-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Epzw7nY8KoerkWzaxMDtsGDmd7oc77Nly9vXcrHTkeF5rFy+lgRdVjO7j6UYG6qP ylHSj0gXjMoQP2RldmUORQ== 0000071297-99-000026.txt : 19990402 0000071297-99-000026.hdr.sgml : 19990402 ACCESSION NUMBER: 0000071297-99-000026 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 33 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND ELECTRIC SYSTEM CENTRAL INDEX KEY: 0000071297 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663060 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03446 FILM NUMBER: 99581332 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 5083669011 MAIL ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASSACHUSETTS ELECTRIC CO CENTRAL INDEX KEY: 0000063073 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041988940 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-05464 FILM NUMBER: 99581333 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 5083892000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NARRAGANSETT ELECTRIC CO CENTRAL INDEX KEY: 0000069659 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 050187805 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07471 FILM NUMBER: 99581334 BUSINESS ADDRESS: STREET 1: 280 MELROSE ST CITY: PROVIDENCE STATE: RI ZIP: 02907 BUSINESS PHONE: 4019411400 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND POWER CO CENTRAL INDEX KEY: 0000071337 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06564 FILM NUMBER: 99581335 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 6173669011 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Registrant; State of Incorporation or I.R.S. Employer Commission Organization; Address; Identification File Number and Telephone Number Number - ------------ ---------------------- --------------- 1-3446 NEW ENGLAND ELECTRIC SYSTEM 04-1663060 (A Massachusetts voluntary association) 25 Research Drive Westborough, Massachusetts 01582 Telephone: 508-389-2000 1-6564 NEW ENGLAND POWER COMPANY 04-1663070 (A Massachusetts corporation) 25 Research Drive Westborough, Massachusetts 01582 Telephone: 508-389-2000 0-5464 MASSACHUSETTS ELECTRIC COMPANY 04-1988940 (A Massachusetts corporation) 25 Research Drive Westborough, Massachusetts 01582 Telephone: 508-389-2000 1-7471 THE NARRAGANSETT ELECTRIC COMPANY 05-0187805 (A Rhode Island corporation) 280 Melrose Street Providence, Rhode Island 02907 Telephone: 401-784-7000 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. (X) Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
Securities registered pursuant to Section 12(b) of the Act:
Outstanding at Name of each exchange Registrant Title of each class March 17, 1999 on which registered - ---------- ------------------- -------------- --------------------- New England Common Shares 59,111,433 New York Stock Exchange Electric Boston Stock Exchange System Securities registered pursuant to Section 12(g) of the Act: Registrant Title of each class - ---------- ------------------- 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 17, 1999 March 17, 1999 ---------------------- ------------------------ New England $2,892,765,752 59,111,433 ($1 par value) Electric System New England $1,551,528 3,619,896 ($20 par value) Power Company Massachusetts None 2,398,111 ($25 par value) Electric Company The Narragansett None 1,132,487 ($50 par value) Electric Company
Documents Incorporated by Reference
Part of Form 10-K into which Description document is incorporated - ---------------------------------- ---------------------------- Portions of Annual Reports to Parts I and II Shareholders for the year ended December 31, 1998 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 May 3, 1999, as set forth in Part III This combined Form 10-K is separately filed by New England Electric System, New England Power Company, Massachusetts Electric Company, and The Narragansett Electric Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
TABLE OF CONTENTS PAGE GLOSSARY OF TERMS.......................................... iv FORWARD LOOKING INFORMATION................................ vi PART I ITEM 1. BUSINESS........................................... 1 THE SYSTEM.................................................. 1 System Organization.................................... 1 Employees.............................................. 3 ELECTRIC UTILITY OPERATIONS................................. 3 Introduction........................................... 3 Merger Agreement with National Grid.................... 4 Merger Agreement with Eastern Utilities Associates..... 4 Industry Restructuring................................. 5 Accounting Implications............................. 7 Impact of Restructuring on Distribution Business.... 8 Overview of Financial Results and Outlook........... 9 Other............................................... 10 Year 2000 Readiness Disclosure......................... 10 Merger Activity........................................ 13 National Grid Merger................................ 13 Eastern Utilities Associates Merger................. 17 Regulatory Merger Outlook.............................. 20 NEES/National Grid.................................. 21 NEES/EUA............................................ 21 Electricity Delivery Companies......................... 22 Mass. Electric Description of Business........................... 22 Rates............................................. 23 Narragansett Description of Business........................... 24 Rates............................................. 24 Granite State Description of Business........................... 25 Rates............................................. 26 Nantucket Description of Business........................... 26 Standard Offer Service.............................. 27 Recovery of Demand-Side Management Expenditures..... 27 Performance-Based Ratemaking........................ 28 Transmission and Nuclear Generation Business........... 28 NEP Description of Business........................... 28 Rates............................................. 28 Unregulated Business................................... 29 Operating Revenues..................................... 30 PAGE Electric Utility Properties............................ 