $3
million annual contribution to a storm fund, and increased
amortization of unfunded deferred income taxes of approximately
$1 million over six years. The Massachusetts restructuring
legislation also expanded the eligibility for certain rate
discount programs, the cost of which is uncertain at this time.
From 1998 through 2000, the Company's return on equity will be
subject to a floor of 6 percent and a ceiling of 11 percent.
Earnings over the ceiling will be shared equally between
customers and shareholders up to a maximum of 12.5 percent. This
sharing results in an effective cap on the Company's return on
equity of 11.75 percent, excluding certain limited incentive
opportunities. To the extent that earnings fall below the floor,
the Company will be authorized to surcharge customers for the
shortfall. The statute also imposes an inflation cap through
March 1, 2005 on the total rates for customers who have not
chosen a power supplier. If this inflation cap is triggered,
under the Massachusetts Settlement the recovery of stranded
investment costs would be deferred. This inflation cap does not
apply to any surcharge triggered by the rate of return floor.
<PAGE>
The Massachusetts Settlement also eliminated the Company's
purchased power cost adjustment (PPCA) mechanism as of July 31,
1996. This mechanism allowed the Company to recover purchased
power rate changes from NEP and the effects of NEP's seasonal
rates. The Massachusetts Settlement required that the Company's
net $18 million PPCA refund liability balance at July 31, 1996 be
transferred on its books to establish a storm contingency fund
account of $3 million initially, with the remainder applied to
reduce regulatory assets for hazardous waste costs.
A referendum question which asks voters to repeal the
Massachusetts statute is expected to be on the ballot in November
1998. The Company is unable to predict the outcome. While by
itself, repeal of the statute is not expected to materially
impair the effectiveness of the previously approved Massachusetts
Settlement, the potential exists that following repeal, there
could be legislative or regulatory actions which could be
materially adverse to the Company.
Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
Electric (collectively, the Sellers) reached an agreement to sell
their nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
megawatts (MW) of capacity, as well as NEES' 100 percent interest
in Narragansett Energy Resources Company, a 20 percent general
partner in the Ocean State Power project, all of which has a book
value of $1.1 billion. USGen will pay the Sellers $1.59 billion
in cash, of which $225 million will be contingent upon the
introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. USGen will
also reimburse the NEES companies for $85 million of costs
associated with early retirement and special severance programs
for employees affected by industry restructuring.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale, and
conditionally approved most supporting filings. While the timing
<PAGE>
of receipt of final regulatory approvals is uncertain, receipt of
all approvals is unlikely before mid-1998. Closing is contingent
upon all regulatory approvals being obtained by February 1999.
Upon completion of the divestiture of NEP's nonnuclear
generating business, the Company's share of NEP's stranded costs
that will be recovered from the Company's customers through the
transition access charge will be reduced from approximately $3.3
billion to $1.5 billion.
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions beginning in 1998 as a result of industry
restructuring and the sale of the nonnuclear generating business.
The NEES companies are in the process of offering early
retirement programs to their union and non-union employees,
contingent upon the closing of the sale of the nonnuclear
generating business to USGen. In addition, the NEES companies
intend to offer enhanced severance benefits to affected
employees. As previously described, the costs of the early
retirement and severance programs for all NEES companies are
expected to be substantially recovered from the proceeds of the
sale of the nonnuclear generating business. Since the early
retirement program is contingent upon the divestiture, its cost
will not be accrued until that time.
Risk Factors
This annual report contains statements that may be considered
forward looking statements as defined under the securities laws.
Actual results may differ materially for the reasons discussed in
this Financial Review. While the Company believes that the
previously described settlement and legislation and the sale
agreement with USGen and other developments constitute
substantial progress in reducing the impacts associated with
industry restructuring, significant risks remain. These include,
but are not limited to: (i) the potential that ultimately the
Massachusetts Settlement will not be implemented in the manner
anticipated by the Company, (ii) the possibility that a voter
referendum in November 1998 could overturn the Massachusetts
legislation, followed by materially adverse legislative or
regulatory actions, (iii) the possibility of federal legislation
that would increase the risks above those contained in the
Massachusetts Settlement and statute, and (iv) the failure of NEP
and Narragansett Electric to complete the sale of the nonnuclear
generating business to USGen. The major risk factors affecting
the Company relate to the possibility of adverse regulatory or
judicial decisions or legislation which limit the level of
revenues the Company is allowed to charge for its services or
affect the costs the Company incurs.
<PAGE>
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $18
million in net regulatory assets in compliance with FAS 71.
The Company believes the Massachusetts Settlement and statute
will enable the Company to recover through rates its specific
costs of providing ongoing distribution services and stranded
costs billed to it by NEP. The Company believes these factors
will allow it to continue to apply FAS 71.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations.
Overview of Financial Results
Net income for 1997 increased $28 million compared with 1996.
The increase was primarily due to the reversal of prior period
refund accruals related to the Company's rate mechanisms and a
2.0 percent increase in kWh deliveries. Partially offsetting the
higher earnings were increased operation and maintenance costs,
increased depreciation, and increased income taxes.
Net income for 1996 increased $9 million compared with 1995,
reflecting a 1995 rate increase, growth in sales, and decreased
demand charges from NEP, partially offset by increased operation
and maintenance expense and reduced revenues due to rate
adjustment mechanisms.
<PAGE>
Operating Revenue
The following table summarizes the changes in operating
revenue:
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Revenue
(In millions) 1997 1996
---- ----
<S> <C> <C>
Sales and deliveries growth $19 $ 5
Fuel recovery 26 13
PPCA mechanism 35 (6)
Rate changes - 23
Demand-side management (DSM) recovery 4 (5)
Other 2 3
--- ---
$ 86 $ 33
=== ===
</TABLE>
For a discussion of fuel recovery, see the fuel costs
discussion in the "Operating Expenses" section.
The PPCA rate mechanism was designed to allow the Company to
pass on to its customers changes in purchased energy costs
resulting from rate increases or decreases by NEP. The mechanism
was eliminated as of July 31, 1996 upon approval of the
Massachusetts Settlement in November 1997. Pending final
approval of the settlement, the Company accrued additional
potential refund provisions of $9 million for the last five
months of 1996 and $7 million for the first nine months of 1997.
Upon approval of the settlement, these refund provisions were all
reversed in the fourth quarter of 1997, thereby increasing
revenues. The Company had accrued refund provisions of $17
million during the first seven months of 1996, which were part of
the net $18 million PPCA balance at July 31, 1996 discussed in
"Industry Restructuring." In the future, to the extent the
Company is required to purchase energy for customers, a
reconciliation mechanism will allow the Company to recover its
purchased energy costs.
KWh deliveries increased 2.0 percent in 1997 and reflects the
effects of an improving regional economy.
The Company received approval from the MDPU to recover demand-
side management (DSM) program expenditures in rates on a current
basis through 1997. These expenditures were $51 million, $48
million, and $53 million in 1997, 1996, and 1995, respectively.
The Massachusetts Settlement and statute provide for recovery of
DSM-related costs. The Company has filed DSM program expenditure
plans with the MDTE for the period 1998 through 2002, and has
received interim MDTE approval, subject to further MDTE review
and modification based on comments by the Massachusetts Division
of Energy Resources (DOER) and other parties. The Company
subsequently filed a comprehensive Offer of Settlement with the
<PAGE>
MDTE resolving all issues raised by the DOER and other settling
parties relating to the Company's DSM program for the period
1998-2002. Since 1990, the Company has been allowed to earn
incentives based upon the results of its DSM programs. The
Company recorded before-tax incentives of $7.0 million, $5.7
million, and $5.1 million in 1997, 1996, and 1995, respectively.
Operating Expenses
The following table summarizes the changes in operating
expenses:
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Expenses
(In millions) 1997 1996
---- ----
<S> <C> <C>
Purchased electric energy:
Fuel costs $26 $13
Purchases and demand charges from NEP (2) (6)
Other operation and maintenance:
DSM 3 (5)
Other 9 12
Depreciation 2 3
Taxes 18 6
--- ---
$56 $23
=== ===
</TABLE>
The increase in fuel costs in 1997 is due to increased
replacement power fuel purchases by NEP due to the reduced
generation from partially owned nuclear units. These costs were
passed on to the Company through NEP's fuel clause. The Company,
in turn, passed these costs on to its customers. The 1996
increase reflects increased purchases as well as increased gas
pipeline demand charges being recovered by NEP through its fuel
adjustment clause in connection with NEP's Manchester Street
plant entering service in the second half of 1995. Effective
March 1, 1998, the Company terminated its power purchases under
NEP's fuel clause, and the rates in effect for sales on and after
March 1, 1998 no longer include a fuel clause.
Other operation and maintenance expenses increased in 1997
primarily due to increased distribution-system related costs,
including increased tree-trimming expenditures. The increase
also reflects increased transmission wheeling charges from NEP
related to the use of NEP's transmission network for the
Company's pilot program. The increase in 1996 reflects start-up
costs of a new customer service center, and increased general and
administrative expenses including increased postretirement
benefits other than pensions (PBOPs) commensurate with additional
amounts being recovered from customers. The Company is
recovering deferred PBOP expenses over five years.
<PAGE>
Hazardous Waste
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The most prevalent types of hazardous
waste sites with which the Company has been associated are
manufactured gas locations. (Until the early 1970's, NEES was a
combined electric and gas holding company system.) The Company
is aware of approximately 35 such manufactured gas locations,
including eight for which the Company has been identified by
either federal or state environmental regulatory agencies as a
potentially responsible party, located in Massachusetts. The
Company has reported the existence of all manufactured gas
locations of which it is aware to state environmental regulatory
agencies. The Company is engaged in various phases of
investigation and remediation work at 17 of the manufactured gas
locations. The Company is currently aware of other possible
hazardous waste sites, and may in the future become aware of
additional sites, that they may be held responsible for
remediating.
In 1993, the MDPU approved a settlement agreement that
provides for rate recovery of remediation costs of former
manufactured gas sites and certain other hazardous waste sites in
Massachusetts. A more detailed discussion of this settlement
agreement and of potential hazardous waste liabilities is
contained in Note D-2 of the Notes to the Financial Statements.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. At December 31,
1997, the Company had total reserves of $35 million. The Company
believes that hazardous waste liabilities for all sites of which
it is aware, and which are not covered by a rate agreement, are
not material to its financial position.
Year 2000 Computer Issues
In the next two years, most large companies will face a
potentially serious information systems (computer) problem
because most software applications and operational programs
written in the past will not properly recognize calendar dates
beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The NEES companies
began the process of identifying the changes required to their
computer programs and hardware during 1996. The necessary
modifications to the NEES companies' centralized financial,
customer, and operational information systems are expected to be
completed by the end of 1998. Noncentralized systems are also
being reviewed for Year 2000 problems. The NEES companies
believe total costs associated with making the necessary
modifications to all centralized and noncentralized systems will
be approximately $25 million, of which approximately $8 million
has been incurred as of December 31, 1997. Most of the remaining
costs are expected to be incurred prior to December 31, 1998.
The Company's share of the total costs is expected to be
approximately $12 million.
<PAGE>
New Accounting Standards
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
does not believe these new accounting standards will have a
significant impact on its future reporting requirements.
Utility Plant Expenditures and Financing
Cash expenditures for utility plant totaled $88 million in
1997. The funds necessary for utility plant expenditures during
1997 were primarily provided by net cash from operating
activities, after the payment of dividends and long-term debt
issuances. Cash expenditures for utility plant for 1998 are
estimated to be approximately $85 million. Internally generated
funds are expected to meet approximately 80 percent of capital
expenditure requirements in 1998.
In 1997, the Company issued $15 million of first mortgage
bonds, bearing an interest rate of 7.39 percent. In 1997, the
Company also retired $30 million of maturing long-term debt. The
Company plans to issue $15 million of long-term debt in 1998 to
fund capital expenditures and $40 million to retire $20 million
of maturing debt and refinance higher rate bonds. The Company
has issued $25 million of this long-term debt to date in 1998.
In 1997, the Company retired preferred stock with an aggregate
par value of $34 million. Total premiums paid of $3.7 million in
connection with the preferred stock retirement were charged to
retained earnings.
At December 31, 1997, the Company had $35 million of
short-term debt outstanding including $30 million of commercial
paper borrowings and $5 million of borrowings from affiliates.
As of December 31, 1997, the Company had lines of credit with
banks totaling $65 million which are available to provide
liquidity support for commercial paper borrowings and other
corporate purposes. There were no borrowings under these lines
of credit at December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Massachusetts Electric Company
Statements of Income
Year Ended December 31,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue $1,624,085 $1,538,537 $1,505,676
---------- ---------- ----------
Operating expenses:
Purchased electric energy, principally
from New England Power Company,
an affiliate 1,145,047 1,120,709 1,113,673
Other operation 217,150 211,663 206,660
Maintenance 36,906 31,102 29,525
Depreciation 49,694 47,357 44,829
Taxes, other than income taxes 31,143 30,559 30,022
Income taxes 42,454 25,186 19,297
---------- ---------- ----------
Total operating expenses 1,522,394 1,466,576 1,444,006
---------- ---------- ----------
Operating income 101,691 71,961 61,670
Other income (expense), net (1,536) (1,213) (541)
---------- ---------- ----------
Operating and other income 100,155 70,748 61,129
---------- ---------- ----------
Interest:
Interest on long-term debt 27,612 27,089 25,901
Other interest 7,214 6,473 6,784
Allowance for borrowed funds used during
construction - credit (429) (740) (657)
---------- ---------- ----------
Total interest 34,397 32,822 32,028
---------- ---------- ----------
Net income $ 65,758 $ 37,926 $ 29,101
========== ========== ==========
Statements of Retained Earnings
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Retained earnings at beginning of year $ 165,936 $ 150,308 $ 136,911
Net income 65,758 37,926 29,101
Dividends declared on cumulative
preferred stock (2,821) (3,114) (3,114)
Dividends declared on common stock,
$10.00, $8.00, and $5.25 per
share, respectively (23,981) (19,184) (12,590)
Premium on redemption of preferred stock (3,736) - -
---------- ---------- ----------
Retained earnings at end of year $ 201,156 $ 165,936 $ 150,308
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Massachusetts Electric Company
Balance Sheets
At December 31, (In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at original cost $1,579,309 $1,509,896
Less accumulated provisions for depreciation 465,796 430,585
---------- ----------
1,113,513 1,079,311
Construction work in progress 13,363 9,119
---------- ----------
Net utility plant 1,126,876 1,088,430
---------- ----------
Current assets:
Cash 6,743 2,356
Accounts receivable:
From sales of electric energy 158,627 165,866
Other (including $1,321 and $1,605 from affiliates) 2,112 2,600
Less reserves for doubtful accounts 12,808 13,146
---------- ----------
147,931 155,320
Unbilled revenues (Note A-3) 49,513 43,390
Materials and supplies, at average cost 9,599 8,820
Prepaid and other current assets 22,255 25,923
---------- ----------
Total current assets 236,041 235,809
---------- ----------
Deferred charges and other assets (Note B) 45,450 66,019
---------- ----------
$1,408,367 $1,390,258
========== ==========
Capitalization and Liabilities
Capitalization:
Common stock, par value $25 per share,
authorized and outstanding 2,398,111 shares $ 59,953 $ 59,953
Premium on capital stock 45,945 45,862
Other paid-in capital 193,224 155,310
Retained earnings 201,156 165,936
Unrealized gain on securities, net 129 -
---------- ----------
Total common equity 500,407 427,061
Cumulative preferred stock (Note H) 15,739 50,000
Long-term debt 338,387 343,321
---------- ----------
Total capitalization 854,533 820,382
---------- ----------
Current liabilities:
Long-term debt due in one year 20,000 30,000
Short-term debt (including $4,800
and $5,275 to affiliates) 34,700 43,775
Accounts payable (including $179,211
and $157,603 to affiliates) 195,023 178,263
Accrued liabilities:
Taxes 8,275 961
Interest 9,183 9,635
Other accrued expenses (Note G) 22,081 54,833
Customer deposits 4,487 4,308
Dividends payable 5,036 7,973
---------- ----------
Total current liabilities 298,785 329,748
---------- ----------
Deferred federal and state income taxes 179,474 177,778
Unamortized investment tax credits 15,463 16,566
Other reserves and deferred credits 60,112 45,784
Commitments and contingencies (Note D)
---------- ----------
$1,408,367 $1,390,258
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Massachusetts Electric Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 65,758 $ 37,926 $ 29,101
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 49,694 47,357 44,829
Deferred income taxes and investment
tax credits, net 478 (7,850) 6,666
Allowance for borrowed funds
used during construction (429) (740) (657)
Amortization of unbilled revenues
Decrease (increase) in accounts
receivable, net and unbilled revenues 1,266 2,868 4,281
Decrease (increase) in materials
and supplies (779) 1,782 922
Decrease (increase) in prepaid
and other current assets 3,668 (3,409) (931)
Increase (decrease) in accounts payable 16,760 (3,680) (159)
Increase (decrease) in other
current liabilities (25,711) 31,095 (2,326)
Other, net 36,902 (2,430) (2,340)
-------- -------- --------
Net cash provided by
operating activities $147,607 $102,919 $ 79,386
-------- -------- -------
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $(87,998) $(93,828) $(89,735)
Other investing activities (1,408) (598) (1,972)
-------- -------- --------
Net cash used in investing activities $(89,406) $(94,426) $(91,707)
-------- -------- --------
Financing activities:
Capital contributions from parent $ 37,914 $ - $ 14,000
Dividends paid on common stock (26,380) (13,188) (24,580)
Dividends paid on preferred stock (3,359) (3,114) (3,114)
Long-term debt - issues 15,000 20,000 88,000
Long-term debt - retirements (30,000) - (35,000)
Preferred stock - retirements (34,178) - -
Premium on redemption of preferred stock (3,736) - -
Changes in short-term debt (9,075) (11,675) (26,370)
-------- -------- --------
Net cash provided by(used in)
financing activities $(53,814) $ (7,977) $ 12,936
-------- -------- --------
Net increase in cash and cash equivalents $ 4,387 $ 516 $ 615
Cash and cash equivalents at
beginning of year 2,356 1,840 1,225
-------- -------- --------
Cash and cash equivalents at end of year $ 6,743 $ 2,356 $ 1,840
======== ======== ========
Supplementary information:
Interest paid less amounts capitalized $ 31,251 $ 30,569 $ 29,130
-------- -------- --------
Federal and state income taxes
paid (refunded) $ 31,711 $ 39,174 $ (8,026)
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Massachusetts Electric Company
Notes to Financial Statements
Note A - Significant Accounting Policies
1. Nature of Operations:
The Company is a wholly owned subsidiary of New England
Electric System (NEES) operating in Massachusetts. The Company's
business is the distribution of electricity at retail. Electric
service is provided to approximately 970,000 customers in 146
cities and towns having a population of approximately 2,160,000
(1990 Census). The Company's service area covers approximately
43 percent of Massachusetts. The properties of the Company
consist principally of substations and distribution lines
interconnected with transmission and other facilities of New
England Power Company (NEP), the Company's generation and
transmission affiliate. The Company purchased all of its
electric energy requirements from NEP under a contract which
obligates NEP to furnish such requirements at its standard resale
rate. This contract has been amended to terminate the all-
requirements provision of the contract and to allow NEP to
recover its above-market generation commitments through a
transition access charge, which the Company will collect from its
customers. See Note B for a discussion of industry restructuring
and Note C for a discussion of NEP's planned divestiture of its
nonnuclear generating business.
2. System of Accounts:
The accounts of the Company are maintained in accordance with
the Uniform System of Accounts prescribed by regulatory bodies
having jurisdiction.
In preparing the financial statements, management is required
to make estimates that affect the reported amounts of assets and
liabilities and disclosures of asset recovery and contingent
liabilities as of the date of the balance sheets and revenues and
expenses for the period. These estimates may differ from actual
amounts if future circumstances cause a change in the assumptions
used to calculate these estimates.
3. Electric Sales Revenue:
The Company accrues revenues for electricity delivered but
not yet billed (unbilled revenues). Accrued revenues are also
recorded in accordance with rate adjustment mechanisms, which
include the Company's purchased power cost adjustment (PPCA)
mechanism. Upon approval of the Massachusetts Settlement in
November 1997, the PPCA mechanism was eliminated as of July 31,
1996. Pending final approval of the settlement, the Company had
accrued refund reserves of $9 million for the last five months of
1996 and an additional $7 million in the first nine months of
1997. Upon final approval of the settlement, these refund
reserves were reversed in the fourth quarter of 1997, thereby
increasing revenue.
<PAGE>
4. Allowance for Funds Used During Construction (AFDC):
The Company capitalizes AFDC as part of construction costs.
AFDC represents an allowance for the cost of funds used to
finance construction. AFDC is capitalized in "Utility plant"
with offsetting noncash credits to "Interest." This method is in
accordance with an established rate-making practice under which a
utility is permitted a return on, and the recovery of, prudently
incurred capital costs through their ultimate inclusion in rate
base and in the provision for depreciation. The composite AFDC
rates were 5.7 percent, 5.4 percent, and 6.0 percent, in 1997,
1996, and 1995, respectively.
5. Depreciation:
Depreciation is provided annually on a straight-line basis.
The provision for depreciation as a percentage of weighted
average depreciable property was 3.3 percent in each of the years
1997, 1996, and 1995.
6. Cash:
The Company classifies short-term investments with a maturity
of 90 days or less at time of purchase as cash.
7. New Accounting Standards:
In 1997, the Financial Accounting Standards Board released
two new Statements of Financial Accounting Standards (FAS), FAS
130 and FAS 131, both of which will go into effect in 1998. FAS
130, Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
does not believe these new accounting standards will have a
significant impact on its future reporting requirements.
Note B - Industry Restructuring
Historically, electric utilities have provided their
customers bundled electric service within exclusive service
territories. As a result of a number of trends, including a
disparity in electric rates among regions of the country and new
regulations and legislation intended to foster competition,
distribution customers are being allowed to choose their power
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution systems.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments (generation related)
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs." The Company and NEP reached a
<PAGE>
settlement agreement with parties representing all of the
Company's distribution customers (the Massachusetts Settlement).
The Massachusetts Settlement provides for the recovery of
stranded costs.
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1,
1998. The legislation requires electric companies to provide
customers who do not choose a power supplier with a transition
rate (or "standard offer generation service") which results in a
10 percent rate reduction, with the discount increasing to 15
percent on or before September 1, 1999. The legislation also
provides a mechanism for the recovery of stranded costs resulting
from the introduction of customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) (formerly the Massachusetts
Department of Public Utilities (MDPU)) found that the
Massachusetts Settlement substantially complies with or is
consistent with the Massachusetts statute. The Massachusetts
Settlement was also conditionally approved by the Federal Energy
Regulatory Commission (FERC) in November 1997, subject to a
compliance filing to clarify the impact of the settlement on
nonsettling parties.
In accordance with the Massachusetts Settlement, NEP's
wholesale contract with the Company has been amended effective
March 1, 1998. The Massachusetts Settlement provides that NEP's
stranded costs (the Company's share is 73 percent) will be
recovered from distribution customers through a transition access
charge, which will be collected by the Company. Under the
Massachusetts Settlement, the recovery of NEP's stranded costs is
divided into several categories. Unrecovered costs associated
with generating plants and regulatory assets would be recovered
over 12 years and would earn a return on equity of 9.4 percent.
The above-market component of purchased power contracts and
nuclear decommissioning costs would be recovered as incurred over
the life of those obligations, a period expected to extend beyond
12 years. Initially, the transition access charge was set at 2.8
cents per kilowatthour (kWh). The MDTE has approved a reduction
of the initial transition access charge to 2.7 cents per kWh.
NEP's filing with the FERC to approve this reduction is pending.
The Company has already reflected the lower transition access
charge amount in its rates. The transition access charge would
be reduced further upon completion of the sale of NEP's
nonnuclear generating business, as described below.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, NEP and the Company's Rhode Island affiliate, The
Narragansett Electric Company (Narragansett Electric), entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation. See
"Divestiture of Generating Business" below. The net proceeds
<PAGE>
from the sale of the nonnuclear generating business to USGen will
be used to reduce the transition access charge to approximately
1.5 cents per kWh. In addition, the FERC accepted the NEES
companies' proposal in conjunction with their divestiture filing
that the recovery of the remaining above-market nuclear
generating plant investment and regulatory assets be completed by
the end of the year 2000.
The Massachusetts Settlement also establishes distribution
rates for the Company. On March 1, 1998, the Company's
distribution rates were set at a level approximately $45 million
above the level embedded in its previously bundled rates, with
such rates then frozen through the year 2000. This increase
reflects changes to the distribution cost of service that include
an $11 million increase in annual depreciation expense, a $3
million annual contribution to a storm fund, and increased
amortization of unfunded deferred income taxes of approximately
$1 million over six years. The Massachusetts restructuring
legislation also expanded the eligibility for certain rate
discount programs, the cost of which is uncertain at this time.
From 1998 through 2000, the Company's return on equity will be
subject to a floor of 6 percent and a ceiling of 11 percent.
Earnings over the ceiling will be shared equally between
customers and shareholders up to a maximum of 12.5 percent. This
sharing results in an effective cap on the Company's return on
equity of 11.75 percent, excluding certain limited incentive
opportunities. To the extent that earnings fall below the floor,
the Company will be authorized to surcharge customers for the
shortfall. The statute also imposes an inflation cap through
March 1, 2005 on the total rates for customers who have not
chosen a power supplier. If this inflation cap is triggered,
under the Massachusetts Settlement the recovery of stranded
investment costs would be deferred. This inflation cap does not
apply to any surcharge triggered by the rate of return floor.
The Massachusetts Settlement also eliminated the Company's
PPCA mechanism as of July 31, 1996. This mechanism allowed the
Company to recover purchased power rate changes from NEP and the
effects of NEP's seasonal rates. The Massachusetts Settlement
required that the Company's net $18 million PPCA refund liability
balance at July 31, 1996 be transferred on its books to establish
a storm contingency fund account of $3 million initially, with
the remainder applied to reduce regulatory assets for hazardous
waste costs.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
<PAGE>
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $18
million in net regulatory assets in compliance with FAS 71.
The Company believes the Massachusetts Settlement and statute
will enable the Company to recover through rates its specific
costs of providing ongoing distribution services and stranded
costs billed to it by NEP. The Company believes these factors
will allow it to continue to apply FAS 71.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations.
The components of regulatory assets are as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Regulatory assets (liabilities) included
in current assets and liabilities:
Rate adjustment mechanisms (see Note G) $ 2,960 $(40,264)
-------- --------
Regulatory assets included in deferred charges
and other reserves and deferred credits:
Unamortized losses on reacquired debt 6,939 7,482
Deferred FAS No. 106 costs (see Note E-2) 9,950 13,568
Deferred FAS No. 109 costs (see Note F) 8,275 8,244
Environmental response costs (see Note D-2) (18,294) 14,546
Deferred storm costs 8,108 11,221
Other 412 862
-------- --------
15,390 55,923
-------- --------
$ 18,350 $ 15,659
======== ========
</TABLE>
Note C - Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
Electric (collectively, the Sellers) reached an agreement to sell
their nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
megawatts (MW) of capacity, as well as NEES' 100 percent interest
in Narragansett Energy Resources Company, a 20 percent general
partner in the Ocean State Power project, all of which has a book
value of $1.1 billion. USGen will pay the Sellers $1.59 billion
in cash, of which $225 million will be contingent upon the
introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. USGen will
also reimburse the NEES companies for $85 million of costs
associated with early retirement and special severance programs
for employees affected by industry restructuring.
<PAGE>
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale, and
conditionally approved most supporting filings. While the timing
of receipt of final regulatory approvals is uncertain, receipt of
all approvals is unlikely before mid-1998. Closing is contingent
upon all regulatory approvals being obtained by February 1999.
Note D - Commitments and Contingencies
1. Plant Expenditures:
The Company's utility plant expenditures are estimated to be
approximately $85 million in 1998. At December 31, 1997,
substantial commitments had been made relative to future planned
expenditures.
2. Hazardous Waste:
The Federal Comprehensive Environmental Response,
Compensation and Liability Act, more commonly known as the
"Superfund" law, imposes strict, joint and several liability,
regardless of fault, for remediation of property contaminated
with hazardous substances. A number of states, including
Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. NEES subsidiaries currently have in
place an internal environmental audit program and an external
waste disposal vendor audit and qualification program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for
16 sites at which hazardous waste is alleged to have been
disposed. Private parties have also contacted or initiated legal
proceedings against the Company regarding hazardous waste
cleanup. The most prevalent types of hazardous waste sites with
which the Company has been associated are manufactured gas
locations. (Until the 1970s, NEES was a combined electric and
gas holding company system.) The Company is aware of
<PAGE>
approximately 35 such manufactured gas locations in
Massachusetts. The Company has been identified as a PRP at eight
of these manufactured gas locations, which are included in the 16
PRP sites discussed above. The Company has reported the
existence of all manufactured gas locations of which it is aware
to state environmental regulatory agencies. The Company is
engaged in various phases of investigation and remediation work
at 17 of the manufactured gas locations. The Company is
currently aware of other possible hazardous waste sites, and may
in the future become aware of additional sites, that it may be
held responsible for remediating.
In 1993, the MDPU approved a settlement agreement regarding
the rate recovery of remediation costs of former manufactured gas
sites and certain other hazardous waste sites located in
Massachusetts. Under that agreement, qualified costs related to
these sites are paid out of a special fund established on the
Company's books. The Company made an initial $30 million
contribution to the fund. Rate-recoverable contributions of $3
million, adjusted since 1993 for inflation, are added annually to
the fund along with interest and any recoveries from insurance
carriers. At December 31, 1997, the fund had a balance of $45
million, including $15 million transferred to the fund in 1997
out of existing reserves for refunds under terms of the 1996
Massachusetts Settlement.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. The NEES
Companies have recovered amounts from certain insurers, and,
where appropriate, the Company intends to seek recovery from
other insurers and from other PRPs, but it is uncertain whether,
and to what extent, such efforts will be successful. At December
31, 1997, the Company had total reserves for environmental
response costs of $35 million. The Company believes that
hazardous waste liabilities for all sites of which it is aware,
and which are not covered by a rate agreement, are not material
to its financial position.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These
new rules did not have a material effect on the Company's
financial position or results of operations.
<PAGE>
Note E - Employee Benefits
1. Pension Plans:
The Company participates with other subsidiaries of NEES in
noncontributory, defined-benefit plans covering substantially all
employees of the Company. The plans provide pension benefits
based on the employee's compensation during the five years prior
to retirement. The Company's funding policy is to contribute
each year the net periodic pension cost for that year. However,
the contribution for any year will not be less than the minimum
contribution required by federal law or greater than the maximum
tax deductible amount.
The Company's net pension cost for 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ 4,474 $ 4,429 $ 3,992
Plus (less):
Interest cost on projected
benefit obligation 17,413 16,935 17,576
Return on plan assets at
expected long-term rate (19,961) (18,562) (18,122)
Amortization (95) 316 99
-------- -------- --------
Net pension cost $ 1,831 $ 3,118 $ 3,545
======== ======== ========
Actual return on plan assets $ 46,452 $ 32,675 $ 47,717
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assumptions used to determine pension cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Average rate of increase in future
compensation levels 4.13% 4.13% 4.13% 4.63%
Expected long-term rate of return
on assets 8.50% 8.50% 8.50% 8.75%
The funded status of the plans cannot be presented separately for the
Company as the Company participates in the plans with other NEES subsidiaries.
</TABLE>
<PAGE>
The following table sets forth the funded status of the NEES
companies' plans:
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
---- ----
<S> <C> <C>
Benefits earned
Actuarial present value of
accumulated benefit liability:
Vested $647 $640
Nonvested 18 19
--- ----
Total $665 $659
==== ====
Reconciliation of funded status
Actuarial present value of
projected benefit liability 757 753
Unrecognized prior service costs (8) (9)
FAS No. 87 transition liability
not yet recognized (amortized) (1) (1)
Net gain (loss) not yet
recognized (amortized) 61 40
---- ----
809 783
---- ----
Pension fund assets at fair value 834 812
FAS No. 87 transition asset
not yet recognized (amortized) (8) (10)
---- ----
826 802
---- ----
Accrued pension/(prepaid)
payments recorded on books $(17) $(19)
==== ====
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates from 1998 and 1997,
respectively, and the 1983 Group Annuity Mortality table.
Plan assets are composed primarily of corporate equity, debt
securities, and cash equivalents.
2. Postretirement Benefit Plans Other Than Pensions (PBOPs):
The Company provides health care and life insurance coverage
to eligible retired employees. Eligibility is based on certain
age and length of service requirements and in some cases retirees
must contribute to the cost of their coverage.
<PAGE>
The Company's total cost of PBOPs for 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 2,164 $ 2,232$ 2,368
Plus (less):
Interest cost on accumulated
benefit obligation 9,486 9,661 11,699
Return on plan assets at expected
long-term rate (6,871) (5,455) (4,165)
Amortization 4,465 5,267 6,628
------- ------- -------
Net postretirement benefit cost $ 9,244 $11,705 $16,530
======= ======= =======
Actual return on plan assets $16,189 $10,857 $12,209
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995
==== ==== ==== ====
<S> <C> <C> <C> <C>
Assumptions used to determine
postretirement benefit cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Expected long-term rate of
return on assets 8.25% 8.25% 8.25% 8.50%
Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50%
Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50%
Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
</TABLE>
The following table sets forth the Company's benefits earned and the plans'
funded status:
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 87 $ 94
Fully eligible active plan participants 12 11
Other active plan participants 37 39
----- -----
Total benefits earned 136 144
Unrecognized transition obligation (109) (117)
Unrecognized net gain 60 40
----- -----
87 67
----- -----
Plan assets at fair value 98 82
----- -----
Prepaid postretirement benefit costs recorded on books $ 11 $ 15
===== =====
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates in effect for 1998 and 1997,
respectively.
<PAGE>
The assumptions used in the health care cost trends have a
significant effect on the amounts reported. Increasing the
assumed rates by 1 percent in each year would increase the
accumulated postretirement benefit obligation as of December 31,
1997 by approximately $17 million and the net periodic cost for
1997 by approximately $2 million.
The Company funds the annual tax-deductible contributions.
Plan assets are invested in equity and debt securities and cash
equivalents.
Note F - Income Taxes
The Company and other subsidiaries participate with NEES in
filing consolidated federal income tax returns. The Company's
income tax provision is calculated on a separate return basis.
Federal income tax returns have been examined and reported on by
the Internal Revenue Service through 1993.
Total income taxes in the statements of income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes charged to operations $42,454 $25,186 $19,297
Income taxes charged (credited)
to "Other income" (887) (2,010) (901)
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
Total income taxes, as shown above, consist of the following components:
Year Ended December 31, (In thousands) 1997 1996 1995
---- ---- ----
Current income taxes $41,089 $31,026 $11,730
Deferred income taxes 1,581 (6,732) 7,798
Investment tax credits, net (1,103) (1,118) (1,132)
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
Investment tax credits have been deferred and are being amortized over the
estimated lives of the property giving rise to the credits.
Total income taxes, as shown above, consist of federal and state components
as follows:
Year Ended December 31, (In thousands) 1997 1996 1995
---- ---- ----
Federal income taxes $34,053 $18,697 $14,461
State income taxes 7,514 4,479 3,935
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
</TABLE>
Consistent with rate-making policies of the MDPU, the Company has adopted
comprehensive interperiod tax allocation (normalization) for temporary
book/tax differences.
<PAGE>
Total income taxes differ from the amounts computed by applying the federal
statutory tax rates to income before taxes. The reasons for the differences
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed tax at statutory rate $37,564 $21,386 $16,624
Increases (reductions) in tax resulting from:
Amortization of investment tax credits (1,103) (1,118) (1,132)
State income taxes, net of federal
income tax benefit 4,884 2,911 2,558
All other differences 222 (3) 346
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
The following table identifies the major components of total deferred
income taxes:
</TABLE>
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Plant related $ 9 $ 9
Investment tax credits 6 7
All other 57 57
----- -----
72 73
----- -----
Deferred tax liability:
Plant related (223) (216)
All other (28) (35)
----- -----
(251) (251)
----- -----
Net deferred tax liability $(179) $(178)
===== =====
</TABLE>
Note G - Short-term Borrowings and Other Accrued Expenses
At December 31, 1997, the Company had $35 million of
short-term debt outstanding including $30 million in commercial
paper borrowings and $5 million of borrowings from affiliates.
NEES and certain subsidiaries, including the Company, with
regulatory approval, operate a money pool to more effectively
utilize cash resources and to reduce outside short-term
borrowings. Short-term borrowing needs are met first by
available funds of the money pool participants. Borrowing
companies pay interest at a rate designed to approximate the cost
of outside short-term borrowings. Companies which invest in the
pool share the interest earned on a basis proportionate to their
average monthly investment in the money pool. Funds may be
withdrawn from or repaid to the pool at any time without prior
notice.
<PAGE>
At December 31, 1997, the Company had lines of credit with
banks totaling $65 million which are available to provide
liquidity support for commercial paper borrowings and other
corporate purposes. There were no borrowings under these lines
of credit at December 31, 1997. Fees are paid in lieu of
compensating balances on most lines of credit.
The weighted average rate on outstanding short-term
borrowings was 5.6 percent at December 31, 1997. The fair value
of the Company's short-term debt equals carrying value.
The components of other accrued expenses are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
At December 31, (In thousands) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Rate adjustment mechanisms $ 4,227 $ 39,863
Accrued wages and benefits 15,244 12,591
Other 2,610 2,379
------- -------
$22,081 $54,833
======= =======
</TABLE>
Note H - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1997
and 1996 is as follows (dollar amounts expressed in thousands
except for share data):
<TABLE>
<CAPTION>
Shares
Authorized Dividends Call
and Outstanding Amount Declared Price
- -----------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$25 Par value -
6.84% Series 192,161 600,000 $ 4,804$15,000 $ 931 $1,026 (a)
$100 Par value -
4.44% Series 27,815 75,000 2,782 7,500 305 333 $104.068
4.76% Series 27,530 75,000 2,753 7,500 326 357 $103.730
6.99% Series 54,000 200,000 5,400 20,000 1,259 1,398 (b)
- -----------------------------------------------------------------------------------
Total 301,506 950,000 $15,739$50,000 $2,821 $3,114
===================================================================================
<FN>
(a) Callable on or after October 1, 1998 at $25.80.
(b) Callable on or after August 1, 2003 at $103.50.
</FN>
</TABLE>
The annual dividend requirement for total cumulative preferred stock
was $961,000 for 1997 and $3,114,000 for 1996.
<PAGE>
There are no mandatory redemption provisions on the Company's
cumulative preferred stock.
In 1997, the Company retired preferred stock with an aggregate par value
of $34 million. Total premiums paid of $3.7 million in connection with the
preferred stock retirement were charged to retained earnings.