32 Transmission, Distribution, and Nuclear Generation Properties........................................ 32 Map - Electric Utility Properties................... 35 Nuclear Units....................................... 36 Divestiture of Nonnuclear Generating Business....... 42 Natural Gas Contracts............................... 42 Oil and Gas Operations.............................. 42 Purchased Power Transfer Agreement.................. 42 Regulatory and Environmental Matters................... 42 Regulation.......................................... 42 Environmental Requirements.......................... 43 Construction and Financing............................. 44 EXECUTIVE OFFICERS.......................................... 48 ITEM 2. PROPERTIES.......................................... 52 ITEM 3. LEGAL PROCEEDINGS................................... 52 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 54 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS........................ 54 ITEM 6. SELECTED FINANCIAL DATA............................. 54 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 55 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 56 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 57 ITEM 11. EXECUTIVE COMPENSATION............................ 60 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................... 73 PAGE PART IV ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 75 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.................. 75 INDEX TO FINANCIAL STATEMENTS............................... 103 GLOSSARY OF TERMS Term Meaning ---- ------- AFDC allowance for funds used during construction AllEnergy AllEnergy Marketing Company, LLC Connecticut Yankee Connecticut Yankee Atomic Power Company CTC contract termination charges DOE U.S. Department of Energy DSM demand-side management EPA U.S. Environmental Protection Agency EUA Eastern Utilities Associates Electricity Delivery Mass. Electric, Narragansett, Granite Companies State, and Nantucket FERC Federal Energy Regulatory Commission FAS 71 Accounting for the Effects of Certain Types of Regulation 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 Holdings NGG Holdings LLC kWh kilowatthour 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 MDTE Massachusetts Department of Telecommunications and Energy MW megawatts Nantucket Nantucket Electric Company Narragansett The Narragansett Electric Company National Grid The National Grid Group plc 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 Energy NEES Energy, Inc. NEES Global NEES Global, Inc. NEET New England Electric Transmission Corporation NEP New England Power Company NEPOOL New England Power Pool NEUs New England Utilities GLOSSARY OF TERMS Term Meaning ---- ------- N.H. Hydro New England Hydro-Transmission Corporation NHPUC New Hampshire Public Utilities Commission NOATT NEPOOL Open Access Transmission Tariff NRC Nuclear Regulatory Commission PG&E PG&E Corporation PBOPs postretirement benefits other than pensions PPCA purchased power cost adjustment Research Drive Research Drive LLC 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 ROE Return on Equity Seabrook 1 Seabrook Nuclear Generating Station Unit 1 SEC Securities and Exchange Commission Sellers NEP and Narragansett Service Company New England Power Service Company 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. Vermont Yankee Vermont Yankee Nuclear Power Corporation Yankee Atomic Yankee Atomic Electric Company Yankee Companies Yankee Atomic, Vermont Yankee, Maine Yankee, and Connecticut Yankee Y2K year 2000 1935 Act Public Utility Holding Company Act of 1935, as amended FORWARD LOOKING INFORMATION This report and other presentations made by NEES and its subsidiaries contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Throughout this report, forward looking statements can be identified by the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimated", "projected", "believe", "hopes", 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: (a) the impact of general economic changes in New England; (b) the impact of industry restructuring, customer choice of power suppliers, increased competition in the electric utility industry, and timing and nature of federal and state regulatory actions on the mergers with Eastern Utilities Associates (EUA) and The National Grid Group plc (National Grid), including - significant opposition in regulatory proceedings, - delay at one or more regulatory agencies, - unanticipated changes in circumstances requiring amendments be made to filings, and - the imposition of unacceptable conditions to approval by one or more regulatory agencies, as more fully set out below under ELECTRIC UTILITY OPERATIONS, page 3, and INDUSTRY RESTRUCTURING, page 5; (c) 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; (d) changes in accounting rules and interpretations which may have an adverse impact on the NEES companies' statements of financial position and reported earnings; (e) timing and adequacy of rate relief; (f) adverse changes in electric load and customer growth; (g) climatic changes or unexpected changes in weather patterns; (h) distribution facility performance, as more fully set out below under Transmission, Distribution, and Nuclear Generation Properties, page 32; and (i) operation and decommissioning costs associated with nuclear generating facilities, as set out under Nuclear Units below, page 36. 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, Delaware 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 Metrowest Realty, LLC (Metrowest Delaware Property 100 Realty) Ownership Nantucket Electric Company Mass. Retail 100 (Nantucket) Electric The Narragansett Electric Company R.I. Retail 100 (Narragansett) Electric NEES Communications, Inc. Mass. Telecommunications 100 (NEESCom) NEES Energy, Inc. (NEES Energy) Mass. Marketing 100 NEES Global, Inc. Mass. Consulting 100 (NEES Global) (formerly NEES Global Transmission, Inc.) New England Electric Transmission N.H. Electric 100 Corporation (NEET) Transmission New England Energy Incorporated Mass. Formerly Oil (NEEI) and Gas 100 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) New England Power Company (NEP) Mass. Transmission (c) 99.97(b)