Note I - Long-term Debt
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands)
- ---------------------------------------------------------------------------
Series Rate % Maturity 1997 1996
===========================================================================
<S> <C> <C> <C> <C>
First Mortgage Bonds:
R(92-4) 7.230 June 3, 1997 $ 10,000
R(92-5) 7.210 June 3, 1997 5,000
S(92-6) 6.120 August 15, 1997 12,000
S(92-7) 6.010 August 15, 1997 3,000
U(95-3) 7.800 February 13, 1998 $ 5,000 5,000
U(95-4) 7.790 February 16, 1998 5,000 5,000
R(92-1) 7.240 December 30, 1998 10,000 10,000
S(92-3) 6.630 August 12, 1999 7,500 7,500
S(92-4) 6.600 August 12, 1999 7,500 7,500
U(95-5) 7.930 February 14, 2000 6,000 6,000
S(92-2) 6.980 July 17, 2000 5,000 5,000
S(92-9) 6.310 September 15, 2000 10,000 10,000
R(92-6) 7.710 July 1, 2002 10,000 10,000
S(92-11) 7.250 October 28, 2002 5,000 5,000
S(92-12) 7.340 November 25, 2002 10,000 10,000
T(93-2) 7.090 January 27, 2003 20,000 20,000
T(93-5) 6.400 June 24, 2003 10,000 10,000
U(93-1) 6.240 November 17, 2003 5,000 5,000
U(94-6) 8.520 November 30, 2004 10,000 10,000
U(95-1) 8.450 January 10, 2005 10,000 10,000
U(95-2) 8.220 January 24, 2005 10,000 10,000
U(95-7) 7.920 March 3, 2005 9,000 9,000
V(95-1) 6.720 June 23, 2005 10,000 10,000
V(96-1) 6.780 November 20, 2006 20,000 20,000
T(93-7) 6.660 June 23, 2008 5,000 5,000
T(93-8) 6.660 June 30, 2008 5,000 5,000
T(93-10) 6.110 September 8, 2008 10,000 10,000
T(93-11) 6.375 November 17, 2008 10,000 10,000
R(92-3) 8.550 February 7, 2022 5,000 5,000
S(92-5) 8.180 August 1, 2022 10,000 10,000
S(92-10) 8.400 October 26, 2022 5,000 5,000
T(93-1) 8.150 January 20, 2023 10,000 10,000
T(93-3) 7.980 January 27, 2023 10,000 10,000
T(93-4) 7.690 February 24, 2023 10,000 10,000
T(93-6) 7.500 June 23, 2023 3,000 3,000
T(93-9) 7.500 June 29, 2023 7,000 7,000
U(93-2) 7.200 November 15, 2023 10,000 10,000
U(93-3) 7.150 November 24, 2023 1,000 1,000
U(94-1) 7.050 February 2, 2024 10,000 10,000
U(94-2) 8.080 May 2, 2024 5,000 5,000
U(94-3) 8.030 June 14, 2024 5,000 5,000
U(94-4) 8.160 August 9, 2024 5,000 5,000
U(94-5) 8.850 November 7, 2024 1,000 1,000
U(95-6) 8.460 February 28, 2025 3,000 3,000
V(95-2) 7.630 June 27, 2025 10,000 10,000
V(95-3) 7.600 September 12, 2025 10,000 10,000
V(95-4) 7.630 September 12, 2025 10,000 10,000
V(97-1) 7.390 October 1, 2027 15,000
Unamortized discounts (1,613) (1,679)
-------- --------
Total long-term debt 358,387 373,321
======== ========
Long-term debt due in one year 20,000 30,000
-------- --------
$338,387 $343,321
======== ========
</TABLE>
<PAGE>
Substantially all of the properties and franchises of the Company are
subject to the lien of mortgage indentures under which the first mortgage
bonds have been issued.
In July 1996, Nantucket Electric issued $28 million of tax- exempt
long-term debt at rates ranging from 4.10 percent to 6.75 percent to fund
construction of an undersea cable. The Company guaranteed the debt on
behalf of Nantucket Electric.
The Company will make cash payments of $20,000,000 in 1998, $15,000,000
in 1999, $21,000,000 in 2000, and $25,000,000 in 2002 to retire maturing
mortgage bonds. There are no cash payments required in 2001.
At December 31, 1997, the Company's long-term debt had a carrying value
of approximately $360,000,000 and had a fair value of approximately
$377,000,000. The fair market value of the Company's long-term debt was
estimated based on the quoted prices for similar issues or on the current
rates offered to the Company for debt of the same remaining maturity.
Note J - Restrictions on Retained Earnings Available for Dividends on
Common Stock
As long as any preferred stock is outstanding, certain restrictions on
payment of dividends on common stock would come into effect if the "junior
stock equity" was, or by reason of payment of such dividends became, less
than 25 percent of "Total capitalization." However, the junior stock
equity at December 31, 1997 was 57 percent of total capitalization, and
accordingly, none of the Company's retained earnings at December 31, 1997
were restricted as to dividends on common stock under the foregoing
provisions.
Under restrictions contained in the indentures relating to first
mortgage bonds, $20,113,000 of the Company's retained earnings at December
31, 1997 were restricted as to dividends on common stock.
<PAGE>
Note K - Supplementary Income Statement Information
Advertising expenses, expenditures for research and development, and
rents were not material and there were no royalties paid in 1997, 1996, or
1995. Taxes, other than income taxes, charged to operating expenses are
set forth by classes as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal property taxes $23,796 $23,304 $23,119
Federal and state payroll
and other taxes 7,347 7,255 6,903
------- ------- -------
$31,143 $30,559 $30,022
======= ======= =======
</TABLE>
New England Power Service Company, an affiliated service company
operating pursuant to the provisions of Section 13 of the Public Utility
Holding Company Act of 1935, furnished services to the Company at the cost
of such services. These costs amounted to $73,145,000, $67,756,000, and
$67,680,000, including capitalized construction costs of $7,907,000,
$9,330,000, and $7,660,000 for each of the years 1997, 1996, and 1995,
respectively.
<TABLE>
<CAPTION>
Selected Financial Information
Year Ended December 31, (In millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue:
Electric sales (excluding fuel
cost recovery) $1,132 $1,084 $1,072 $1,088 $1,062
Fuel cost recovery 453 427 414 376 392
Other 39 28 20 18 15
------ ------ ------ ------ ------
Total operating revenue $1,624 $1,539 $1,506 $1,482 $1,469
Net income $ 66 $ 38 $ 29 $ 35 $ 24
Total assets $1,408 $1,390 $1,343 $1,296 $1,232
Capitalization:
Common equity $ 500 $ 427 $ 412 $ 384 $ 382
Cumulative preferred stock 16 50 50 50 50
Long-term debt 339 343 353 266 265
------ ------ ------ ------ ------
Total capitalization $ 855 $ 820 $ 815 $ 700 $ 697
Preferred dividends declared $ 3 $ 3 $ 3 $ 3 $ 4
Common dividends declared $ 24 $ 19 $ 13 $ 30 $ 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Financial Information (Unaudited)
- ---------------------------------------------------------------------------
First Second Third Fourth
(In Thousands) Quarter Quarter Quarter Quarter
===========================================================================
<S> <C> <C> <C> <C>
1997
Operating revenue $405,518 $369,542 $404,990 $444,035
Operating income $ 24,241 $ 19,697 $ 17,621 $ 40,132
Net income $ 13,636 $ 10,353 $ 8,041 $ 33,728 *
1996
Operating revenue $390,819 $358,479 $398,542 $390,697
Operating income $ 20,687 $ 13,783 $ 13,538 $ 23,953
Net income $ 10,734 $ 5,456 $ 4,774 $ 16,962
<FN>
* See "Overview of Financial Results" and "Operating Revenue" sections of
Financial Review for a discussion of factors contributing to the fourth
quarter increase in net income over prior year.
</FN>
</TABLE>
Per share data is not relevant because the Company's common
stock is wholly owned by New England Electric System.
A copy of Massachusetts Electric Company's Annual Report on
Form 10-K to the Securities and Exchange Commission for the year
ended December 31, 1997 will be available on or about April 1,
1998, without charge, upon written request to Massachusetts
Electric Company, Shareholder Services Department, 25 Research
Drive, Westborough, Massachusetts 01582.
<PAGE>
EXHIBIT (24)
POWER OF ATTORNEY
-----------------
Each of the undersigned directors of Massachusetts Electric Company
(the "Company"), individually as a director of the Company, hereby
constitutes and appoints John G. Cochrane, Robert King Wulff, and
Geraldine M. Zipser, individually, as attorney-in-fact to execute on
behalf of the undersigned the Company's annual report on Form 10-K for
the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission, and to execute any appropriate amendment or
amendments thereto as may be required by law.
Dated this 18th day of March, 1998.
s/Cheryl A. LaFleur s/Christopher E. Root
_________________________ _________________________
Cheryl A. LaFleur Christopher E. Root
s/Robert L. McCabe s/Richard P. Sergel
_________________________ _________________________
Robert L. McCabe Richard P. Sergel
s/Lydia M. Pastuszek s/Dennis E. Snay
_________________________ _________________________
Lydia M. Pastuszek Dennis E. Snay
s/Lawrence J. Reilly
_________________________
Lawrence J. Reilly
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF
INCOME, RETAINED EARNINGS AND CASH FLOWS OF MASSACHUSETTS
ELECTRIC COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SUBSIDIARY>
<NAME> MASSACHUSETTS ELECTRIC COMPANY
<NUMBER> 2
<CIK> 0000063073
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,126,876
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 236,041
<TOTAL-DEFERRED-CHARGES> 45,450 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,408,367
<COMMON> 59,953
<CAPITAL-SURPLUS-PAID-IN> 239,169
<RETAINED-EARNINGS> 201,156
<TOTAL-COMMON-STOCKHOLDERS-EQ> 500,407 <F3>
0
15,739
<LONG-TERM-DEBT-NET> 338,387
<SHORT-TERM-NOTES> 4,800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 29,900
<LONG-TERM-DEBT-CURRENT-PORT> 20,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 499,134
<TOT-CAPITALIZATION-AND-LIAB> 1,408,367
<GROSS-OPERATING-REVENUE> 1,624,085
<INCOME-TAX-EXPENSE> 42,454
<OTHER-OPERATING-EXPENSES> 1,479,940
<TOTAL-OPERATING-EXPENSES> 1,522,394
<OPERATING-INCOME-LOSS> 101,691
<OTHER-INCOME-NET> (1,536)
<INCOME-BEFORE-INTEREST-EXPEN> 100,155
<TOTAL-INTEREST-EXPENSE> 34,397
<NET-INCOME> 65,758
2,821
<EARNINGS-AVAILABLE-FOR-COMM> 62,937
<COMMON-STOCK-DIVIDENDS> 23,981
<TOTAL-INTEREST-ON-BONDS> 27,612
<CASH-FLOW-OPERATIONS> 147,607
<EPS-PRIMARY> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Per share data is not relevant because the Company's common stock
is wholly-owned by New England Electric System.
<F3> Total common stockholders equity includes the unrealized gain on
securities.
</FN>
<PAGE>
AMENDED AND RESTATED
WHOLESALE STANDARD OFFER SERVICE AGREEMENT
WHOLESALE STANDARD OFFER
SERVICE AGREEMENT
between
THE NARRAGANSETT ELECTRIC COMPANY
and
USGEN ACQUISITION CORPORATION
Dated as of October 29, 1997
<PAGE>
Table of Contents
ARTICLE 1. BASIC UNDERSTANDINGS.......................................... 1
ARTICLE 2. DEFINITIONS................................................... 2
ARTICLE 3. TERM AND REGULATORY APPROVAL.................................. 4
3.1 Term.................................................... 4
3.2 Obtaining and Maintaining Required Permits.............. 5
ARTICLE 4. SALE AND PURCHASE............................................. 5
ARTICLE 5. PRICE AND BILLING............................................. 6
5.1 Price................................................... 6
5.2 Payment................................................. 7
5.3 Taxes, Fees and Levies.................................. 8
ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND
REPORTING OF HOURLY LOADS..................................... 8
6.1 Delivery................................................ 8
6.2 Losses.................................................. 8
6.3 Determination and Reporting of Hourly Loads............. 9
ARTICLE 7. DEFAULT AND TERMINATION....................................... 10
7.1 Material Breach and Termination......................... 10
ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES....................... 11
8.1 Notices................................................. 11
8.2 Authority of Representative............................. 12
ARTICLE 9. LIABILITY, INDEMNIFICATION, AND
RELATIONSHIP OF PARTIES....................................... 12
9.1 Limitation on Consequential, Incidental and
Indirect Damages........................................ 12
9.2 Recovery of Direct Damages Permitted.................... 12
9.3 Indemnification......................................... 13
9.4 Independent Contractor Status........................... 14
ARTICLE 10. ASSIGNMENT.................................................... 14
10.1 Assignment............................................. 14
ARTICLE 11. SUCCESSORS AND ASSIGNS........................................ 15
ARTICLE 12. FORCE MAJEURE................................................. 15
12.1 Force Majeure Standard................................. 15
12.2 Force Majeure Definition............................... 15
12.3 Obligation to Diligently Cure Force Majeure............ 16
ARTICLE 13. WAIVERS....................................................... 16
ARTICLE 14. REGULATION.................................................... 16
14.1 Laws and Regulations................................... 16
14.2 NEPOOL Requirements.................................... 17
ARTICLE 15. INTERPRETATION, DISPUTE RESOLUTION............................ 17
15.1 Interpretation......................................... 17
15.2 Dispute Resolution..................................... 17
ARTICLE 16. SEVERABILITY.................................................. 17
ARTICLE 17. MODIFICATIONS................................................. 18
ARTICLE 18. SUPERSESSION.................................................. 18
ARTICLE 19. COUNTERPARTS.................................................. 18
ARTICLE 20. HEADINGS...................................................... 18
Appendix A. Incremental Revenues..........................................A-1
Appendix B. Estimation of Supplier Hourly Loads...........................B-1
Appendix C. Arbitration Agreement.........................................C-1
<PAGE>
AMENDED AND RESTATED WHOLESALE STANDARD OFFER
SERVICE AGREEMENT
This AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE
AGREEMENT ("Agreement") is dated as of October 29, 1997 and is by and between
THE NARRAGANSETT ELECTRIC COMPANY, a Rhode Island corporation ("NECO"), and
USGen Acquisition Corporation, a Delaware corporation ("Seller"), and amends
and restates and, together with the NECO Wholesale Standard Offer Service
Agreement II dated as of the date hereof between NECO and Seller, supersedes
in its entirety the Wholesale Standard Offer Service Agreement dated as of
August 5, 1997 between NECO and Seller. This Agreement provides for the
purchase by NECO and the sale by Seller of Wholesale Standard Offer Service,
as defined in this Agreement.
ARTICLE 1. BASIC UNDERSTANDINGS
NECO purchases all of its requirements of electricity for resale to its
retail electric customers from its affiliate, New England Power Company
("NEP").
NEP, NECO and other parties have entered into an agreement in settlement
of regulatory proceedings before the Federal Energy Regulatory Commission (the
"Rhode Island Restructuring Agreement") that, among other things, implements
certain requirements of the Rhode Island Utility Restructuring Act of 1996
(the "Act"), permits NECO to terminate wholesale purchases from NEP, permits
current retail customers of NECO to purchase electricity from other suppliers
on and after a date defined therein as the "Retail Access Date," or, for a
limited time, to purchase Standard Offer Service from NECO, obligates NEP to
supply NECO with power sufficient to meet the latter's obligations to supply
Standard Offer Service, and obligates NEP to transfer its interests in the
electric generating business to another party or parties.
NEP, NECO, and Seller have entered an agreement under which Seller will
acquire certain NEP and NECO generating assets.
NEP and Seller desire that Seller shall supply electric capacity and
energy to NECO to fulfill a portion of NEP's power supply obligations under
the Rhode Island Restructuring Agreement.
Under the Rhode Island Restructuring Agreement, NECO is obligated to
afford wholesale power suppliers other than NEP the opportunity to commit to
supply NECO with power sufficient to meet NECO's obligation to supply retail
Standard Offer Service after the Retail Access Date.
This Agreement sets forth the terms under which Seller will supply
Wholesale Standard Offer Service to NECO, for a period beginning on the
Closing Date, to enable NECO to meet the needs of its retail customers for
electricity, including all or a portion of the needs of customers receiving
retail Standard Offer Service after the Retail Access Date.
ARTICLE 2. DEFINITIONS
The following words and terms shall be understood to have the following
meanings when used in this Agreement, or in any associated documents entered
into in conjunction with this Agreement. In addition, except as otherwise
expressly provided, where terms used in this Agreement are defined in the
NEPOOL Agreement and not otherwise defined herein, such definitions are
expressly incorporated into this Agreement by reference.
Affiliate of NECO - Any company that is a subsidiary of New England Electric
System and its successors.
Closing Date - The date upon which the Seller acquires ownership of generating
assets it purchases from NEP.
Commission or FERC - The Federal Energy Regulatory Commission or such
successor federal regulatory agency as may have jurisdiction over this
Agreement.
Contract Termination Date - The date established by the Rhode Island
Restructuring Agreement when the respective obligations of NEP and NECO under
<PAGE>
NEP's FERC Electric Tariff, Original Volume No. 1, to sell and purchase
wholesale electric requirements service shall cease. The Contract Termination
Date shall occur on the earlier of the Retail Access Date or the Wholesale
Access Date.
GWh - Gigawatt hour.
ISO - The Independent System Operator to be established in accordance with the
NEPOOL Agreement and the Interim Independent System Operator Agreement as
amended, superseded or restated from time to time.
kWh - Kilowatt- hour.
MECO - Massachusetts Electric Company.
MECO Wholesale Standard Offer Service Agreement - The Wholesale Standard Offer
Service Agreement of even date herewith between MECO and the Seller.
NECO's Service Territory - The geographic area in which NECO provided electric
service to retail customers on August 6, 1996.
NECO's System - The electrical system of NECO and/or the electrical system of
any Affiliate of NECO.
MMBtu - Million British thermal units.
NEP - New England Power Company, an Affiliate of NECO.
NEPEX - The New England Power Exchange.
NEPOOL - The New England Power Pool.
NEPOOL Agreement - The New England Power Pool Agreement dated as of September
1, 1971, as amended and as may be amended or restated from time to time.
Price - The price set forth in SECTION 5.1, below.
Prime Rate - The prime (or comparable) rate announced from time to time as its
prime rate by the Bank of Boston or its successor, which rate may differ from
the rate offered to its more substantial and creditworthy customers.
PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL
Agreement.
Retail Access Date - The date so defined under the Rhode Island Restructuring
Agreement, as the later of January 1, 1998, or the date of a final,
nonappealable order of the RIPUC approving the divestiture plan for the
disposition of NEP's non-nuclear generating facilities provided, however, that
in any event the Retail Access Date shall occur no later than three (3) months
after retail access is available to forty percent (40%) or more of the
kilowatt hour sales in New England including the total kilowatt hour sales in
Rhode Island.
Rhode Island Restructuring Agreement - The Offer of Settlement dated May 30,
1997, entered into by and among the RIPUC, the Rhode Island Division of Public
Utilities and Carriers, NECO, and NEP, as amended and accepted or approved by
the FERC.
RIPUC - The Rhode Island Public Utilities Commission.
Standard Offer Auction - The solicitation by NECO of offers from wholesale
power suppliers, including, at their option, NEP and Seller, of electric
energy and associated capacity and ancillary services necessary to meet the
needs of ultimate customers of NECO eligible for and accepting retail Standard
Offer Service on or after the Retail Access Date, and any wholesale electric
supply contracts resulting from that solicitation. The solicitation and any
contract(s) entered into as a result thereof shall not be on terms that are
materially different from those described by MECO in the Massachusetts
Restructuring Agreement (as defined in the MECO Wholesale Standard Offer
Service Agreement), the RFQ dated April 3, 1997, and the letter to potential
asset purchasers dated June 16, 1997, or result in a material adverse impact
on Seller. NECO shall not, without Seller's consent, conduct the Standard
Offer Auction more than once or more than six (6) months prior to the Retail
Access Date, which date shall be as reasonably determined by NECO.
<PAGE>
Standard Offer Service - The electric service provided by NECO pursuant to the
Rhode Island Restructuring Agreement: (i) to retail customers in NECO's
Service Territory during the period, if any, during the term of this Agreement
preceding the Retail Access Date; and (ii) to NECO's retail customers on the
Retail Access Date that do not elect to obtain their electric supply from an
alternative supplier on or after the Retail Access Date through December 31,
2009.
Wholesale Access Date - The date so defined under the Rhode Island
Restructuring Agreement, as the date on which NECO in its sole discretion
decides to terminate its purchase from NEP of wholesale requirements service
pursuant to NEP's FERC Electric Tariff, Original Volume No. 1, by providing
the Commission and the Signatories to the Rhode Island Restructuring Agreement
with 90 days advance notice in writing, said date not to be earlier than
January 1, 1998.
Wholesale Standard Offer Service - The generation and delivery, to any
location on the NEPOOL PTF system or NECO's system, of the portion of the
electric capacity, energy and ancillary services required by NECO to meet the
needs of NECO's ultimate customers taking Standard Offer Service, excluding,
after the Retail Access Date, any portion of such requirements that NECO has
contracted to obtain through the Standard Offer Auction, determined in
accordance with ARTICLE 4. Seller, as the supplier of Wholesale Standard
Offer Service capacity and energy, will be responsible for all present, or
future requirements and associated costs for installed capability, operable
capability, energy, operating reserves, and automatic generation control,
including tie benefit payments, losses and any congestion charges associated
with Seller's supply of Wholesale Standard Offer Service and any other
requirements imposed by NEPOOL or the ISO, as they may be in effect from time
to time. To the extent that any NEPOOL, ISO or any successor entity expenses
or uplift costs are allocated to wholesale suppliers, the portion of such
costs associated with Seller's supply of Standard Offer Service will also be
the responsibility of Seller. To the extent any costs contemplated by this
paragraph are applicable to NECO and recoverable by NECO from its customers,
NECO shall be responsible for such costs.
ARTICLE 3. TERM AND REGULATORY APPROVAL
3.1 Term
The term of this Agreement shall begin at 12:01 am on the Closing Date
and continue until the earlier of: (a)11:59 pm on December 31, 2009; or (b)
the first date that NECO has no requirements for electric capacity and energy
to supply Standard Offer Service that are not satisfied by contracts resulting
from the Standard Offer Auction.
3.2 Obtaining and Maintaining Required Permits
(a) Performance under this Agreement is conditioned upon both Parties
securing and maintaining such federal, state or local approvals, grants or
permits as may be necessary for the sale and purchase of Wholesale Standard
Offer Service, which shall not include any approvals, grants, or permits
necessary for the operation of any particular generating facility. Each Party
shall use reasonable efforts to acquire and maintain such approvals, grants or
permits. If the acquisition or maintenance of a particular approval, grant,
or permit requires a modification to this Agreement, then the Parties agree to
negotiate in good-faith to reach a mutually agreeable modification of the
Agreement. The Parties are not required to reach such a mutually acceptable
modification.
(b) Seller will file this Agreement with FERC (and any other
regulatory agency as may have jurisdiction over the Agreement) in
accordance with the provisions of applicable laws, rules and
regulations. Seller will be responsible for any filing fees for filing
this Agreement with FERC (and any other regulatory agency as may have
jurisdiction over the Agreement) and for any regulatory assessments
associated with sales under this Agreement. FERC approval of this
Agreement shall be a condition to the obligations of the Parties
hereunder.
<PAGE>
ARTICLE 4. SALE AND PURCHASE
Seller shall sell and deliver to the Delivery Points, as defined in
ARTICLE 6, SECTION 6.1, and NECO shall purchase 90.78% of NECO's requirements
for Wholesale Standard Offer Service. NECO's requirements for Wholesale
Standard Offer Service shall be determined on the basis of ARTICLE 6, SECTION
6.3, below, and the price for such sale and purchase shall be as set forth in
ARTICLE 5, SECTION 5.1, below.
ARTICLE 5. PRICE AND BILLING
5.1 Price
For each kilowatt hour of Wholesale Standard Offer Service that Seller
delivers to the Delivery Points, in accordance with ARTICLE 6, SECTION 6.3,
below, NECO shall pay Seller a price equal to the following amounts for each
period during the term of this Agreement:
Period Price in Cents per kWh
1998 3.2 Cents
1999 3.5 Cents
2000 3.8 Cents
2001 3.8 Cents
2002 4.2 Cents
2003 4.7 Cents
2004 5.1 Cents
2005 5.5 Cents
2006 5.9 Cents
2007 6.3 Cents
2008 6.7 Cents
2009 7.1 Cents
In addition, in the event of increases in the market price of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999 as described in
Appendix A, NECO shall pay Seller a percentage of any incremental revenues
received by NECO as a result of NECO's Customer Rate Fuel Adjustment,
described in Appendix A, attached and incorporated herein by reference. Such
percentage, with respect to the billing month, shall equal the percentage of
NECO's total Standard Offer Service requirements during the month that Seller
delivers under this Agreement.
5.2 Payment
(a) On or before the tenth (10th) day of each month during the term of
this Agreement, NECO shall: (i) calculate the amount due and payable to
Seller pursuant to this ARTICLE 5 with respect to the preceding month;
and (ii) advise Seller of the schedule upon which it shall pay the
amount so calculated, which schedule shall comply with paragraph (b),
below. The amount payable shall be calculated by multiplying the Price
specified in the first paragraph of ARTICLE 5, SECTION 5.1, above, for
the applicable Contract Period by the quantity of Wholesale Standard
Offer Service delivered by Seller to the Delivery Points for NECO's
Standard Offer Service customers in the month, as determined in
accordance with ARTICLE 6, SECTION 6.3, below. Because quantities
determined under SECTION 6.3 are estimated, subject to a reconciliation
process described in SECTION 6.3(d), quantities used in calculations
under this paragraph (a) shall be subject to adjustment, whether
positive or negative, in subsequent months' calculations, to reflect
that reconciliation process, and any adjusted quantities shall be
applied to the Price applicable during the month of the calculation
being adjusted. Seller's percentage of any Customer Rate Fuel
Adjustment incremental revenue shall be added to such amount.
(b) NECO shall pay Seller any amounts due and payable on or before the
twenty-fifth (25th) day after the date a calculation is made pursuant to
paragraph (a), provided that, if and to the extent NECO pays Seller any
portion of the amount due and payable before the twenty-fifth (25th) day
after a calculation is made, it shall be entitled, without interest or
penalty, to defer payment of an equal portion of the amount due and
payable for that month by the lesser of: (i) the same number of days
that the early payment preceded the twenty-fifth day after the
<PAGE>
calculation; and (ii) twenty-five (25) days. If all or any part of any
amount due and payable pursuant to paragraph (a) shall remain unpaid
thereafter, interest shall thereafter accrue and be payable to Seller on
such unpaid amount at a rate per annum equal to two percent (2%) above
the Prime Rate in effect on the date of such bill; provided, however, if
the amount due and payable is disputed, interest shall accrue and be
payable to Seller on the unpaid amount finally determined to be due and
payable at a rate per annum equal to the Prime Rate in effect on the
date of the calculation pursuant to paragraph (a); and provided,
further, no interest shall accrue in favor of Seller or NECO on amounts
that are added to or credited against a calculation due to the
adjustment of estimated quantities in accordance with paragraph (a) and
ARTICLE 6, SECTION 6.3.
(c) With respect to reconciliation adjustments pursuant to SECTION
6.3(d) or any error in a calculation (whether the amount is paid or
not), any overpayment, underpayment, or reconciliation adjustment will
be refunded or paid up, as appropriate. Interest shall accrue from the
date of the error or adjustment on the unpaid or overpaid amount finally
determined to be due and shall be calculated pursuant to Section 35.19a
of the Commission regulations.
5.3 Taxes, Fees and Levies
Seller shall be obligated to pay all present and future taxes, fees and
levies which may be assessed upon Seller by any entity upon the purchase or
sale of electricity covered by the Agreement. To the extent such taxes, fees,
and levies are allowed to be, and are actually, recoverable by NECO from its
customers, NECO shall reimburse Seller for such taxes, fees, and levies paid
by Seller. It is expressly agreed that Seller shall not be responsible for,
and shall be held harmless from, the Rhode Island Tax on gross receipts or
earnings (Public Service Corporation Tax, Chapter 44-13 of the Rhode Island
General Laws, as amended or superseded).
ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND
REPORTING OF HOURLY LOADS
6.1 Delivery
All electricity shall be delivered to NECO in the form of three-phase
sixty-hertz alternating current at any location on the NEPOOL PTF system or
NECO's System ("Delivery Points"). Title shall pass to NECO at the Delivery
Point and Seller shall incur no expense or risk beyond the Delivery Point
other than those described in SECTION 6.2. If the NEPOOL control area
experiences congestion, Seller will be responsible for any congestion costs
incurred in delivering power across the PTF system to NECO to the extent such
costs are imposed by NEPOOL or the ISO on suppliers. Seller shall be
responsible for all transmission and distribution costs associated with the
use of transmission systems outside of NEPOOL and any local point to point
charges and distribution charges needed to deliver the power to the NEPOOL
PTF.
6.2 Losses
Seller shall be responsible for all transmission and distribution losses
associated with the delivery of electricity supplied under this Agreement to
the meters of ultimate customers of NECO receiving retail Standard Offer
Service, provided, however, that losses do not include service to unmetered
facilities for which estimates of kWh use are available and provided, further,
that Seller shall not be responsible for unmetered use or consumption of
electricity by NECO's Affiliates. Seller shall provide NECO at the Delivery
Points with additional quantities of electricity and ancillary services to
cover such losses, but Seller shall not be entitled to payment under ARTICLE 5
of this Agreement for such additional quantity. The quantities required for
this purpose in each hour of a billing period shall be determined in
accordance with NEPOOL's, NEP's and NECO's filed procedures for loss
determination.
6.3 Determination and Reporting of Hourly Loads
<PAGE>
(a) To meet its NEPOOL obligations, Seller, or a NEPOOL member having
an own-load dispatch or settlement account with the NEPOOL billing
system with whom Seller has a load inclusion agreement, must report to
NEPOOL or the ISO the Standard Offer Service load for which Seller is
providing Wholesale Standard Offer Service pursuant to this Agreement,
including losses. To accomplish this, NECO will estimate its total
hourly Standard Offer Service load based upon average load profiles
developed for each NECO customer class and NECO's actual total hourly
load. Appendix B, attached and incorporated herein by reference,
provides a general description of the estimation process that NECO will
initially employ (the "Estimation Process"). NECO reserves the right,
subject to the approval of appropriate regulatory authorities having
jurisdiction to modify the Estimation Process in the future, provided
that any such modification be designed to improve the accuracy of its
results, and provided further that NECO shall consult with Seller and
other similarly situated sellers to the maximum extent permitted by any
applicable standards of conduct. NECO will report to NEPOOL, on behalf
of Seller or such other NEPOOL member, Seller's hourly Standard Offer
Service load, which shall equal the portion of NECO's estimated total
Standard Offer Service hourly load for which Seller is responsible for
supplying Wholesale Standard Offer Service under this Agreement.
(b) NECO will report to NEPOOL or the ISO Seller's hourly adjusted
Standard Offer Service loads by 12:00 noon of the second following
business day. This adjusted load should be added by NEPOOL or the ISO
to the other NEPOOL load of Seller or such other NEPOOL member.
(c) At the end of each month, NECO shall aggregate Seller's hourly
loads for the month as determined by the Estimation Process. For
purposes of SECTION 5.1, above, the result of the Estimation Process,
less losses to the Standard Offer Service customers' meters determined
as specified in ARTICLE 6 SECTION 6.2, above, will be deemed to be the
quantity of Wholesale Standard Offer Service delivered by Seller to the
Delivery Points in a month.
(d) To refine the estimates of Seller's monthly Standard Offer Service
load developed by the Estimation Process, a monthly calculation will be
performed to reconcile the original estimate of Seller's Standard Offer
Service loads to actual customer usage based on meter reads. NECO will
apply any resulting billing adjustment (debit or credit) to Seller's
account no later than the last day of the third month following the
billing month. Appendix B, attached and incorporated herein by
reference, also provides a general description of this reconciliation
process.
ARTICLE 7. DEFAULT AND TERMINATION
7.1 Material Breach and Termination
(a) (i) If NECO fails in any material respect to comply with,
observe or perform any covenant, warranty or obligation
under this Agreement (except due to causes excused by force
majeure or attributable to Seller's wrongful act or wrongful
failure to act); and
(ii) After receipt of written notice from Seller such failure
continues for the Cure Period (as defined below), or, if
such failure cannot be reasonably cured within the Cure
Period, such further period as shall reasonably be required
to effect such cure (except in the case of a payment
default), provided that NECO commences within the Cure
Period to effect such cure and at all times thereafter
proceeds diligently to complete such cure as quickly as
possible; then
(iii) Seller shall have the right to terminate this Agreement,
subject to paragraph (c) below. For purposes of this
Section 7.1(a), the Cure Period shall mean five days in the
case of a failure by NECO to fulfill its payment obligations
pursuant to Section 5.2 and forty-five (45) days in the case
of a failure by NECO to comply with, observe or perform any
other covenant, warranty or obligation under this Agreement.
If an unexcused failure to pay continues for fifteen (15)
<PAGE>
days, Seller shall have the right to suspend service until
payment is made in full and appropriate security is posted
for future payments or to terminate this Agreement.
(b) (i) If Seller fails in any material respect to comply with,
observe, or perform any covenant, warranty or obligation
under this Agreement (except due to causes excused by force
majeure or attributable to NECO's wrongful act or wrongful
failure to act); and
(ii) After receipt of written notice from NECO such failure
continues for a period of forty-five (45) days, or, if such
failure cannot be reasonably cured within such forty-five
(45) day period, such further period as shall reasonably be
required to effect such cure, provided that Seller commences
within such forty-five (45) day period to effect such cure
and at all times thereafter proceeds diligently to complete
such cure as quickly as possible; then
(iii) NECO shall have the right to terminate this Agreement,
subject to paragraph (c) below.
(c) Any termination arising out of the exercise of the termination
rights specified in paragraphs (a) or (b) above (with the exception of
termination for a payment default) may not take effect unless and until an
arbitrator (pursuant to ARTICLE 15, SECTION 15.2 of this Agreement) has made a
ruling that the exercise of such termination right was valid. The fact that
one party alleged to be in material breach of this Agreement ("Alleged
Breaching Party") complies with the request of the other to cure an alleged
material breach shall not be considered by the arbitrator as an admission
against the Alleged Breaching Party or evidence that such party was or was not
in material breach.
(d) Nothing in this SECTION 7.1 shall be construed to limit the right
of any party to seek any remedies for damages, as limited by ARTICLE 9 of this
Agreement, even if a cure of an alleged breach is made within the periods of
time specified for curing any such breach stated above. The provisions of
this SECTION 7.1 are intended only to provide the exclusive process through
which one party may exercise and effectuate its right to terminate this
Agreement as a result of a material breach of this Agreement.
ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES
8.1 Notices
Any notice, demand, or request required or authorized by this Agreement
to be given by one party to another party shall be in writing. It shall
either be sent by facsimile (confirmed by telephone), overnight courier,
personally delivered and acknowledged in writing or by registered or certified
mail, (return receipt requested) postage prepaid, to the representative of the
other party designated in this ARTICLE 8. Any such notice, demand, or request
shall be deemed to be given (i) when sent by facsimile confirmed by telephone,
(ii) when actually received if delivered by courier or personal deliver or
(iii) three (3) days after deposit in the United States mail, if sent by first
class mail.
Notices and other communications by Seller to NECO shall be addressed
to:
The Narragansett Electric Company
c/o New England Power Service Company
25 Research Drive
Westborough, MA 01582
Attention: Michael J. Hager
Fax: (508) 389-3001
Notices and other communications by NECO to Seller shall be addressed
to:
USGen Acquisition Corporation
7500 Old Georgetown Road, 13th Floor
Bethesda, MD 20814
Attention: Stephen A. Herman
Fax: (301) 718-6913
<PAGE>
Any party may change its representative by written notice to the others.
8.2 Authority of Representative
The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall
have full authority to act for their respective principals in all technical
matters relating to the performance of this Agreement. They shall not,
however, have the authority to amend, modify, or waive any provision of this
Agreement unless they are authorized officers of their respective entities.
ARTICLE 9. LIABILITY, INDEMNIFICATION, AND
RELATIONSHIP OF PARTIES
9.1 Limitation on Consequential, Incidental and Indirect Damages
To the fullest extent permissible by law, neither NECO nor Seller, nor
their respective officers, directors, agents, employees, parent or affiliates,
successor or assigns, or their respective officers, directors, agents, or
employees, successors, or assigns, shall be liable to the other party or its
parent, subsidiaries, affiliates, officers, directors, agents, employees,
successors or assigns, for claims, suits, actions or causes of action for
incidental, indirect, special, punitive, multiple or consequential damages
(including attorney's fees or litigation costs) connected with or resulting
from performance or non-performance of this Agreement, or any actions
undertaken in connection with or related to this Agreement, including without
limitation any such damages which are based upon causes of action for breach
of contract, tort (including negligence and misrepresentation), breach of
warranty, strict liability, Rhode Island Gen. Laws Title 6, c. 13.1, statute,
operation of law, or any other theory of recovery. The provisions of this
SECTION 9.1 shall apply regardless of fault and shall survive termination,
cancellation, suspension, completion or expiration of this Agreement.
9.2 Recovery of Direct Damages Permitted
Notwithstanding the provisions of ARTICLE 9, SECTION 9.1, subject to the
duty to mitigate damages as provided under common law of damages recovery,
both NECO and Seller shall be entitled to recover their actual, direct damages
(i) incurred as a result of the other party's breach of this Agreement or (ii)
incurred as a result of any other claim arising out of any action undertaken
in connection with or related to this Agreement. For purposes of avoiding any
disputes about the difference between direct damages and consequential
damages, the parties agree as follows:
(a) (1) To the extent that NECO is found to be in breach of this
Agreement or liable under another cause of action; and
(2) as a result of such breach or event giving rise to the cause
of action, Seller suffers loss of profits that Seller
reasonably expected to have received from NECO under this
Agreement had NECO performed under this Agreement; then
(3) Seller shall be entitled to recover any lost profits that
Seller can demonstrate it lost or will lose as a result of
NECO's breach, subject to the duty to mitigate.
(b) (1) To the extent that Seller fails to provide NECO Wholesale
Standard Offer Service Power under the terms of this
Agreement; and
(2) as a result, Seller is found to be in material breach of
this Agreement or liable under another cause of action; and
(3) subject to the duty to mitigate, NECO purchases (as a result
of Seller's failure) power from a third party at a price
that is higher than what NECO would have paid under the
terms of this Agreement, NECO may recover the difference
between the price NECO paid to such third party and the
price it would have paid had Seller performed; provided,
however, Seller shall not be liable to NECO for lost profits
associated with any expected revenue streams from the sale
of power to third parties or lost profits from any other
contracts or sales.
<PAGE>
(c) Except as provided in paragraphs (a) and (b) above, neither NECO
nor Seller shall be liable to the other for lost profits arising out of
performance, or non-performance of this Agreement, whether such lost profits
may be categorized as direct, incidental, indirect, or consequential damages
and irrespective of whether such claims are based upon warranty, tort, strict
liability, contract, statute (including R.I. G.L. Title 6, c. 13.1), operation
of law or otherwise.
9.3 Indemnification
(a) Seller agrees to defend, indemnify and save NECO, its officers,
directors, employees, agents, successors, assigns, and Affiliates and their
officers, directors, employees, and agents harmless from and against any and
all claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by Seller, its officers,
directors, employees, agents or affiliates or caused by or sustained on its
facilities, except to the extent caused by an act of negligence or willful
misconduct by an officer, director, agent, employee or Affiliate of NECO or
their successors or assigns.
(b) NECO agrees to defend, indemnify and save Seller, its officers,
directors, employees, agents, successors, assigns, and affiliates and their
officers, directors, employees, and agents harmless from and against any and
all claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by NECO, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by
an officer, director, agent, employee or Affiliate of Seller or their
successors or assigns.