% Voting Securities State of Type of Owned by Name of Company Organization Business NEES --------------- ------------ -------- --------- New England Power Service Company Mass. Service 100 (Service Company) Company New England Water Heater Co., Inc. Mass. Water Heater *** (NEWH) Rentals Research Drive LLC (Research Mass. Acquisition 99 Drive) Vehicle **** * NEES Energy owns 100 percent of the voting securities. ** Mass. Hydro and N.H. Hydro each own 50 percent of the voting securities. *** NEES Global owns 100 percent of the voting securities. **** NEES Global owns 1 percent of the voting securities. (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 33. (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 0.03 percent of the total voting power. (c) For information on NEP's ownership interest in nuclear generating units, see Nuclear Units, page 36. 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 transmission subsidiary, NEP, constitute an electrical transmission and distribution 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. 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. To date, Granite State Energy's activities have been limited to participation in the New Hampshire retail choice pilot program. NEES Energy is a wholly-owned, nonutility marketing subsidiary of NEES. NEES Energy owns AllEnergy, an energy marketing company. NEESCom is a wholly-owned, nonutility subsidiary of NEES which provides telecommunications infrastructure to the telecommunication industry. 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 33. 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' divestiture of their generating business, NEEI sold its oil and gas properties in February 1998. For more information, see INDUSTRY RESTRUCTURING, page 5, and Oil and Gas Operations, page 42. 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 services. NEWH is a subsidiary of NEES Global which provides water heater rentals. Metrowest Realty owns the System's headquarters complex in Westborough, Mass., and the North Andover, Mass., service center occupied by Mass. Electric. EMPLOYEES At December 31, 1998, NEES subsidiaries had approximately 3,540 employees. At that date, the total number of employees was approximately 87 at NEP, 1,505 at Mass. Electric, 522 at Narragansett, 54 at Granite State, 21 at Nantucket, 1,045 at the Service Company, and 306 at AllEnergy. Of the 3,540 employees, approximately 1,944 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. Negotiation of new contracts with these unions is in progress. ELECTRIC UTILITY OPERATIONS INTRODUCTION 1998 was a year of unprecedented change for the electric utility industry and for NEES. Prior to 1998, the NEES companies provided their customers bundled electric service (i.e. production and delivery) within exclusive franchise service territories. By mid-1998, all NEES customers were provided the right to purchase electricity from the power supplier of their choice. NEES remains obligated to deliver that electricity over its transmission and distribution systems. In September 1998, NEES completed the divestiture of substantially all of its nonnuclear generating business. In December 1998, NEES agreed to a merger with National Grid, whereby NEES would become a wholly-owned subsidiary of National Grid. National Grid's principal subsidiary operates the transmission system in England and Wales. On February 1, 1999, NEES entered into an agreement to acquire EUA, a utility holding company serving approximately 300,000 customers in Massachusetts and Rhode Island. MERGER AGREEMENT WITH NATIONAL GRID On December 11, 1998, NEES, National Grid, and NGG Holdings LLC (Holdings), a directly and indirectly wholly-owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly-owned subsidiary of National Grid. NEES shareholders will receive $53.75 per share in cash, which will be increased at a rate of $.003288 each day beginning six months after shareholder approval of the Merger until the Merger is completed, up to a maximum price of $54.35 per share. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (the 1935 Act), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC), support or approval from the states in which NEES operates, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. For more information, see National Grid Merger, page 13. MERGER AGREEMENT WITH EASTERN UTILITIES ASSOCIATES On February 1, 1999, NEES, EUA, and Research Drive, a directly and indirectly wholly-owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly-owned subsidiary of NEES. EUA shareholders will receive $31.00 per share in cash, which will be increased at a rate of $.003 each day beginning six months after EUA shareholder approval of the EUA acquisition until the acquisition is completed or until April 30, 2000, whichever is earlier. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. For more information, see Eastern Utilities Associates Merger, page 17. INDUSTRY RESTRUCTURING During 1998, pursuant to legislation enacted in Massachusetts, Rhode Island, and New Hampshire, and settlement agreements approved by state and federal regulators (the Settlement Agreements), all NEES customers were provided the right to purchase electricity from the power supplier of their choice. The NEES companies remain obligated to deliver that electricity over its transmission and distribution systems, with such delivery services provided under regulated rates approved by state and federal regulators. As described below, those delivery rates include a non-bypassable charge for the costs of NEES' former generating business which were not recovered through the sale of that business ("stranded costs"), which was substantially completed in 1998. As a result of the Settlement Agreements, customers choice of power supplier has no impact on NEES' transmission and distribution business or on its ability to recover stranded costs. Customers who do not choose a power supplier are able, for a period of time, to continue to purchase their electricity from the NEES companies at a transition rate ("standard offer generation service") which, when combined with delivery charges, results in total rate