(c) If any party intends to seek indemnification under this ARTICLE
from the other party with respect to any action or claim, the party seeking
indemnification shall give the other party notice of such claim or action
within fifteen (15) days of the commencement of, or actual knowledge of, such
claim or action. Such party seeking indemnification shall have the right, at
its sole cost and expense, to participate in the defense of any such claim or
action. The party seeking indemnification shall not compromise or settle any
such claim or action without the prior consent of the other party, which
consent shall not be unreasonably withheld.
9.4 Independent Contractor Status
Nothing in this Agreement shall be construed as creating any
relationship between NECO and Seller other than that of independent
contractors for the sale and purchase of electricity provided as Wholesale
Standard Offer Service.
ARTICLE 10. ASSIGNMENT
10.1 Assignment
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto,
including by operation of law without the prior written consent of the other
party, nor is this Agreement intended to confer upon any other Person except
the parties hereto any rights or remedies hereunder. Notwithstanding the
foregoing, (i) NECO may, without Seller's prior written consent, (A) assign
all or a portion of its rights and obligations under this Agreement to any
Affiliate of NECO or (B) assign its rights and obligations hereunder, or
transfer such rights and obligations by operation of law, to any corporation
or other entity with which or into which NECO shall merge or consolidate or to
which NECO shall transfer all or substantially all of its assets, provided
that such Affiliate or other entity agrees to be bound by the terms thereof;
provided, in either case, that the assignee or transferor shall have senior
securities rated investment grade or better; (ii) the Seller may assign all of
its rights and obligations hereunder to any wholly owned Subsidiary (direct or
indirect) of PG&E Corporation and upon NECO's receipt of notice from Seller of
any such assignment, the Seller will be released from all liabilities and
obligations hereunder, accrued and unaccrued, such assignee will be deemed to
have assumed, ratified, agreed to be bound by and perform all such liabilities
and obligations, and all references herein to "Seller" shall thereafter be
<PAGE>
deemed references to such assignee, in each case without the necessity for
further act or evidence by the parties hereto or such assignee; provided,
however, that no such assignment and assumption shall release the Buyer from
its liabilities and obligations hereunder unless the assignee shall have
acquired all or substantially all of the Buyer's assets; provided, further,
however, that no such assignment and assumption shall relieve or in any way
discharge PG&E Corporation from the performance of its duties and obligations
under the Guaranty dated as of the date of this Agreement executed by PG&E
Corporation, and (iii) the Seller or its permitted assignee may assign,
transfer, pledge or otherwise dispose of its rights and interests hereunder to
a trustee or lending institution(s) for the purposes of financing or
refinancing the Purchased Assets, including upon or pursuant to the exercise
of remedies under such financing or refinancing, or by way of assignments,
transfers, conveyances or dispositions in lieu thereof; provided, however,
that no such assignment or disposition shall relieve or in any way discharge
the Seller or such assignee from the performance of its duties and obligations
under this Agreement. NECO agrees to execute and deliver such documents as
may be reasonably necessary to accomplish any such assignment, transfer,
conveyance, pledge or disposition of rights hereunder so long as NECO's rights
under this Agreement are not thereby altered, amended, diminished or otherwise
impaired.
ARTICLE 11. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the parties hereto and their respective permitted successors and assigns.
ARTICLE 12. FORCE MAJEURE
12.1 Force Majeure Standard
The parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise, if and
only to the extent that they are unable to so perform or are prevented from
performing by an event of force majeure.
12.2 Force Majeure Definition
An event of force majeure includes, without limitation, storm, flood,
lightning, drought, earthquake, fire, explosion, equipment failure, civil
disturbance, labor dispute, act of God or the public enemy, action of a court
or public authority, or any other cause beyond a party's control, but only if
and to the extent that the event directly affects the availability of the
transmission or distribution facilities of NEPOOL, NECO or an Affiliate
necessary to deliver Wholesale Standard Offer Service to NECO's customers.
Events affecting the availability or cost of operating any generating facility
shall not be events of force majeure.
12.3 Obligation to Diligently Cure Force Majeure
If any party shall rely on the occurrence of an event or condition
described in ARTICLE 12, SECTION 12.2, above, as a basis for being excused
from performance of its obligations under this Agreement, then the party
relying on the event or condition shall:
a. provide written notice to the other parties promptly but in
no event later than 5 days of the occurrence of the event or
condition giving an estimation of its expected duration and
the probable impact on the performance of its obligations
hereunder;
b. exercise all reasonable efforts to continue to perform its
obligations hereunder;
c. expeditiously take reasonable action to correct or cure the
event or condition excusing performance; provided that
settlement of strikes or other labor disputes will be
completely within the sole discretion of the party affected
by such strike or labor dispute;
<PAGE>
d. exercise all reasonable efforts to mitigate or limit damages
to the other parties to the extent such action will not
adversely affect its own interests; and
e. provide prompt notice to the other parties of the cessation
of the event or condition giving rise to its excuse from
performance.
ARTICLE 13. WAIVERS
The failure of either party to insist in any one or more instance upon
strict performance of any of the provisions of this Agreement or to take
advantage of any of its rights under this Agreement shall not be construed as
a general waiver of any such provision or the relinquishment of any such
right, but the same shall continue and remain in full force and effect, except
with respect to the particular instance or instances.
ARTICLE 14. REGULATION
14.1 Laws and Regulations
This Agreement and all rights, obligations, and performances of the
parties hereunder, are subject to all applicable Federal and state laws, and
to all duly promulgated orders and other duly authorized action of
governmental authority having jurisdiction.
14.2 NEPOOL Requirements
This Agreement must comply with all NEPOOL Criteria, Rules, and Standard
Operating Procedures ("Rules"). If, during the term of this Agreement, the
NEPOOL Agreement is terminated or amended in a manner that would eliminate or
materially alter a Rule affecting a right or obligation of a party hereunder,
or if such a Rule is eliminated or materially altered by NEPOOL, the parties
agree to negotiate in good faith in an attempt to amend this Agreement to
incorporate a replacement Rule ("Replacement Rule"). The intent of the
parties is that any such Replacement Rule reflect, as closely as possible, the
intent and substance of the Rule being replaced as such Rule was in effect
prior to such termination or amendment of the NEPOOL Agreement or elimination
or alteration of the Rule. If the parties are unable to reach agreement on
such an amendment, the parties agree to submit the matter to arbitration under
the terms of Appendix C, attached and incorporated herein by reference, and to
seek a resolution of the matter consistent with the above stated intent.
ARTICLE 15. INTERPRETATION, DISPUTE RESOLUTION
15.1 Interpretation
The interpretation and performance of this Agreement shall be in
accordance with and controlled by the laws of The State of Rhode Island.
15.2 Dispute Resolution
All disputes between NECO and Seller arising out of or relating to this
Agreement which are defined as "Arbitrable Claims" in SECTION 2 of Appendix C,
attached and incorporated herein by reference, shall be resolved by binding
arbitration and be governed by the terms of such Arbitration Agreement. Any
arbitration of an Arbitrable Claim that is substantially related to an
arbitrable claim under a Wholesale Standard Offer Service Agreement among
Seller, Massachusetts Electric Company, and Nantucket Electric Company shall
be conducted jointly with the arbitration of the latter claim, before the same
panel of arbitrators, with NECO, Massachusetts Electric Company, and Nantucket
Electric Company jointly exercising their rights regarding the selection of
arbitrators. Any decisions of the arbitrators shall be final and binding upon
the parties.
ARTICLE 16. SEVERABILITY
If any provision or provisions of this Agreement shall be held invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
<PAGE>
ARTICLE 17. MODIFICATIONS
No modification to this Agreement will be binding on any party unless it
is in writing and signed by all parties.
ARTICLE 18. SUPERSESSION
This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and its execution supersedes any other
agreements, written or oral, between the parties concerning such subject
matter.
ARTICLE 19. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
executed counterpart shall have the same force and effect as an original
instrument.
ARTICLE 20. HEADINGS
Article and Section headings used throughout this Agreement are for the
convenience of the parties only and are not to be construed as part of this
Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.
THE NARRAGANSETT ELECTRIC COMPANY
BY:
Its
USGEN ACQUISITION CORPORATION
BY:
Its
<PAGE>
APPENDIX A. INCREMENTAL REVENUES
FROM NECO CUSTOMER RATE FUEL ADJUSTMENT
In the event of substantial increases in the market prices of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999, incremental
revenues received by NECO as a result of NECO's Customer Rate Fuel
Adjustment, described below, will be fully allocated among suppliers of
Wholesale Standard Offer Service Power in proportion to the percentage of
NECO's total Standard Offer Service requirements during the month that such
supplier delivers under its respective agreement with NECO.
NECO's Customer Rate in effect for a given billing month is multiplied
by a "Fuel Adjustment" that is set equal to 1.0 and thus has no impact on the
Customer Rate unless the "Market Gas Price" plus "Market Oil Price" for the
billing month exceeds the "Fuel Trigger Point" then in effect, where:
The NECO Customer rate for retail customers who elect Standard
Offer Service by choice or inaction is the following
predetermined, flat rate for energy consumed:
Calendar Year Price per Kilowatt hour
1998 3.2 cents
1999 3.5 cents
2000 3.8 cents
2001 3.8 cents
2002 4.2 cents
2003 4.7 cents
2004 5.1 cents
2005 5.5 cents
2006 5.9 cents
2007 6.3 cents
2008 6.7 cents
2009 7.1 cents
Market Gas Price is the average of the values of "Gas Index" for the
most recent available twelve months, where:
Gas Index is the average of the daily settlement prices for the
last three days that the NYMEX Contract (as defined below) for the
month of delivery trades as reported in the "Wall Street Journal",
expressed in dollars per MMBtu. NYMEX Contract shall mean the New
York Mercantile Exchange Natural Gas Futures Contract as approved
by the Commodity Futures Trading Commission for the purchase and
sale of natural gas at Henry Hub;
Market Oil Price is the average of the values of "Oil Index" for the
most recent available twelve months, where:
Oil Index is the average for the month of the daily low quotations
for cargo delivery of 1.0% sulphur No. 6 residual fuel oil into
New York harbor, as reported in "Platt's Oilgram U.S. Marketscan"
in dollars per barrel and converted to dollars per MMBtu by
dividing by 6.3; and
If the indices referred to above should become obsolete or no longer
suitable, NECO shall file alternate indices with the RIPUC.
Fuel Trigger Point is the following amounts, expressed in dollars per
MMBtu, applicable for all months in the specified calendar year:
2000 $5.35/MMBtu
2001 $5.35
2002 $6.09
2003 $7.01
2004 $7.74
2005 $8.48
2006 $9.22
2007 $9.95
2008 $10.69
2009 $11.42
<PAGE>
In the event that the Fuel Trigger Point is exceeded, the Fuel
Adjustment value for the billing month is determined based according to the
following formula:
Fuel = (Market Gas Price +$.60/MMBtu)+(Market Oil Price +$.04/MMBtu)
Adjustment ____________________________________________________________
Fuel Trigger Point+$.60+$.04/MMBtu
Where:
Market Gas Price, Market Oil Price and Fuel Trigger Point are as
defined above. The values of $.60 and $.04/MMBtu represent for
gas and oil respectively, estimated basis differentials or market
costs of transportation from the point where the index is
calculated to a proxy power plant in the New England market.
For example if at a point in the year 2002 the Market Gas Price and
Market Oil Price total $6.50 ($3.50/MMBtu plus $3.00/MMBtu respectively), the
Fuel Trigger Point of 6.09 would be exceeded. In this case the Fuel
Adjustment value would be:
($3.50+$.60/MMBtu)+($3.00+$.04/MMBtu) = 1.0609
_____________________________________
$6.09+$.60+$.04/MMBtu
The Customer Rate paid to NECO is increased by this Fuel Adjustment factor for
the billing month, becoming 4.4548 cents/kWh (4.2 x 1.0609).
In subsequent months the same comparisons are made and, if applicable, a
Fuel Adjustment determined.
<PAGE>
APPENDIX B. ESTIMATION OF SUPPLIER HOURLY LOADS
OVERVIEW
Generating units operated by suppliers are dispatched by the power pool
to meet the region's electrical requirements reliably, and at the lowest
possible cost. As a result, a supplier's electricity production may not match
the demand of its customers. In each hour some suppliers with low cost
production units are net sellers of electricity to the pool, while other
suppliers are purchasing power from the pool to meet the demand of their
customers. To determine the extent to which suppliers are net buyers or
sellers on an hourly basis, it is necessary to estimate the hourly aggregate
demand for all of the customers served by each supplier ("own-load"). NECO
will estimate Seller's Wholesale Standard Offer Service "own-load" within
NECO's service territory and report the hourly results to NEPOOL or the ISO on
a daily basis.
The estimation process is a cost effective approach to producing results
that are reliable, unbiased and reasonably accurate. The hourly load
estimates will be based on rate class load profiles which will be developed
from statistically designed samples. Each day, the class load shapes will be
scaled to the population of customers served by each supplier contracting with
NECO as a result of the Standard Offer Auction ("Standard Offer Auction
Supplier"), Seller, and any other entity providing Wholesale Standard Offer
Service. In cases where telemetered data on individual customers are
available, they will be used in place of the estimated shapes. On a monthly
basis, the estimates will be refined by incorporating actual usage data
obtained from meter readings. In both processes, the sum of all suppliers'
estimated Standard Offer Service loads will match the total load delivered
into the distribution system. A description of the estimation process
follows.
DAILY ESTIMATION OF SUPPLIERS' OWN LOAD
The daily process estimates the hourly load for each Standard Offer
Auction Supplier, Seller, and any other entity providing Wholesale Standard
Offer Service, for the previous day. There are four components in this
process:
- Select a proxy date from the previous year with characteristics
which best match the day for which the hourly demand estimates are
being produced. Extract class load shapes for the selected proxy
date from the load research data base.
- Scale the class load shapes appropriately for each individual
customer based on the usage level of the customer relative to the
class average usage level.
- Calculate a factor for each customer which reflects their relative
usage level and includes an adjustment for losses ("load
adjustment factor"). Aggregate the load adjustment factors across
the customers served by each supplier in each class.
- Produce a preliminary estimate of each supplier's hourly loads by
combining the proxy day class load shapes with the supplier's
total load adjustment factors. Aggregate the loads across the
classes for each supplier.
- Adjust the preliminary hourly supplier estimates so that their sum
is equal to NECO's actual hourly metered loads (as metered at the
point of delivery to the distribution system) by allocating any
differences to suppliers in proportion to their estimated load.
MONTHLY RECONCILIATION PROCESS
The monthly process will improve the estimates of Standard Offer Service
supplier loads by incorporating the most recent customer usage information,
which will be available after the monthly meter readings are processed. A
comparison will be made between customers' estimated and actual usage, by
billing cycle, then summed across billing cycles for each supplier. The ratio
between the actual kWh and the estimated kWh reflects the kWh amount for which
the supplier may have been overcharged or undercharged by NEPOOL or the ISO
<PAGE>
during the month. This ratio will be used to develop a kWh adjustment amount
for each supplier for the calendar month. The sum of the adjustments will be
zero because the total kWh will still be constrained to equal NECO's actual
hourly metered Standard Offer Service loads during the month.
<PAGE>
APPENDIX C. ARBITRATION AGREEMENT
ARBITRATION AGREEMENT
This Arbitration Agreement, dated as of _______________________ (date of
Wholesale Standard Offer Service Agreement), is entered into between The
Narragansett Electric Company, a Rhode Island corporation ("NECO") and
_______________________________, a _______________________ (describe entity)
("Seller"). Reference is made to that certain Wholesale Standard Offer
Service Agreement dated as of ___________________, 199__ (the "Service
Agreement") between NECO and Seller. Unless otherwise specified or apparent
from the context of this Arbitration Agreement, the term "Party" shall mean
either NECO or Seller, or both of them.
WHEREAS, NECO and Seller wish to avoid the burden, time, and expense of
court proceedings with respect to any disputes that may arise from or relate
to the Service Agreement, and to submit such disputes to mandatory binding
arbitration if they cannot first be resolved through negotiation and
mediation.
NOW, THEREFORE, NECO and SELLER AGREE AS FOLLOWS:
1. Mediation
Before resorting to mediation or arbitration under this Arbitration
Agreement, the Parties will try to resolve promptly through negotiation any
Arbitrable claim, as defined below. If the Arbitrable Claim has not been
resolved through negotiation within ten (10) days after the existence of the
Arbitrable Claim has been brought to the attention of the other Party in a
writing, any Party may request in writing to resolve the Arbitrable Claim
through mediation conducted by a mediator selected by agreement of the
Parties. The mediation procedure shall be determined by the Parties in
consultation with the mediator. Any medication pursuant hereto shall be kept
confidential. The fees and expenses of the mediator shall be borne equally by
the Parties. If the Parties are unable to agree upon the identity of a
mediator or a mediation procedure within ten (10) days after a Party has
requested mediation in writing or if the Arbitrable Claim has not been
resolved to the satisfaction of either NECO or Seller within forty (40) days
after the Parties have selected a mediator and agreed upon a mediation
procedure, either Party may invoke arbitration pursuant to the following
sections by notifying the other Party of such selection in writing consistent
with Section 3(c), below.
2. Mandatory Arbitration
(a) Except as provided in paragraph (b) of this Section 2 and in
Section 8, below, any case, controversy or claim arising out of or relating to
the Service Agreement, its breach, or any other disputes arising out of the
business relationship created by the Service Agreement, of whatever nature,
including but not limited to any claim based in contract, in law, in equity,
any statute, regulation, or theory of law now in existence or which may come
into existence in the future, whether known or unknown, including without
limitation, claims based upon deceit, fraudulent inducement,
misrepresentation, 18 U.S.C sec. 1962 and 1964 (RICO), and R.I. G.L. Title 6,
c. 13.1, the federal and state antitrust laws (collectively, the "Arbitrable
Claims"), which cannot be resolved by negotiation or mediation, as provided in
Section 1 above, shall be submitted to mandatory, binding, and final
arbitration in accordance with procedures set forth in this Agreement, which
shall constitute the exclusive remedy for any and all Arbitrable Claims.
(b) Notwithstanding paragraph (a) above, physical accidents or events
giving rise to negligence or intentional tort claims for the recovery of
property damages and/or damages for personal injury and failure to make
payments due under Section 5.2 of the Service Agreement shall not be
considered "Arbitrable Claims." However disputes regarding the interpretation
or scope of any indemnification clauses in the Service Agreement shall be
subject to arbitration, even if the dispute relates to whether one Party must
indemnify the other for property damages and/or damages for personal injury,
the recovery of which was or will be determined in a court of law.
<PAGE>
(c) Each Party agrees that it will not attempt to circumvent this
Arbitration Agreement by coordinating or cooperating with their respective
parent companies of affiliates or guarantors in the filing of a legal action
in the name of any of the parent companies or affiliates or guarantors of the
Parties to this Arbitration Agreement regarding claims that otherwise are
subject to this Arbitration Agreement. Any Party failing to comply with this
provision shall indemnify the other Party against, and hold the other harmless
from, the costs (including reasonable litigation costs) incurred by the other
in defending any and all claims brought by a parent company or affiliate or
guarantor of the other in a court of law regarding claims that otherwise would
be Arbitrable Claims under this Arbitration Agreement.
3. Selection and Qualification of Arbitrators
(a) Any arbitration shall be conducted by a panel of three neutral
arbitrators, consisting of (i) a practicing lawyer admitted to practice in
the Commonwealth of Massachusetts; (ii) a person with professional experience
in and substantial knowledge of the power generation industry in any one or
more of the New England States, who may be, but need not be a lawyer, and
(iii) a person with professional experience in and substantial knowledge of
power markets in any one or more of the New England States, who may, but need
not be, a lawyer (collectively, the "Arbitration Panel"). For purposes of
this Arbitration Agreement, an arbitrator or candidate shall be considered
"neutral" only if the arbitrator or candidate has not previously served as an
arbitrator for a Party or one of its affiliates or guarantors and is not a
present or former lawyer, employee or consultant of a Party or any of its
affiliates or guarantors.
(b) Any Party entitled to commence arbitration hereunder shall do so
by serving a written Notice of Arbitration briefly describing the Arbitrable
Claims and the Agreements under which they are brought. Service of such
Notice of Arbitration shall be complete upon receipt by the person designated
for each party at the addresses specified in Section 12 below.
(c) Within twenty (20) days after service of a Notice of Arbitration,
each Party shall serve upon the other Party a list of seven neutral candidates
for each of the three panel members described in subparagraph (a) above.
(d) Within twenty (20) days after service of the lists referred to in
subparagraph (c), NECO and Seller shall then strike from the other's lists any
two candidates from each of the lists, for any reason whatsoever. For the
remaining candidates each Party shall rank each candidate on its three lists
from one to five and shall do the same for the other Party's lists.
(e) The candidates in each of the three categories with the lowest
total score shall be invited to serve as panel members. In the event that the
candidate in any of the three categories with the lowest total score is unable
or unwilling to serve, or has a potential conflict of interest not consented
to by each Party, then the candidate with the next lowest score in that
category shall be invited to serve, subject to full disclosure by each
candidate of, and consent by each Party to any potential conflicts of
interests. This process shall be repeated until a full arbitration Panel is
selected or the list of candidates for that category is exhausted. If the
list of candidates for a category is exhausted the Parties shall exchange a
new list of candidates for that category and the procedures set forth above
shall be repeated a second time.
(f) If the parties cannot select a full Arbitration Panel in
accordance with these procedures than any Party may request that a court of
competent jurisdiction appoint the remaining members subject to their
qualifications, willingness and ability to serve as provided above.
(g) The American Arbitration Association shall be appointed to
facilitate and administer the parties' compliance with the procedures set
forth above.
4. Time Schedule
The Arbitration shall be conducted as expeditiously as possible. The
Arbitration Panel shall schedule a pre-hearing conference and hearings as it
deems advisable and shall use its best efforts to schedule consecutive days of
hearings. Hearings shall be limited to a total of ten (10) days. The
Arbitration Panel shall issue its final decision and award within thirty (30)
<PAGE>
days of the close of the hearings, which shall be accompanied by a written,
reasoned opinion.
5. Remedies
(a) The Arbitration Panel shall not award punitive or multiple damages
or any other damages not measured by the prevailing Party's actual damages -
except that the Arbitration Panel, in its sole discretion, may shift all or a
portion of the costs of the Arbitration to any Party.
(b) Any award of damages by the Arbitration Panel shall be determined,
limited and controlled by the damages limitation clauses of the Service
Aereement applicable to the dispute before the Arbitration Panel.
(c) The Arbitration Panel may, in its discretion, award pre-award and
post-award interest on any damages award; provided, however, that the rate of
pre-award or post-award interest shall not exceed a rate equal to the rate
provided for post-judgment interest by 28 U.S.C. sec. 1961 as published from
time to time by the Administrative Office of the United States Courts based on
the equivalent coupon issue yield for auctions of 52-week Treasury bills.
6. Confidentiality
The existence, contents, or results of any mediation or arbitration
hereunder may not be disclosed without the prior written consent of both
Parties; provided, however, either Party may make disclosures as may be
necessary to fulfill regulatory obligations to any regulatory bodies having
jurisdiction, and may inform their lenders, affiliates, auditors and insurers,
as necessary, under pledge of confidentiality and can consult with experts as
required in connection with the arbitration under pledge of confidentiality.
If any Party seeks preliminary injunctive relief from any court to preserve
the status quo or avoid irreparable harm pending mediation or arbitration, the
Parties agree to use best efforts to keep the court proceedings confidential,
to the maximum extent permitted by law.
7. FERC Jurisdiction over Certain Disputes
(a) Nothing in this Arbitration Agreement shall preclude, or be
construed to preclude, any Party from filing a petition or complaint with the
Federal Energy Regulatory Commission ("FERC") with respect to any Arbitrable
Claim. In such case, the other Party may request FERC to reject or to waive
jurisdiction. If the FERC rejects or waives jurisdiction, with respect to all
or a portion of the claim, the portion of the claim not so accepted by FERC
shall be resolved through arbitration, as provided in this Arbitration
Agreement. To the extent that FERC asserts or accepts jurisdiction over the
claim, the decision, finding of fact, or order of FERC shall be final and
binding, and any arbitration proceedings that may have commenced prior to the
assertion or acceptance of jurisdiction by FERC shall be stayed, pending the
outcome of the FERC proceedings.
(b) The Arbitration Panel shall have no authority to modify, and shall
be conclusively bound by, any decision, finding of fact, or order of FERC.
However, to the extent that a decision finding of fact, or order of FERC does
not provide a final or complete remedy to the Party seeking relief, such Party
may proceed to arbitration under this Arbitration Agreement to secure such
remedy, subject to the FERC decision, finding or order.
8. Preliminary Injunctive Relief
Nothing in this Arbitration Agreement shall preclude, or be construed to
preclude, the resort by either Party to a court of competent jurisdiction
solely for the purposes of securing a temporary or preliminary injunction to
preserve the status quo or avoid irreparable harm pending mediation or
arbitration pursuant to this Arbitration Agreement.
9. Governing Law
This Arbitration Agreement shall be construed, enforced in accordance
with, and governed by, the laws of the State of Rhode Island.
10. Location of Arbitration
Any arbitration hereunder shall be conducted in Boston, Massachusetts.
<PAGE>
11. Severability
If any section, subsection, sentence, or clause of this Arbitration
Agreement is adjudged illegal, invalid, or unenforceable, such illegality,
invalidity, or enforceability shall not affect the legality, validity, or
enforceability of the Arbitration Agreement as a whole or of any section,
subsection, sentence or clause hereof not so adjudged.
12. Notices
Any notices required to be given pursuant to this Arbitration Agreement
shall be in writing and sent to the receiving party by (i) certified mail,
return receipt requested, (ii) overnight delivery service, or (iii) facsimile
transmission (confirmed by telephone), addressed to the receiving party at the
address shown below or such other address as a party may subsequently
designate in writing. Any such notice shall be deemed to be given (i) three
days after deposit in the United States mail, if sent by mail, (ii) when
actually received if sent by overnight delivery service, or (iii) when sent,
if sent by facsimile and confirmed by telephone.
If to NECO: The Narragansett Electric Company
25 Research Drive
Westborough, Massachusetts 01582
Attention: General Counsel
Facsimile: (508) 389-2463
If to Seller
Attention:
Facsimile: ( )
In addition, the parties shall send copies of any notices required by
the terms of any of the Agreements, in accordance with the terms of each
Agreement.
IN WITNESS WHEREOF, Each Party has caused its duly authorized officers
to execute this Arbitration Agreement on the dates set forth below.
THE NARRAGANSETT ELECTRIC COMPANY
BY:
Its
USGEN ACQUISITION CORPORATION
BY:
Its
<PAGE>
<TABLE>
<CAPTION>
THE NARRAGANSETT ELECTRIC COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
Years Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Income $27,932 $22,954 $23,910 $14,589 $14,274
- ----------
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes 14,185 6,918 7,212 1,020 2,183
Deferred federal income taxes 79 4,675 3,512 3,930 2,199
Investment tax credits - net (495) (498) (503) (508) (508)
Interest on long-term debt 16,179 17,205 16,627 14,334 12,715
Interest on short-term debt and other 2,475 2,883 3,663 2,897 2,074
------- ------- ------- ------- -------
Net earnings available for fixed charges $60,355 $54,137 $54,421 $36,262 $32,937
------- ------- ------- ------- -------
Fixed charges:
Interest on long-term debt $16,179 $17,205 $16,627 $14,334 $12,715
Interest on short-term debt and other 2,475 2,883 3,663 2,897 2,074
------- ------- ------- ------- -------
Total fixed charges $18,654 $20,088 $20,290 $17,231 $14,789
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.24 2.69 2.68 2.10 2.23
- ----------------------------------
</TABLE>
<PAGE>
Annual Report 1997
The Narragansett Electric Company
A Subsidiary of
New England Electric System
[LOGO] Narragansett Electric
A NEES Company
<PAGE>
The Narragansett Electric Company
280 Melrose Street
Providence, Rhode Island 02901
Directors
(As of March 18, 1998)
Richard W. Frost
Vice President of the Company and of certain affiliates
Cheryl A. LaFleur
Senior Vice President, General Counsel, and Secretary of New
England Electric System
Robert L. McCabe
Chairman of the Company and of certain affiliates
Lawrence J. Reilly
President and Chief Executive Officer of the Company and of
certain affiliates
Michael F. Ryan
Vice President of the Company
Richard P. Sergel
President and Chief Executive Officer of New England Electric
System
Ronald L. Thomas
Manager of Labor Relations of the Company and of certain
affiliates
Officers
(As of March 18, 1998)
Robert L. McCabe
Chairman of the Company and of certain affiliates
Lawrence J. Reilly
President and Chief Executive Officer of the Company and of
certain affiliates
Lydia M. Pastuszek
Senior Vice President of the Company and of certain affiliates
Christopher E. Root
Senior Vice President of the Company and of certain affiliates
Richard W. Frost
Vice President of the Company and of certain affiliates
Michael E. Jesanis
Vice President of the Company and Senior Vice President and
Chief Financial Officer of New England Electric System
Shannon M. Larson
Vice President of the Company
<PAGE>
Richard Nadeau
Vice President of the Company
Michael F. Ryan
Vice President of the Company
Peter T. Zschokke*
Vice President of the Company
Ronald T. Gerwatowski
Secretary and General Counsel of the Company
John G. Cochrane
Treasurer of the Company and of certain affiliates, Vice
President of an affiliate, Assistant Treasurer of an affiliate
and Treasurer of New England Electric System
Robert King Wulff
Assistant Secretary of the Company and Clerk, Assistant Clerk or
Secretary of certain affiliates
Howard W. McDowell
Assistant Treasurer and Controller of the Company and of certain
affiliates, Treasurer or Controller of certain affiliates and
Assistant Secretary of an affiliate
* Effective April 1, 1998.
Transfer Agent, Dividend Paying Agent, and Registrar of Preferred
Stock, Fleet National Bank, Providence, Rhode Island
This report is not to be considered an offer to sell or buy or
solicitation of an offer to sell or buy any security.
<PAGE>
The Narragansett Electric Company
The Narragansett Electric Company (the Company) is a wholly
owned subsidiary of New England Electric System (NEES) operating
in Rhode Island. The Company's business is the distribution of
electricity at retail. Electric service is provided to
approximately 330,000 customers in 27 cities and towns having a
population of approximately 725,000 (1990 Census). The Company's
service area, which includes urban, suburban, and rural areas,
covers approximately 80 percent of Rhode Island, and includes the
cities of Providence, East Providence, Cranston, and Warwick.
The diversified economy of the Company's service area produces
fabricated metal products, electrical and industrial machinery,
transportation equipment, textiles, silverware, and chemical
products. In addition, a broad range of professional, banking,
medical, and educational institutions is served. In 1996,
legislation was enacted in the state of Rhode Island which
provided certain customers with choice of power supplier as early
as July 1, 1997. The balance of customers gained such choice on
January 1, 1998.
The properties of the Company include an integrated system of
transmission and distribution lines and substations. In
addition, the Company owns a 10 percent share of the 489 megawatt
Manchester Street generating station. The entire output of this
plant is made available to New England Power Company (NEP), the
Company's generation and transmission affiliate, as part of the
integrated NEES system. Under an all-requirements contract with
NEP, the Company purchased its electric energy requirements from
NEP. This contract has been amended to terminate the all-
requirements provision of the contract and allow NEP to recover
its above-market generation commitments through a transition
access charge, which the Company will collect from its customers.
For further information, refer to the "Industry Restructuring"
section of Financial Review.
In August 1997, the Company and NEP agreed to sell their
nonnuclear generating business, which includes Manchester Street,
to an independent third party. See the "Divestiture of
Generating Business" section of Financial Review.
<PAGE>
Report of Independent Accountants
The Narragansett Electric Company, Providence, Rhode Island:
We have audited the accompanying balance sheets of The
Narragansett Electric Company (the Company), a wholly owned
subsidiary of New England Electric System, as of December 31,
1997 and 1996 and the related statements of income, retained
earnings, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
March 2, 1998
<PAGE>
The Narragansett Electric Company
Financial Review
Industry Restructuring
Historically, electric utilities have provided their customers
bundled electric service within exclusive service territories.
As a result of a number of trends, including a disparity in
electric rates among regions of the country and new regulations
and legislation intended to foster competition, distribution
customers are being allowed to choose their power supplier, with
incumbent utilities required to deliver that electricity over
their transmission and distribution systems.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments (generation related)
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs."
In August 1996, the state of Rhode Island enacted legislation
that allows customers in that state the opportunity to choose
their power supplier. Under the Rhode Island statute, state
accounts, certain new customers, and the largest manufacturing
customers were able to choose their power supplier beginning on
July 1, 1997. The balance of Rhode Island customers gained the
ability to choose their power supplier on January 1, 1998. The
statute also provides a mechanism for the recovery of stranded
costs resulting from the introduction of customer choice of power
supplier.
As part of the implementation of the statute, the Company and
its affiliate, New England Power Company (NEP), reached a
settlement agreement with the Rhode Island Public Utilities
Commission (RIPUC), the Rhode Island Division of Public Utilities
and Carriers, and other parties representing all of its
distribution customers (the Rhode Island Settlement). The Rhode
Island Settlement provides for the recovery of stranded costs.
In November 1997, the Federal Energy Regulatory Commission (FERC)
conditionally approved the Rhode Island Settlement, subject to a
compliance filing to clarify the impact of the settlement on
nonsettling parties.
The Rhode Island Settlement requires NEP to sell power to the
Company at specified prices for resale to distribution customers
who do not choose a power supplier ("standard offer generation
service"). The total rates for customers purchasing this interim
power service from the Company are approximately 7 percent below
the total rates that were in effect during 1997. Pursuant to the
Rhode Island statute, the total rate for customers who do not
choose a power supplier is capped through 2009 at a level equal
to the 1996 rate adjusted upward for 80 percent of inflation and
for other factors beyond the control of the Company. The statute
also provided for the Company to increase distribution rates by
approximately $11 million in January 1997 and another $7 million
<PAGE>
in January 1998. The statute also provides that the Company may
request increased distribution rates which would take effect no
earlier than 1999.
In accordance with the Rhode Island Settlement, NEP's
wholesale contract with the Company has been amended effective
January 1, 1998. The Rhode Island statute provides that NEP's
stranded costs (the Company's share is 22 percent) will be
recovered from distribution customers through a transition access
charge, which will be collected by the Company. Under the Rhode
Island Settlement, the recovery of NEP's stranded costs is
divided into several categories. Unrecovered costs associated
with generating plants and regulatory assets would be recovered
over 12 years and would earn a return on equity of 11 percent.
The above-market component of purchased power contracts and
nuclear decommissioning costs would be recovered as incurred over
the life of those obligations, a period expected to extend beyond
12 years. Initially, the transition access charge would be set
at 2.8 cents per kilowatthour (kWh) and would be reduced upon
completion of the sale of NEP's generating business, as described
below.
In addition to addressing customer choice and the recovery of
stranded costs, the Rhode Island Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, the Company and NEP entered into an agreement to
sell substantially all of their nonnuclear generating business to
USGen New England, Inc. (USGen), an indirect wholly owned
subsidiary of PG&E Corporation (PG&E). See "Divestiture of
Generating Business" below. The net proceeds from the sale of
the nonnuclear generating business to USGen will be used to
reduce the transition access charge from 2.8 cents per kWh to
approximately 1.5 cents per kWh. In addition, the FERC accepted
the NEES companies' proposal in conjunction with their
divestiture filing that the recovery of the remaining above-
market nuclear generating plant investment and regulatory assets
be completed by the end of the year 2000.
Divestiture of Generating Business
As described above, in August 1997, the Company and NEP
(collectively, the Sellers) reached an agreement to sell their
nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
megawatts (MW) of capacity, as well as NEES' 100 percent interest
in Narragansett Energy Resources Company, a 20 percent general
partner in the Ocean State Power project, all of which has a book
value of $1.1 billion. USGen will pay the Sellers $1.59 billion
in cash, of which $225 million will be contingent upon the
introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. NEP will remit
to the Company a portion of the proceeds from the sale equal to
the Company's net book value of the Manchester Street plant.
<PAGE>
USGen will also reimburse the NEES companies for $85 million of
costs associated with early retirement and special severance
programs for employees affected by industry restructuring. USGen
will assume responsibility for environmental conditions at the
Sellers' nonnuclear generating stations. USGen will also assume
the Sellers' obligations under long-term fuel and fuel
transportation contracts and certain collective bargaining
agreements.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale, and
conditionally approved most supporting filings. While the timing
of receipt of final regulatory approvals is uncertain, receipt of
all approvals is unlikely before mid-1998. Closing is contingent
upon all regulatory approvals being obtained by February 1999.
Upon completion of the divestiture of the nonnuclear
generating business, the Company's share of NEP's stranded costs
which will be recovered from the Company's customers through the
transition access charge will be reduced from approximately $1
billion to $0.5 billion.
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions beginning in 1998 as a result of industry
restructuring and the sale of the nonnuclear generating business.
The NEES companies are in the process of offering early
retirement programs to their union and non-union employees,
contingent upon the closing of the sale of the nonnuclear
generating business to USGen. In addition, the NEES companies
intend to offer enhanced severance benefits to affected
employees. As previously described, the costs of the early
retirement and severance programs for all NEES companies are
expected to be substantially recovered from the proceeds of the
sale of the nonnuclear generating business. Since the early
retirement program is contingent upon the divestiture, its cost
will not be accrued until that time.
<PAGE>
Risk Factors
This annual report contains statements that may be considered
forward looking statements as defined under the securities laws.
Actual results may differ materially for the reasons discussed in
this Financial Review. While the Company believes that the
previously described settlement and legislation and the sale
agreement with USGen and other developments constitute
substantial progress in reducing the impacts associated with
industry restructuring, significant risks remain. These include,
but are not limited to: (i) the potential that ultimately the
Rhode Island Settlement will not be implemented in the manner
anticipated by the Company, (ii) the possibility of federal
legislation that would increase the risks above those contained
in the Rhode Island Settlement and statute, and (iii) the failure
to complete the sale of the nonnuclear generating business to
USGen. The major risk factors affecting the Company relate to
the possibility of adverse regulatory or judicial decisions or
legislation which limit the level of revenues the Company is
allowed to charge for its services or affect the costs the
Company incurs.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $35
million in net regulatory assets in compliance with FAS 71.
The Company believes the Rhode Island Settlement and statute
will enable the Company to recover through rates its specific
costs of providing ongoing distribution services and stranded
costs billed to it by NEP. The Company believes these factors
will allow it to continue to apply FAS 71.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations.
Overview of Financial Results
Net income for 1997 increased $5 million compared with 1996.
The increase was primarily due a rate increase in base
distribution rates which became effective January 1, 1997, and an
increase in kWh deliveries.
<PAGE>
Net income in 1996 decreased by $1 million. This decrease was
primarily due to (i) the completion of the amortization, in
accordance with a rate agreement, of the initial effect of
recording unbilled revenues, as well as (ii) a decrease in
allowance for funds used during construction (AFDC) primarily due
to the completion in the second half of 1995 of the Manchester
Street Station. These decreases were partially offset by the
effects of a rate increase that went into effect in late 1995.
Operating Revenue
The following table summarizes the changes in operating
revenue:
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Revenue
(In Millions) 1997 1996
---- ----
<S> <C> <C>
Sales and deliveries growth $ 2 $ 1
Fuel recovery 7 3
Rate changes 11 11
Unbilled revenues recognized
under rate agreements - (8)
Purchased power cost adjustment
(PPCA) mechanism (3) (4)
Other - 1
--- ---
$17 $ 4
=== ===
</TABLE>
KWh deliveries increased by 1.3 percent in 1997 and less than
1 percent in 1996.