reductions ranging from 8 to 24 percent compared with the rates that had been in effect prior to the introduction of customer choice. The NEES companies bear little risk associated with the provision of standard offer generation service as substantially all of the obligations of the NEES companies to provide such service are backed by contracts with USGen New England, Inc. (USGen), an indirect wholly-owned subsidiary of PG&E Corporation, and other power suppliers. Pursuant to the Settlement Agreements, the NEES companies had agreed to sell their nonnuclear generating business. On September 1, 1998, NEES subsidiaries NEP and Narragansett (collectively, the Sellers) completed the sale of substantially all of their nonnuclear generating business to USGen. The assets sold include 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 had a book value of approximately $1.1 billion. The NEES companies received $1.59 billion for the sale. In addition, the NEES companies were reimbursed approximately $140 million for costs associated with early retirements and special severance programs for employees affected by industry restructuring, and the value of inventories. USGen assumed responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen also assumed the Sellers' obligations under long-term fuel and fuel transportation contracts, and certain collective bargaining agreements. As part of the sale, NEP also signed a purchased power transfer agreement through which USGen purchased NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts in exchange for monthly fixed payments by NEP averaging $9.5 million per month through January 2008 (having a net present value of $833 million) toward the above market cost of those contracts. In some cases, these transfers involved formal assignment of the contracts to USGen and a release of NEP from further obligations to the power supplier, while others did not. For those that involved formal assignment, NEP was required to make a lump sum payment equivalent to the present value of the monthly fixed payment obligations of those contracts. On or prior to the closing date, NEP made lump sum payments totaling approximately $340 million and was released from further obligations relating to two of the contracts. These lump sum payments are separate from the $833 million figure referred to above. As part of the divestiture plan, in February 1998, NEEI, a wholly-owned subsidiary of NEES, whose costs had been supported by the generating business, 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. NEP agreed under the Settlement Agreements to endeavor to sell its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine. In February 1999, Vermont Yankee Nuclear Power Corporation entered into a letter of intent to sell its assets (for more information, see Nuclear Units, page 36). The Settlement Agreements provide that stranded costs are to be recovered from NEP's wholesale customers through contract termination charges (CTC). The affiliated wholesale customers, in turn, are recovering those costs through their delivery charges to distribution customers. Under the Settlement Agreements, the recovery of NEP's stranded costs is divided into several categories. Unrecovered costs associated with generating plants (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and earn a return on equity averaging 9.7 percent. NEP's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. The CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of NEP's nonnuclear generating business. As the CTC rate declines, NEP, under certain of the Settlement Agreements, earns incentives based on successful mitigation of its stranded costs. These incentives supplement NEP's return on equity. Finally, the Settlement Agreements provide that until such time as NEP divests its operating nuclear interests, NEP will share with customers, through the CTC, 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. 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 these charges because they are expected to be included in future customer charges. In 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) concluded in Issue 97-4 that a utility that had 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 stranded costs. NEP has received authorization from the FERC to recover through the CTC substantially all of the costs associated with its former generating business not recovered through the sale of that business. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, substantially all of NEP's business, including the recovery of its stranded costs, remains under cost-based rate regulation. Under existing ratemaking practices, NEES' distribution companies will have the ability to recover through rates their specific costs of providing ongoing distribution services. NEES believes these factors and the EITF conclusion allow its principal utility subsidiaries to continue to apply FAS 71. Because of the nuclear cost-sharing provisions related to NEP's CTC, NEP ceased applying FAS 71 in 1997 to 20 percent of its ongoing nuclear operations, the impact of which is immaterial. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets, including those being recovered through NEP's CTC. In addition, reserves for depreciation may also have to be increased to comply with unregulated accounting practices. As a result of applying FAS 71, NEES has recorded a regulatory asset for the costs that are recoverable from customers through the CTC. The regulatory asset reflects the loss on the sale of NEES' oil and gas business and the unrecovered plant costs in operating nuclear plants (assuming no market value), the costs associated with permanently closed nuclear power plants, and the present value of the payments associated with the above-market costs of purchased power contracts, reduced by the gain from the sale of NEP's nonnuclear generating business. At December 31, 1998, the regulatory asset related to the CTC was approximately $1.5 billion, of which $1.2 billion related to the above-market costs of purchased power contracts. As described above, the CTC regulatory asset includes the unrecovered plant costs associated with NEP's interest in operating nuclear plants. This balance sheet treatment is due to NEP's conclusion that its interests in the Millstone 3 and Seabrook 1 nuclear generating units have little, if any, market value. Three proposed sales of nuclear units by other utilities have required the seller to set aside amounts for decommissioning in excess of the proceeds from the sale of the units. Two of these proposed sales were agreed upon prior to the end of the third quarter of 1998. As a result, at the end of the third quarter of 1998, NEP recorded an impairment writedown in its reserve for depreciation of approximately $390 million, which represents the net book value at December 31, 1995, less applicable depreciation subsequent to that date, of Millstone 3 and Seabrook 1. Because the Settlement Agreements permit NEP to recover its pre-1996 investment as well as decommissioning expenses through the CTC, NEP established a regulatory asset in an amount equal to the impairment writedown. Should NEP's efforts to sell its nuclear interests result in a gain over the amounts remaining in the plant account, such gain will be credited to customers through the CTC. Impact of Restructuring on Distribution Business The Settlement Agreement applying to Massachusetts (The Massachusetts Settlement) also establishes distribution rates for NEES' Massachusetts subsidiaries Mass. Electric and Nantucket. 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, including an $11 million increase in annual depreciation expense, a $3 million annual contribution to a storm fund, and increased annual amortization of unfunded deferred income taxes of approximately $1 million over six years. Through the year 2000, Mass. Electric's return on equity is 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. Under the Rhode Island statute, Narragansett increased distribution rates by approximately $7 million and $11 million in 1998 and 1997, respectively. The statute does not limit Narragansett's ability to seek approval from state regulators to increase rates in the future. Overview of Financial Results and Outlook Earnings were $3.04 per diluted share in 1998 compared with $3.39 and $3.22 per diluted share in 1997 and 1996, respectively. The return on common equity was 11.4 percent in 1998, 12.8 percent in 1997, and 12.6 percent in 1996. The market price of NEES common shares was 48 1/8 per share at the end of 1998 compared with 42 3/4 per share and 34 7/8 per share at the end of 1997 and 1996, respectively. The decrease in 1998 earnings reflects significant revenue reductions due to the restructuring of the utility business in Massachusetts, Rhode Island, and New Hampshire, the effect of the divestiture of NEES' nonnuclear generating business (the combined effects of these items reduced revenues by approximately $1.60 per share and operating expenses by approximately $.60 per share), increased investments in unregulated ventures (reducing earnings by approximately $.05 per share), and costs incurred in connection with the development of the Merger Agreement between NEES and National Grid (reducing earnings by approximately $.05 per share). The decrease in earnings was partially offset by increased kWh deliveries to ultimate customers (approximately $.05 per share), a reduction in costs associated with nuclear operations (approximately $.35 per share), a reduction in core business operation and maintenance expense (approximately $.20 per share) in part as a result of workforce reductions. 1998 earnings per share were also positively affected by a share repurchase program (approximately $.07 per share). The earnings decrease related to investments in unregulated ventures is primarily attributable to losses incurred at AllEnergy. AllEnergy is an energy marketing company which offers energy commodities (natural gas, propane, and oil) and related value-added services to customers in the emerging competitive energy markets in the northeast. As AllEnergy develops market share in competitive energy markets which have yet to mature, low profit margins realized have been insufficient to cover overhead expenses. NEES believes its 1999 earnings will be reduced by a full year's effect of industry restructuring. NEES earnings will be negatively affected by the return on the reinvestment of the sale proceeds, which is expected, at least in the near term, to be considerably less than the return historically earned in the generating business. Further, the Settlement Agreements related to recovery of stranded costs limit the return on equity earned on the unrecovered investment in NEES' generating business to 9.7 percent, before mitigation incentives, which is significantly lower than that earned by the generating business in recent years. Finally, through the year 2000, the return on equity for NEES' principal distribution subsidiary is capped at 11.75 percent, plus certain incentives. Other For more information on new accounting standards, see page 18 of the 1998 NEES Annual Report. YEAR 2000 READINESS DISCLOSURE Over the next year, most companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates associated with the year 2000 (Y2K). This could cause computers to either shut down or lead to incorrect calculations. During 1996, the NEES companies began the process of identifying the changes required to their computer software and hardware to mitigate Y2K issues. The NEES companies established a Y2K Project team to manage these issues, which has consisted of as many as 70 full-time equivalent staff at some points in time, primarily external consultants being overseen by an internal Y2K management team. To facilitate the Y2K Project, NEES entered into contracts with Keane, Inc. and International Business Machines Corp. to provide personnel support to the Y2K Project. Through December 31, 1998, the NEES companies have spent approximately $14 million with these vendors, which is included in the cost figures disclosed below. The Y2K Project team reports project progress to a Y2K Executive Oversight Committee each month. The team also makes regular reports to NEES' Board of Directors and its Audit Committee. The NEES companies have separated their Y2K Project into four parts as shown below, along with the estimated completion dates for each part.