The Company's rates previously contained a fuel clause and a
PPCA provision. These mechanisms were designed to allow the
Company to pass on to its customers changes in purchased energy
costs. Rates in effect during the first five months of 1998
include a reconciliation mechanism that will allow the Company to
recover its purchased energy costs. Rates have not yet been
established for the period beyond May 1998.
For a discussion of fuel recovery, see the fuel costs
discussion in the "Operating Expenses" section.
The increase in revenues due to rate changes in 1997 reflects
an $11 million increase in base rates, approved by the RIPUC,
effective January 1, 1997, in accordance with the Utility
Restructuring Act of 1996. In 1996, the increase in revenues due
to rate changes represents a $12 million general rate increase
that went into effect in December 1995.
<PAGE>
The Company has received approval from the RIPUC to recover
demand-side management (DSM) program expenditures in rates on a
current basis through 1997. These expenditures were $10 million,
$10 million, and $9 million in 1997, 1996 and 1995, respectively.
The Company has received approval from the RIPUC to recover its
1998 DSM program expenditures. Since 1990, the Company has been
allowed to earn incentives based upon the results of its DSM
programs. The Company recorded before-tax incentives of $0.3
million, $0.2 million, and $0.5 million in 1997, 1996 and 1995,
respectively.
Operating Expenses
The following table summarizes the changes in operating
expenses:
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Expenses
(In millions) 1997 1996
---- ----
<S> <C> <C>
Fuel for generation and electric energy:
Fuel costs $ 7 $ 3
Integrated facilities credit from NEP 5 3
Purchases and demand charges and other - (4)
Other operation and maintenance:
DSM - 1
Other 3 1
Depreciation (5) (4)
Taxes, other than income taxes 1 2
Income taxes 2 1
--- ---
$13 $ 3
=== ===
</TABLE>
The increase in fuel costs is due to increased replacement
power fuel purchases by NEP due to the reduced generation from
partially owned nuclear units. These costs were passed on to the
Company through NEP's fuel clause. The Company, in turn, passed
these costs on to its customers. Effective January 1, 1998, the
Company terminated its power purchases under NEP's fuel clause.
The Company's rates in effect for sales on or after January 1,
1998 no longer include a fuel clause.
The entire output of the Company's generating capacity is made
available to NEP. The Company is compensated by NEP for its fuel
costs and other generation and transmission related costs. The
reduction in this compensation in 1997 and 1996, and the
associated reduction in depreciation expenses, reflects a
reduction in dismantlement costs associated with the previously
retired South Street generating facility.
<PAGE>
The increase in other operation and maintenance expenses is
primarily due to increased customer accounts expenses,
transmission and distribution system related expenses and
increased general and administrative expense.
Allowance for Funds Used During Construction (AFDC)
The decrease in AFDC in 1996 is due to the completion of the
Manchester Street plant repowering project.
Hazardous Waste
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The Company has been named as a
potentially responsible party by either federal or state
environmental regulatory agencies for three sites at which
hazardous waste is alleged to have been disposed. The Company is
currently aware of other sites, and may in the future become
aware of additional sites, that it may be held responsible for
remediating. The Company is aware of approximately five sites on
which gas was manufactured or manufactured gas was stored that
were owned either by the Company or by its predecessor companies.
A more detailed discussion of potential hazardous waste
liabilities is contained in Note D-2 of the Notes to the
Financial Statements. Predicting the potential costs to
investigate and remediate hazardous waste sites continues to be
difficult. The Company believes that hazardous waste liabilities
for all sites of which it is aware are not material to its
financial position.
Year 2000 Computer Issues
In the next two years, most large companies will face a
potentially serious information systems (computer) problem
because most software applications and operational programs
written in the past will not properly recognize calendar dates
beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The NEES companies
began the process of identifying the changes required to their
computer programs and hardware during 1996. The necessary
modifications to the NEES companies' centralized financial,
customer, and operational information systems are expected to be
completed by the end of 1998. Noncentralized systems are also
being reviewed for Year 2000 problems. The NEES companies
believe total costs associated with making the necessary
modifications to all centralized and noncentralized systems will
be approximately $25 million, of which approximately $8 million
has been incurred as of December 31, 1997. Most of the remaining
costs are expected to be incurred prior to December 31, 1998.
The Company's share of the total costs is expected to be
approximately $5 million.
<PAGE>
New Accounting Standards
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
does not believe these new accounting standards will have a
significant impact on its future reporting requirements.
Utility Plant Expenditures and Financing
Cash expenditures for utility plant totaled $31 million in
1997. The funds necessary for utility plant expenditures during
1997 were primarily provided by net cash from operating
activities, after the payment of dividends. Cash expenditures
for utility plant for 1998 are estimated to be approximately $35
million. Internally generated funds and the Company's share of
proceeds from the divestiture of the nonnuclear generating
business are expected to fully meet capital expenditures in 1998.
In 1997, the Company retired $33 million of maturing long-term
debt and issued $10 million of first mortgage bonds bearing an
interest rate of 7.39 percent to finance capital expenditures.
The Company plans to issue $5 million of long-term debt in 1998
to retire maturing debt.
In 1997, the Company retired preferred stock with an aggregate
par value of $24 million. Total premiums paid of $1.7 million in
connection with the preferred stock retirement were charged to
retained earnings.
At December 31, 1997, the Company had $16 million of short-
term debt outstanding including $12 million of commercial paper
borrowings and $4 million of borrowings from affiliates. As of
December 31, 1997, the Company had lines of credit with banks
totaling $31 million. There were no borrowings under these lines
of credit at December 31, 1997.
<PAGE>
The Narragansett Electric Company
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue $520,038 $503,585 $499,113
-------- -------- --------
Operating expenses:
Fuel for generation and purchased electric
energy, (principally from New England
Power Company, an affiliate) 309,430 297,060 294,652
Other operation 74,375 71,625 71,814
Maintenance 12,447 13,009 11,174
Depreciation 22,957 27,899 31,533
Taxes, other than federal income taxes 39,366 38,530 36,627
Federal income taxes 14,247 11,951 10,888
-------- -------- --------
Total operating expenses 472,822 460,074 456,688
-------- -------- --------
Operating income 47,216 43,511 42,425
-------- -------- --------
Other income:
Allowance for equity funds used
during construction - - 106
Other income (expense), net (750) (732) (192)
-------- -------- --------
Operating and other income 46,466 42,779 42,339
-------- -------- --------
Interest:
Interest on long-term debt 16,179 17,205 16,627
Other interest 2,475 2,883 3,663
Allowance for borrowed funds used
during construction credit (120) (263) (1,861)
-------- -------- --------
Total interest 18,534 19,825 18,429
-------- -------- --------
Net income $ 27,932 $ 22,954 $ 23,910
======== ======== ========
Statements of Retained Earnings
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Retained earnings at beginning of year $119,978 $108,227 $ 91,556
Net income 27,932 22,954 23,910
Dividends declared on cumulative
preferred stock (1,955) (2,143) (2,143)
Dividends declared on common stock,
$13.00, $8.00, and $4.50 per share,
respectively (14,722) (9,060) (5,096)
Premium on redemption of preferred stock (1,666) - -
-------- -------- --------
Retained earnings at end of year $129,567 $119,978 $108,227
======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
The Narragansett Electric Company
Balance Sheets
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at original cost $760,923 $742,481
Less accumulated provisions for depreciation 198,551 187,690
-------- --------
562,372 554,791
Construction work in progress 5,739 5,392
-------- --------
Net utility plant 568,111 560,183
-------- --------
Current assets:
Cash 3,122 1,727
Accounts receivable:
From sales of electric energy 54,109 54,426
Other (including $1,112 and $1,253
from affiliates) 2,571 3,415
Less reserves for doubtful accounts 4,707 5,149
-------- --------
51,973 52,692
Unbilled revenues (Note A-3) 15,997 15,300
Fuel, materials, and supplies, at average cost 4,165 4,300
Prepaid and other current assets 14,202 15,919
-------- --------
Total current assets 89,459 89,938
-------- --------
Deferred charges and other assets (Note B) 55,285 56,881
-------- --------
$712,855 $707,002
======== ========
Capitalization and Liabilities
Capitalization:
Common stock, par value $50 per share, authorized
and outstanding 1,132,487 shares $ 56,624 $ 56,624
Premium on preferred stock 36 170
Other paid-in capital 105,500 80,000
Retained earnings 129,567 119,978
Unrealized gain on securities, net 112
-------- --------
Total common equity 291,839 256,772
Cumulative preferred stock,
par value $50 per share 12,800 36,500
Long-term debt 183,545 178,517
-------- --------
Total capitalization 488,184 471,789
-------- --------
Current liabilities:
Long-term debt due in one year 5,000 32,500
Short-term debt (including $4,425 and $5,300
to affiliates) 16,350 19,025
Accounts payable (including $50,751 and $40,425
to affiliates) 56,048 45,221
Accrued liabilities:
Taxes 4,314 3,877
Interest 4,810 5,677
Other accrued expenses (Note G) 21,519 11,949
Customer deposits 5,982 5,638
Dividends payable 3,587 2,801
-------- --------
Total current liabilities 117,610 126,688
-------- --------
Deferred federal income taxes 82,871 81,880
Unamortized investment tax credits 7,023 7,517
Other reserves and deferred credits 17,167 19,128
Commitments and contingencies (Note D)
-------- --------
$712,855 $707,002
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
The Narragansett Electric Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 27,932 $ 22,954 $ 23,910
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 22,957 27,899 31,533
Deferred federal income taxes and
investment tax credits, net (415) 4,177 3,009
Allowance for funds used during construction (120) (263) (1,967)
Amortization of unbilled revenues - - (8,209)
Decrease (increase) in accounts receivable,
net and unbilled revenues 22 12,082 (2,215)
Decrease (increase) in fuel, materials, and
supplies 135 1,945 (1,075)
Decrease (increase) in prepaid and other
current assets 1,717 (32) (1,894)
Increase (decrease) in accounts payable 10,827 (1,026) (9,892)
Increase (decrease) in other current
liabilities 9,484 (10,335) 9,320
Other, net 1,181 8,236 5,931
------- ------- -------
Net cash provided by
operating activities $73,720 $65,637 $48,451
------- ------- -------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $(30,965) $(52,574) $(72,897)
Other investing activities (294) (181) (251)
-------- -------- --------
Net cash used in investing activities $(31,259) $(52,755) $(73,148)
-------- -------- --------
Financing activities:
Capital contributions from parent $ 25,500 $ - $ 20,000
Dividends paid on common stock (13,590) (7,361) (4,813)
Dividends paid on preferred stock (2,301) (2,143) (2,143)
Changes in short-term debt (2,675) (3,650) (7,125)
Long-term debt issues 10,000 2,000 38,000
Long-term debt retirements (32,500) (2,000) (16,000)
Preferred stock - retirements (23,834) - -
Premium on reacquisition of preferred stock (1,666) - -
Premium of reacquisition of long-term debt - - (1,936)
-------- -------- --------
Net cash provided by (used in)
financing activities $(41,066) $(13,154) $ 25,983
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents $ 1,395 $ (272) $ 1,286
Cash and cash equivalents at
beginning of year 1,727 1,999 713
-------- -------- --------
Cash and cash equivalents at end of year $ 3,122 $ 1,727 $ 1,999
======== ======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 17,911 $ 18,620 $ 17,050
-------- -------- --------
Federal income taxes paid $ 13,825 $ 8,873 $ 1,084
======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
The Narragansett Electric Company
Notes to Financial Statements
Note A - Significant Accounting Policies
1. Nature of Operations:
The Company is a wholly owned subsidiary of New England
Electric System (NEES) operating in Rhode Island. The Company's
business is the distribution of electricity at retail. Electric
service is provided to approximately 330,000 customers in 27
cities and towns having a population of approximately 725,000
(1990 Census). The Company's service area, which includes urban,
suburban, and rural areas, covers approximately 80 percent of
Rhode Island. The properties of the Company include an
integrated system of transmission and distribution lines and
substations. In addition, the Company owns a 10 percent share of
the 489 megawatt (MW) Manchester Street generating station. The
entire output of this plant is made available to New England
Power Company (NEP), the Company's generation and transmission
affiliate, as part of the integrated NEES system. Under an all-
requirements contract with NEP, the Company purchased its
electric energy requirements from NEP. This contract has been
amended to terminate the all-requirements provision of the
contract and allow NEP to recover its above-market generation
commitments through a transition access charge, which the Company
will collect from its customers. See Note B for a discussion of
industry restructuring and Note C for a discussion of the
Company's and NEP's planned divestiture of their nonnuclear
generating business.
2. System of Accounts:
The accounts of the Company are maintained in accordance with
the Uniform System of Accounts prescribed by regulatory bodies
having jurisdiction.
In preparing the financial statements, management is required
to make estimates that affect the reported amounts of assets and
liabilities and disclosures of asset recovery and contingent
liabilities as of the date of the balance sheets and revenues and
expenses for the period. These estimates may differ from actual
amounts if future circumstances cause a change in the assumptions
used to calculate these estimates.
3. Electric Sales Revenue:
The Company accrues revenues for electricity delivered but not
yet billed (unbilled revenues). Included in income is $8 million
in 1995, which represents the amortization over 21 months of the
initial effect of recording unbilled revenues, in accordance with
a rate agreement. Accrued revenues are also recorded in
accordance with rate adjustment mechanisms.
4. Allowance for Funds Used During Construction (AFDC):
The Company capitalizes AFDC as part of construction costs.
AFDC represents the composite interest and equity costs of
capital funds used to finance that portion of construction costs
not yet eligible for inclusion in rate base. AFDC is
capitalized in "Utility plant" with offsetting noncash credits to
"Other income" and "Interest." This method is in accordance with
an established rate-making practice under which a utility is
<PAGE>
permitted a return on, and the recovery of, prudently incurred
capital costs through their ultimate inclusion in rate base and
in the provision for depreciation. The composite AFDC rates were
5.7 percent, 5.3 percent, and 6.2 percent in 1997, 1996, and
1995, respectively.
5. Depreciation:
Depreciation is provided annually on a straight-line basis.
The provision for depreciation as a percentage of weighted
average depreciable property was 3.2 percent, 4.0 percent, and
5.0 percent in 1997, 1996, and 1995, respectively. The change in
the depreciation rates is primarily due to the recognition
through depreciation expense of dismantlement costs for a retired
generating facility.
6. Cash:
The Company classifies short-term investments with a maturity
of 90 days or less at time of purchase as cash.
7. New Accounting Standards:
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
does not believe these new accounting standards will have a
significant impact on its future reporting requirements.
Note B - Industry Restructuring
Historically, electric utilities have provided their customers
bundled electric service within exclusive service territories.
As a result of a number of trends, including a disparity in
electric rates among regions of the country and new regulations
and legislation intended to foster competition, distribution
customers are being allowed to choose their power supplier, with
incumbent utilities required to deliver that electricity over
their transmission and distribution systems.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments (generation related)
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs."
In August 1996, the state of Rhode Island enacted legislation
that allows customers in that state the opportunity to choose
their power supplier. Under the Rhode Island statute, state
accounts, certain new customers, and the largest manufacturing
customers were able to choose their power supplier beginning on
July 1, 1997. The balance of Rhode Island customers gained the
ability to choose their power supplier on January 1, 1998. The
<PAGE>
statute also provides a mechanism for the recovery of stranded
costs resulting from the introduction of customer choice of power
supplier.
As part of the implementation of the statute, the Company and
NEP reached a settlement agreement with the Rhode Island Public
Utilities Commission (RIPUC), the Rhode Island Division of Public
Utilities and Carriers, and other parties representing all of its
distribution customers (the Rhode Island Settlement). The Rhode
Island Settlement provides for the recovery of stranded costs.
In November 1997, the Federal Energy Regulatory Commission (FERC)
conditionally approved the Rhode Island settlement, subject to a
compliance filing to clarify the impact of the settlement on
nonsettling parties.
The Rhode Island Settlement requires NEP to sell power to the
Company at specified prices for resale to distribution customers
who do not choose a power supplier ("standard offer generation
service"). The total rates for customers purchasing this interim
power service from the Company are approximately 7 percent below
the total rates that were in effect during 1997. Pursuant to the
Rhode Island statute, the total rate for customers who do not
choose a power supplier is capped through 2009 at a level equal
to the 1996 rate adjusted upward for 80 percent of inflation and
for other factors beyond the control of the Company. The statute
also provided for the Company to increase distribution rates by
approximately $11 million in January 1997 and another $7 million
in January 1998. The statute also provides that the Company may
request increased distribution rates which would take effect no
earlier than 1999.
In accordance with the Rhode Island Settlement, NEP's
wholesale contract with the Company has been amended effective
January 1, 1998. The Rhode Island statute provides that NEP's
stranded costs (the Company's share is 22 percent) will be
recovered from distribution customers through a transition access
charge, which will be collected by the Company. Under the Rhode
Island Settlement, the recovery of NEP's stranded costs is
divided into several categories. Unrecovered costs associated
with generating plants and regulatory assets would be recovered
over 12 years and would earn a return on equity of 11 percent.
The above-market component of purchased power contracts and
nuclear decommissioning costs would be recovered as incurred over
the life of those obligations, a period expected to extend beyond
12 years. Initially, the transition access charge would be set at
2.8 cents per kilowatthour (kWh) and would be reduced upon
completion of the sale of NEP's generating business, as described
below.
In addition to addressing customer choice and the recovery of
stranded costs, the Rhode Island Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, the Company and NEP entered into an agreement to
sell substantially all of their nonnuclear generating business to
USGen New England, Inc. (USGen), an indirect wholly owned
subsidiary of PG&E Corporation (PG&E). See "Divestiture of
Generating Business" below. The net proceeds from the sale of
the nonnuclear generating business to USGen will be used to
reduce the transition access charge from 2.8 cents per kWh to
approximately 1.5 cents per kWh. In addition, the FERC accepted
the NEES companies' proposal in conjunction with their
<PAGE>
divestiture filing that the recovery of the remaining
above-market nuclear generating plant investment and regulatory
assets be completed by the end of the year 2000.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation (FAS 71), requires regulated
entities, in appropriate circumstances, to establish regulatory
assets, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $35
million in net regulatory assets in compliance with FAS 71.
The Company believes the Rhode Island Settlement and statute
will enable the Company to recover through rates its specific
costs of providing ongoing distribution services and stranded
costs billed to it by NEP. The Company believes these factors
will allow it to continue to apply FAS 71.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations.
The components of regulatory assets are as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Regulatory assets (liabilities) included
in current assets and liabilities:
Rate adjustment mechanisms
(see Note G) $(9,794) $(2,870)
------- -------
Regulatory assets included in deferred charges
and other reserves and deferred credits:
Deferred FAS No. 109 costs (see Note F) 31,291 30,439
Unamortized losses on reacquired debt 12,438 13,287
Storm fund (3,586) (4,691)
Deferred FAS No. 106 costs (see Note E-2) (795) 2,487
Other 6,020 5,656
------- -------
45,368 47,178
------- -------
$35,574 $44,308
======= =======
</TABLE>
<PAGE>
Note C - Divestiture of Generating Business
As described above, in August 1997, the Company and NEP
(collectively, the Sellers) reached an agreement to sell their
nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
MW of capacity, as well as NEES' 100 percent interest in
Narragansett Energy Resources Company, a 20 percent general
partner in the Ocean State Power project, all of which has a book
value of $1.1 billion. USGen will pay the Sellers $1.59 billion
in cash, of which $225 million will be contingent upon the
introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. NEP will remit
to the Company a portion of the proceeds from the sale equal to
the Company's net book value of the Manchester Street plant.