Substantial Contingency Testing Completion Documentation, of Critical and Clean Category Specific Example Systems Management - -------- ---------------- ----------- ------------------- Mainframe/Midrange Accounting/Customer Completed Throughout 1999 systems service integrated systems Desktop systems Personal computers/ June 30, 1999 Throughout 1999 Department software/ Networks Operational/ Dispatching systems/ June 30, 1999 Throughout 1999 Embedded Transmission and systems Distribution systems/ Telephone systems External issues Electronic Data June 30, 1999 Throughout 1999 Interchange/Vendor communications
The NEES companies are using a three-phase approach in coordinating their Y2K Project for system-related issues: (I) Assessment and Inventory, (II) Pilot Testing, and (III) Renovation, Conversion, or Replacement of Application and Operating Software Packages and Testing. Phase I, which was an initial assessment of all systems and devices for potential Y2K defects, was completed in mid-1997. These assessments included, but were not limited to, the review of program code for mainframe and midrange systems, analysis of personal computer hardware and network equipment for desktop systems, reaching consensus with key "data exchange" partners regarding the approach and execution of plans to address Y2K- related issues, and coordination with other New England Power Pool (NEPOOL) member utilities related to operational systems, such as transmission systems. Phase II, which consisted of renovation pilots for a cross-section of systems in order to facilitate the establishment of templates for Phase III work, was completed in late 1997. Phase III, which is currently ongoing, requires the renovation, conversion, or replacement of the remaining applications and operating software packages. Critical systems include major operational and informational systems such as the NEES companies financial-related and customer information systems. These mission critical systems were first addressed at an individual component level, and then, upon satisfactory completion of that testing, reviewed at an integrated level, during which the Y2K Project team tested for Y2K problems which could be caused by various system interfaces. Additionally, contingency plans are being formulated for mission critical systems, as described below. The overall Y2K Project has also been designed such that Y2K- related work performed by external consultants is reviewed by NEES employees, and vice-versa. The Y2K Project team management periodically benchmarks its progress against the recommended progress schedule documented by the North American Electric Reliability Council, and is currently ahead of the recommended schedule. The NEES companies have also implemented a formalized communication process with third parties to give and receive information related to their progress in remediating their own Y2K issues, and to communicate the NEES companies' progress in addressing the Y2K issue. These third parties include major customers, suppliers, and significant businesses with which the NEES companies have data links (such as banks). The NEES companies have identified standard offer generation service providers, telecommunications companies, and the Independent System Operator- New England (ISO New England) as critical to business operations. The NEES companies have been in contact with all of these parties regarding the progress of their Y2K remediation efforts, and will continue to monitor their ongoing remediation efforts through continued communications. The NEES companies cannot predict the outcome of other companies' remediation efforts. Therefore, contingency plans are being developed, as described below. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $28 million. These costs include the replacement of approximately one thousand desktop computers. In addition, the NEES companies are spending $4 million related to the replacement of the human resources and payroll system, in part due to the Y2K issue. To date, total Y2K-related costs of $25 million have been incurred, of which $3 million has been capitalized. The NEES companies continually review their cost estimates based upon the overall Y2K Project status, and update these estimates as warranted. The NEES companies are in the process of developing Y2K contingency plans to allow for critical information and operating systems to function from January 1, 2000 forward. If required, these plans are intended to address both internal risks as well as potential external risks related to suppliers and customers. Part of the contingency planning for accounting and desktop systems will include taking extensive data back-ups prior to year-end closing. For operational systems, the NEES companies have in place an overall disaster recovery program, which already includes periodic disaster simulation training (for outages due to severe weather, for instance). As part of Y2K contingency planning, the NEES companies will review their disaster recovery plans, modifying them for Y2K-specific issues, such as a potential loss of telecommunication services. The NEES companies expect that these contingency plans will be in place by the third quarter of 1999. Interregional and regional contingency plans are being formulated that address emergency scenarios due to the interconnection of utility systems throughout the United States. At a regional level, the NEES companies are participating and cooperating with NEPOOL and ISO New England. Overall regional activities, including those of NEPOOL and ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by North American Electric Reliability Council. The target for the completion of this planning process is mid-1999. The NEES companies have noted that the Y2K coordination efforts by ISO New England began in May 1998, resulting in a demanding and difficult schedule to attain regional and interregional target dates. The NEES companies believe the worst case scenario with a reasonable chance of occurring is temporary disruptions of electric service. This scenario could result from a failure to adequately remediate Y2K problems at NEES company facilities or could be caused by the inability of entities, such as ISO New England, to maintain the short-term reliability of various generators and/or transmission lines on a regional or interregional basis. The NEES companies believe that the contingency plans being developed both internally and on a regional level, as described above, should substantially mitigate the risks of this potential scenario. In the event that a short-term disruption in service occurs, NEES does not expect that it would have a material impact on its financial position and results of operations. While the NEES companies believe that their overall Y2K program will satisfactorily address all critical operational and system-related issues, significant risks remain. These risks include, but are not limited to, the Y2K readiness of third parties, including other utilities and power suppliers, cost and timeline estimates of remaining Y2K mitigation efforts, and the overall accuracy of assumptions made related to future events in the development of the Y2K mitigation effort. MERGER ACTIVITY National Grid Merger On December 11, 1998, NEES, National Grid, and Holdings entered into the Merger Agreement. Pursuant to the Merger Agreement, Holdings will merge with and into NEES, with NEES being the surviving entity (the Surviving Entity) and becoming a wholly-owned subsidiary of National Grid. The Merger, which was unanimously approved by the boards of directors of each of NEES, National Grid and Holdings, is expected to occur shortly after all of the conditions to the consummation of the Merger, including the receipt of certain regulatory approvals, are met or waived. NEES anticipates that the Merger will be consummated by early 2000. Under the terms of the Merger Agreement, each outstanding NEES common share, $1.00 par value per share (NEES Common Shares), other than shares, if any, owned by NEES as treasury shares (except those treasury shares which are held pursuant to NEES' Rabbi Trust), National Grid, Holdings or any other wholly-owned subsidiary of National Grid, will be converted into the right to receive $53.75 in cash, as may be adjusted (the Merger Consideration). Such adjustment will occur if the Closing Date does not occur on or prior to the date that is the six-month anniversary of the date on which NEES Shareholders' Approval is attained (the Adjustment Date) then the per share amount shall be increased by $.003288 each day up to a maximum adjustment of $0.60 per share, for a total of $54.35 per share. The Board of Directors of NEES has received an opinion from its investment banker, Merrill Lynch, Pierce, Fenner & Smith Incorporated, to the effect that, as of the date of the Merger Agreement, the Merger Consideration to be received by the holders of NEES Common Shares in the Merger is fair from a financial point of view to holders of NEES Common Shares. The Merger is subject to certain customary closing conditions, including, without limitation, the receipt of the required approval of NEES' shareholders, the receipt of the required approval of National Grid's shareholders, and the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including the consent or approval of certain state utility regulators, the approval of the FERC, the approval of the SEC under the 1935 Act, the approval of the NRC, the filing of the requisite notification with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of the applicable waiting period thereunder, and the filing of the requisite notification under the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988, and the termination of the review and investigation with no action taken by the President thereunder. The Merger is not dependent upon the EUA Merger. The Merger Agreement contains certain covenants of the parties pending the consummation of the Merger. Generally, except as required by the terms of NEES' Settlement Agreements with FERC and certain state utility regulators, NEES must carry on its business in the ordinary course consistent with past practice, comply with all laws and preserve intact its goodwill. NEES is permitted to declare and pay its regular quarterly dividends. The Merger Agreement contains certain restrictions on NEES including limitations on, or procedures for: issuance of securities, termination or failure to renew material contracts, amendments to NEES' Declaration of Trust or similar governing documents of NEES' Subsidiaries, capital expenditures, acquisitions, dispositions, incurrence of indebtedness, modification of employee compensation and benefits, rate matters, changes in accounting policies and discharge of liabilities. (See Article VI of the Merger Agreement.) The Merger Agreement prevents NEES and its subsidiaries from knowingly initiating, soliciting or encouraging, directly or indirectly, any inquiry or proposal or offer, or engaging in negotiations with, or providing confidential information to any third party relating to a business combination proposal, and requires NEES to terminate immediately any existing discussions or negotiations and notify National Grid of any such inquiries relating to a business combination proposal, unless prior to NEES shareholder approval: (i) NEES' Board determines, in good faith based upon the advice of its outside legal counsel with respect to the Board's fiduciary duties, that taking such action is necessary for the Board to act in a manner consistent with its fiduciary duties under applicable law; (ii) NEES' Board reasonably concludes, in good faith after consultation with its financial advisors, that (A) the party making such proposal has adequate financing sources and (B) such proposal is likely to be more favorable to stockholders of NEES than the Merger (a Superior Proposal); (iii) prior to furnishing nonpublic information or entering into negotiations, NEES notifies National Grid in writing of such furnishing of information or negotiations (identifying the party making the proposal and the material terms of such proposal) and enters into a confidentiality agreement with such third party; and (iv) NEES keeps National Grid promptly informed of the status and all material information with respect to such discussions or negotiations. NEES may terminate