USGen will also reimburse the NEES companies for $85 million of
costs associated with early retirement and special severance
programs for employees affected by industry restructuring. USGen
will assume responsibility for environmental conditions at the
Sellers' nonnuclear generating stations. USGen will also assume
the Sellers' obligations under long-term fuel and fuel
transportation contracts and certain collective bargaining
agreements.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale, and
conditionally approved most supporting filings. While the timing
of receipt of final regulatory approvals is uncertain, receipt of
all approvals is unlikely before mid-1998. Closing is contingent
upon all regulatory approvals being obtained by February 1999.
Note D - Commitments and Contingencies
1. Plant Expenditures:
The Company's utility plant expenditures are estimated to be
approximately $35 million in 1998. At December 31, 1997,
substantial commitments had been made relative to future planned
expenditures.
2. Hazardous Waste:
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous
substances.
<PAGE>
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. NEES subsidiaries currently have in
place an internal environmental audit program and an external
waste disposal vendor audit and qualification program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for
three sites (two of which are located in Massachusetts) at which
hazardous waste is alleged to have been disposed. The Company is
currently aware of other sites, and may in the future become
aware of additional sites, that it may be held responsible for
remediating.
Gas was manufactured from coal in Rhode Island in the past.
The Company is aware of five sites on which gas was manufactured
or manufactured gas was stored that were owned either by the
Company or by its predecessor companies. It is not known to what
extent the Company would be held liable for hazardous wastes, if
any, left at these manufactured gas locations.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. A
preliminary review by a consultant hired by the NEES companies of
the potential cost of investigating and, if necessary,
remediating Rhode Island manufactured gas sites resulted in costs
per site ranging from less than $1 million to $11 million. An
informal survey of other utilities conducted on behalf of NEES
and its subsidiaries indicated costs in a similar range. The
NEES companies have recovered amounts from certain insurers, and,
where appropriate, the Company intends to seek recovery from its
insurers and from other PRPs, but it is uncertain whether, and to
what extent, such efforts will be successful. The Company
believes that hazardous waste liabilities for all sites of which
it is aware are not material to its financial position.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These
new rules did not have a material effect on the Company's
financial position or results of operations.
Note E - Employee Benefits
1. Pension Plans:
The Company participates with other subsidiaries of NEES in
noncontributory, defined-benefit plans covering substantially all
employees of the Company. The plans provide pension benefits
based on the employee's compensation during the five years prior
to retirement. The Company's funding policy is to contribute
each year the net periodic pension cost for that year. However,
the contribution for any year will not be less than the minimum
contribution required by federal law or greater than the maximum
tax deductible amount.
<PAGE>
The Company's net pension cost for 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned
during the period $ 2,092 $ 2,007 $ 1,963
Plus (less):
Interest cost on projected
benefit obligation 9,027 8,954 9,327
Return on plan assets at
expected long-term rate (10,311) (9,787) (9,567)
Amortization (50) 165 67
-------- ------- -------
Net pension cost $ 758 $ 1,339 $ 1,790
======== ======= =======
Actual return on plan assets $ 23,999 $17,228 $25,192
======== ======= =======
<CAPTION>
Year ended December 31, 1998 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions used to
determine pension cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Average rate of increase in
future compensation levels 4.13% 4.13% 4.13% 4.63%
Expected long-term rate
of return on assets 8.50% 8.50% 8.50% 8.75%
</TABLE>
<PAGE>
The funded status of the plans cannot be presented separately
for the Company as the Company participates in the plans with
other NEES subsidiaries. The following table sets forth the
funded status of the NEES companies' plans at December 31:
<TABLE>
<CAPTION>
Retirement Plans, (In millions) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Benefits earned
Actuarial present value of
accumulated benefit liability:
Vested $647 $640
Nonvested 18 19
---- ----
Total $665 $659
==== ====
Reconciliation of funded status
Actuarial present value of
projected benefit liability $757 $753
Unrecognized prior service costs (8) (9)
FAS No. 87 transition liability
not yet recognized (amortized) (1) (1)
Net gain (loss) not yet recognized (amortized) 61 40
---- ----
809 783
---- ----
Pension fund assets at fair value 834 812
FAS No. 87 transition asset not
yet recognized (amortized) (8) (10)
---- ----
826 802
---- ----
Accrued pension/(prepaid)
payments recorded on books $(17) $(19)
==== ====
</TABLE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates from 1998 and 1997,
respectively, and the 1983 Group Annuity Mortality table.
Plan assets are composed primarily of corporate equity, debt
securities, and cash equivalents.
2. Postretirement Benefit Plans Other Than Pensions (PBOPs)
The Company provides health care and life insurance coverage
to eligible retired employees. Eligibility is based on certain
age and length of service requirements and in some cases retirees
must contribute to the cost of their coverage.
<PAGE>
The Company's total cost of PBOPs for 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 990 $ 1,030 $ 1,072
Plus (less):
Interest cost on accumulated
benefit obligation 4,843 5,034 6,006
Return on plan assets at
expected long-term rate (3,513) (2,803) (2,080)
Amortization 2,257 2,739 3,539
------- ------- -------
Net postretirement benefit cost $ 4,577 $ 6,000 $ 8,537
======= ======= =======
Actual return (loss) on
plan assets $ 8,195 $ 5,469 $ 6,161
======= ======= =======
<CAPTION>
Year ended December 31, 1998 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions used to determine
postretirement benefit cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Expected long-term rate of
return on assets 8.25% 8.25% 8.25% 8.50%
Health care cost rate
1995 to 1999 5.25% 8.00% 8.00% 8.50%
Health care cost rate
2000 to 2004 5.25% 6.25% 6.25% 8.50%
Health care cost rate
2005 and beyond 5.25% 5.25% 5.25% 6.25%
The following table sets forth the Company's benefits earned and
the plans' funded status:
<CAPTION>
At December 31, (In millions) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 46 $ 51
Fully eligible active plan participants 6 5
Other active plan participants 17 19
---- ----
Total benefits earned 69 75
Unrecognized transition obligation (58) (62)
Net gain not yet recognized 33 22
---- ----
44 35
---- ----
Plan assets at fair value 50 42
---- ----
Prepaid postretirement benefit costs
recorded on books $ 6 $ 7
==== ====
</TABLE>
<PAGE>
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates in effect for 1998 and 1997,
respectively.
The assumptions used in the health care cost trends have a
significant effect on the amounts reported. Increasing the
assumed rates by 1 percent in each year would increase the
accumulated postretirement benefit obligation as of December 31,
1997 by approximately $8 million and the net periodic cost for
1997 by approximately $0.8 million.
The Company funds the annual tax-deductible contributions.
Plan assets are invested in equity and debt securities and cash
equivalents.
Note F - Federal Income Taxes
The Company and other subsidiaries participate with NEES in
filing consolidated federal income tax returns. The Company's
income tax provision is calculated on a separate return basis.
Federal income tax returns have been examined and reported on by
the Internal Revenue Service through 1993.
Total federal income taxes consist of the following components:
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes charged (credited)
to operations:
Current income taxes $14,648 $ 7,499 $ 7,560
Deferred income taxes 93 4,950 3,831
Investment tax credits, net (494) (498) (503)
------- ------- -------
Total income taxes charged
to operations 14,247 11,951 10,888
------- ------- -------
Income taxes charged (credited)
to "Other income":
Current income taxes (464) (581) (348)
Deferred income taxes (14) (275) (319)
------- ------- -------
Total income taxes charged
(credited) to "Other income" (478) (856) (667)
------- ------- -------
Total federal income taxes $13,769 $11,095 $10,221
======= ======= =======
</TABLE>
Investment tax credits have been deferred and are being
amortized over the estimated lives of the property giving rise to
the credits.
Consistent with rate-making policies of the RIPUC, the Company
has adopted comprehensive interperiod tax allocation
(normalization) for most temporary book/tax differences.
<PAGE>
Total federal income taxes differ from the amounts computed by
applying the federal statutory tax rates to income before taxes.
The reasons for the differences are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at statutory rate $14,595 $11,917 $11,946
Increases (reductions) in tax resulting from:
Book versus tax depreciation
not normalized 741 778 529
Costs associated with utility
plant retirements deducted
for tax purposes (1,046) (1,341) (1,768)
Allowance for equity funds used
during construction - - (37)
Amortization of investment
tax credits (494) (498) (503)
All other differences (27) 239 54
------- ------- -------
Total federal income taxes $13,769 $11,095 $10,221
======= ======= =======
</TABLE>
The following table identifies the major components of total
deferred income taxes:
<TABLE>
<CAPTION>
At December 31, (In millions) 1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Plant related $ 2 $ 2
Investment tax credits 3 3
All other 13 13
----- -----
18 18
----- -----
Deferred tax liability:
Plant related (72) (67)
All other (29) (33)
----- -----
(101) (100)
----- -----
Net deferred tax liability $ (83) $ (82)
===== =====
</TABLE>
Note G - Short-term Borrowings and Other Accrued Expenses
At December 31, 1997, the Company had $16 million of
short-term debt outstanding including $12 million in commercial
paper borrowings and $4 million of borrowings from affiliates.
NEES and certain subsidiaries, including the Company, with
regulatory approval, operate a money pool to more effectively
utilize cash resources and to reduce outside short-term
borrowings. Short-term borrowing needs are met first by
available funds of the money pool participants. Borrowing
<PAGE>
companies pay interest at a rate designed to approximate the cost
of outside short-term borrowings. Companies which invest in the
pool share the interest earned on a basis proportionate to their
average monthly investment in the money pool. Funds may be
withdrawn from or repaid to the pool at any time without prior
notice.
At December 31, 1997, the Company had lines of credit with
banks totaling $31 million. There were no borrowings under these
lines of credit at December 31, 1997. Fees are paid in lieu of
compensating balances on most lines of credit.
The weighted average rate on outstanding short-term borrowings
was 5.7 percent at December 31, 1997. The fair value of the
Company's short-term debt equals carrying value.
The components of other accrued expenses are as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Rate adjustment mechanisms $12,970 $ 4,632
Accrued wages and benefits 8,050 7,259
Other 499 58
------- -------
$21,519 $11,949
======= =======
</TABLE>
Note H - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1997
and 1996 is as follows (in thousands of dollars except for share
data):
<TABLE>
<CAPTION>
Shares
Authorized Dividends Call
and Outstanding Amount Declared Price
- ------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$50 Par value
4.50% Series 49,730 180,000 $ 2,487 $ 9,000 $ 365 $ 405 $55.000
4.64% Series 61,217 150,000 3,061 7,500 320 348 $52.125
6.95% Series 145,050 400,000 7,252 20,000 1,270 1,390 (a)
- ------------------------------------------------------------------------------
Total 255,997 730,000 $12,800 $36,500 $1,955 $2,143
- ------------------------------------------------------------------------------
<FN>
(a) Callable on or after August 1, 2003 at $51.74.
</FN>
</TABLE>
The annual dividend requirement for total cumulative
preferred stock was $758,000 for 1997 and $2,143,000 for 1996.
In 1997, the Company retired preferred stock with an
aggregate par value of $24 million. Total premiums of $1.7
million in connection with the preferred stock retirement were
charged to retained earnings.
<PAGE>
Note I - Long-term Debt
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
At December 31, (In thousands)
Series Rate % Maturity 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
First Mortgage Bonds:
U(92-1) 7.230 June 3, 1997 $10,000
U(92-2) 7.210 June 3, 1997 5,000
U(92-3) 7.000 June 16, 1997 10,000
U(92-7) 5.700 September 16, 1997 7,500
V(95-1) 7.810 February 16, 1998 $ 5,000 5,000
V(94-2) 6.960 May 3, 1999 2,000 2,000
V(94-3) 6.910 May 4, 1999 1,000 1,000
U(92-6) 6.630 August 12, 1999 5,000 5,000
U(92-5) 6.980 July 17, 2000 5,000 5,000
U(92-8) 6.340 September 18, 2000 10,000 10,000
U(92-4) 7.830 June 17, 2002 15,000 15,000
U(93-1) 7.080 January 13, 2003 7,500 7,500
U(93-2) 6.560 April 15, 2003 5,000 5,000
U(93-4) 6.350 July 1, 2003 5,000 5,000
V(94-4) 7.420 June 15, 2004 5,000 5,000
V(94-6) 8.330 November 8, 2004 10,000 10,000
U(93-3) 6.650 June 30, 2008 5,000 5,000
S 9.125 May 1, 2021 22,200 22,200
T 8.875 August 1, 2021 22,000 22,000
U(93-5) 7.050 September 1, 2023 5,000 5,000
U(94-1) 7.050 February 2, 2024 5,000 5,000
V(94-1) 8.080 May 2, 2024 5,000 5,000
V(94-5) 8.160 August 9, 2024 5,000 5,000
V(95-2) 7.750 June 2, 2025 10,000 10,000
V(95-3) 7.500 October 10, 2025 7,000 7,000
W(95-1) 7.300 November 13, 2025 16,000 16,000
W(96-1) 7.240 January 19, 2026 2,000 2,000
W(97-1) 7.390 September 30, 2027 3,000
W(97-2) 7.390 October 1, 2027 7,000
Unamortized discounts and premiums (1,155) (1,183)
-------- --------
Total long-term debt $188,545 $211,017
======== ========
Long-term debt due in one year 5,000 32,500
-------- --------
$183,545 $178,517
======== ========
</TABLE>
Substantially all of the properties and franchises of the
Company are subject to the lien of mortgage indentures under
which the first mortgage bonds have been issued.
The Company will make cash payments of $5,000,000 in 1998,
$8,000,000 in 1999, $15,000,000 in 2000, and $15,000,000 in 2002
to retire maturing mortgage bonds. There are no cash payments
required in 2001.
<PAGE>
At December 31, 1997, the Company's long-term debt had a
carrying value of approximately $190,000,000 and had a fair value
of approximately $201,000,000. The fair market value of the
Company's long-term debt was estimated based on the quoted prices
for similar issues or on the current rates offered to the Company
for debt of the same remaining maturity.
Note J - Restrictions on Retained Earnings Available for
Dividends on Common Stock
As long as any preferred stock is outstanding, certain
restrictions on payment of dividends on common stock would come
into effect if the "junior stock equity" was, or by reason of
payment of such dividends became, less than 25 percent of "Total
capitalization." However, the junior stock equity at December 31,
1997 was 59 percent of total capitalization and, accordingly,
none of the Company's retained earnings at December 31, 1997 were
restricted as to dividends on common stock under the foregoing
provisions.
Note K - Regulatory Matters
A 1986 Rhode Island Supreme Court decision held that the
RIPUC's rate-making powers include the authority to order refunds
of amounts earned in excess of an allowed return. As a result,
the RIPUC monitors the Company's earnings on a regular basis.
Note L - Supplementary Income Statement Information
Advertising expenses, expenditures for research and
development, and rents were not material and there were no
royalties paid in 1997, 1996, or 1995. Taxes, other than federal
income taxes, charged to operating expenses are set forth by
class as follows
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Municipal property taxes $18,061 $16,546 $15,172
State gross earnings tax 18,676 18,764 18,617
Federal and state payroll
and other taxes 2,629 3,220 2,838
------- ------- -------
$39,366 $38,530 $36,627
======= ======= =======
</TABLE>
New England Power Service Company, an affiliated service
company operating pursuant to the provisions of Section 13 of the
Public Utility Holding Company Act of 1935, furnished services to
the Company at the cost of such services. These costs amounted
to $23,341,012, $27,336,438, and $29,094,719, including
capitalized construction costs of $1,946,000, $6,426,000, and
$6,268,000 for each of the years 1997, 1996, and 1995,
respectively.
<PAGE>
The Narragansett Electric Company
Selected Financial Information
<TABLE>
<CAPTION>
Year Ended December 31,
(In millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue:
Electric sales
(excluding fuel cost recovery) $369 $361 $361 $356 $351
Fuel cost recovery 142 134 131 120 127
Other 9 9 7 6 5
- ------------------------------------------------------------------------------
Total operating revenue $520 $504 $499 $482 $483
Net income $ 28 $ 23 $ 24 $ 15 $ 14
Total assets $713 $707 $700 $647 $556
Capitalization:
Common equity $292 $257 $245 $208 $183
Cumulative preferred stock 13 36 36 37 37
Long-term debt 183 179 211 189 156
- ------------------------------------------------------------------------------
Total capitalization $488 $472 $492 $434 $376
Preferred dividends declared $ 2 $ 2 $ 2 $ 2 $ 2
Common dividends declared $ 15 $ 9 $ 5 $ 3 $ 5
</TABLE>
Selected Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Operating revenue $131,466 $119,894 $141,980 $126,698
Operating income $ 13,403 $ 9,819 $ 14,238 $ 9,756
Net income $ 7,693 $ 5,085 $ 9,862 $ 5,292
1996
Operating revenue $127,285 $116,470 $140,481 $119,349
Operating income $ 12,286 $ 8,245 $ 13,419 $ 9,561
Net income $ 6,290 $ 3,117 $ 8,169 $ 5,378
</TABLE>
Per share data is not relevant because the Company's common
stock is wholly owned by New England Electric System.
A copy of The Narragansett Electric Company's Annual Report on
Form 10-K to the Securities and Exchange Commission for the year
ended December 31, 1997 will be available on or about April 1,
1998, without charge, upon written request to The Narragansett
Electric Company, Shareholder Services Department, 280 Melrose
Street, Providence, Rhode Island 02901.
<PAGE>
EXHIBIT (24)
POWER OF ATTORNEY
-----------------
Each of the undersigned directors of The Narragansett Electric
Company (the "Company"), individually as a director of the Company, hereby
constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine
M. Zipser, individually, as attorney-in-fact to execute on behalf of the
undersigned the Company's annual report on Form 10-K for the year ended
December 31, 1997, to be filed with the Securities and Exchange
Commission, and to execute any appropriate amendment or amendments
thereto as may be required by law.
Dated this 18th day of March, 1998.
s/Michael F. Ryan
_________________________ _________________________
Richard W. Frost Michael F. Ryan
s/Cheryl A. LaFleur s/Richard P. Sergel
_________________________ _________________________
Cheryl A. LaFleur Richard P. Sergel
s/Robert L. McCabe s/Ronald L. Thomas
_________________________ _________________________
Robert L. McCabe Ronald L. Thomas
s/Lawrence J. Reilly
_________________________
Lawrence J. Reilly
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF
INCOME, RETAINED EARNINGS AND CASH FLOWS OF THE
NARRAGANSETT ELECTRIC COMPANY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SUBSIDIARY>
<NAME> THE NARRAGANSETT ELECTRIC COMPANY
<NUMBER> 3
<CIK> 0000069659
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 568,111
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 89,459
<TOTAL-DEFERRED-CHARGES> 55,285 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 712,855
<COMMON> 56,624
<CAPITAL-SURPLUS-PAID-IN> 105,536
<RETAINED-EARNINGS> 129,567
<TOTAL-COMMON-STOCKHOLDERS-EQ> 291,839 <F3>
0
12,800
<LONG-TERM-DEBT-NET> 183,545
<SHORT-TERM-NOTES> 4,425
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 11,925
<LONG-TERM-DEBT-CURRENT-PORT> 5,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 203,321
<TOT-CAPITALIZATION-AND-LIAB> 712,855
<GROSS-OPERATING-REVENUE> 520,038
<INCOME-TAX-EXPENSE> 14,247
<OTHER-OPERATING-EXPENSES> 458,575
<TOTAL-OPERATING-EXPENSES> 472,822
<OPERATING-INCOME-LOSS> 47,216
<OTHER-INCOME-NET> (750)
<INCOME-BEFORE-INTEREST-EXPEN> 46,466
<TOTAL-INTEREST-EXPENSE> 18,534
<NET-INCOME> 27,932
1,955
<EARNINGS-AVAILABLE-FOR-COMM> 25,977
<COMMON-STOCK-DIVIDENDS> 14,722
<TOTAL-INTEREST-ON-BONDS> 16,179
<CASH-FLOW-OPERATIONS> 73,720
<EPS-PRIMARY> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Per share data is not relevant because the Company's common stock
is wholly-owned by New England Electric System.
<F3> Total common stockholders equity includes the unrealized gain on
securities.
</FN>