the Merger Agreement to accept a Superior Proposal (in which case, the termination fee provision described below would be applicable). However, before so terminating, NEES must negotiate with National Grid to adjust the Merger Agreement so as to enable the parties to proceed with the adjusted Merger Agreement, and NEES' Board must determine that, based on advice of counsel with respect to the Board's fiduciary duties and notwithstanding a binding commitment to consummate the Merger Agreement and notwithstanding all concessions that may be offered by National Grid in further negotiations with NEES, the Superior Proposal is more favorable to NEES' shareholders than the Merger. (See Section 7.08 and Article IX of the Merger Agreement.) NEES' CEO and one outside director of NEES' Board of Directors, mutually determined by National Grid and NEES, will be appointed to the Board of Directors of National Grid. In addition, the Surviving Entity will have an advisory board, with eleven members from NEES' Board immediately prior to the Closing, that will advise the Surviving Entity with respect to general business, among other things. The Merger Agreement provides that, after the effectiveness of the Merger (the Effective Time), the headquarters of the Surviving Entity will be in Massachusetts, and utility operations offices will remain in Massachusetts, New Hampshire and Rhode Island. (See Section 7.07 of the Merger Agreement.) The Merger Agreement may be terminated under certain circumstances, including: (i) by mutual written agreement of the boards of directors of the parties; (ii) by either party if the Merger has not been effected by the date nine months from the receipt of NEES shareholder approval (the Initial Termination Date), provided that if the parties are otherwise ready to close, but certain statutory approvals are not yet obtained, the Initial Termination date will be extended to the date fifteen months from the receipt of NEES shareholder approval (the Extended Termination Date), and provided further that if on the Initial or Extended Termination Date, a Financial Disruption exists, then NEES will have the right, but not the obligation, to extend such Termination Date six months beyond such Termination Date (a Financial Disruption means any significant disruption in the financial or capital markets which makes it impracticable for a company having financial characteristics similar to those of National Grid as of the date of the Merger Agreement to finance a transaction of the size and nature as that contemplated under the Merger Agreement on commercially reasonable financing terms that are available as of the date of such financing); and (iii) by either party if: (A) NEES shareholder approval or the National Grid shareholder approval has not been obtained; or (B) any law, rule or regulation is adopted which makes the Merger illegal or any final order or injunction permanently prohibits the Merger. In addition, NEES may terminate the Merger Agreement: (i) under certain circumstances, in order to accept a Superior Proposal (subject to the limitations and procedures described above and to payment of the termination fee described below); (ii) if there has been a material breach of certain of National Grid's representations and warranties or a failure by National Grid to perform and comply with its covenants under the Merger Agreement and such breach or failure has not been cured; (iii) if National Grid fails to deliver the merger consideration at a time when all conditions to National Grid's obligation to close have been satisfied or waived, and such failure is as a result of Financial Disruption; and (iv) if the Board of National Grid withdraws or modifies its approval of the merger or its recommendation to its shareholders. National Grid may terminate the Merger Agreement if: (i) the Board of NEES approves, recommends or takes no position with respect to an alternative business combination proposal; (ii) twelve months after NEES Shareholders' Approval is obtained, the order of the SEC approving the Merger under the 1935 Act has not been issued, and National Grid certifies to NEES that it reasonably believes that the SEC will not issue an order that would comply with the requirements of the regulatory condition; (iii) the Board of NEES withdraws or modifies its approval of the merger or its recommendation to its shareholders; and (iv) there has been a material breach of NEES's representations and warranties or a failure by NEES to perform and comply with its covenants under the Merger Agreement and such breach or failure has not been cured. (See Articles VIII and IX of the Merger Agreement.) National Grid will pay NEES a termination fee of: (i) $100 million if NEES terminates the Merger Agreement because National Grid was unable to pay the merger consideration, at a time when all of the National Grid's closing conditions were met or waived, because of a Financial Disruption; (ii) $75 million plus up to $10 million for documented out-of-pocket expenses if National Grid terminates after the twelve month anniversary of NEES' shareholder approval because an order from the SEC approving the Merger has not been issued, and National Grid certifies to NEES that it reasonably believes that the SEC will not issue an order that would comply with the requirements of the regulatory condition; and (iii) documented out-of-pocket expenses up to $10 million if NEES terminates because of National Grid's (A) material breach of its representations and warranties, (B) failure to perform and comply with its covenants under the Merger Agreement or (C) failure to obtain its shareholder vote. (See Articles VIII and IX of the Merger Agreement.) NEES will pay National Grid a termination fee of (i) $100 million plus up to $10 million for documented out-of-pocket expenses if NEES terminates the Merger Agreement because NEES became the target of a third party alternative proposal, and NEES' Board determined in good faith based upon the advice of outside counsel with respect to the Board's fiduciary duties, that termination was necessary for the Board to act consistently with its fiduciary duties under applicable law; (ii) $100 million plus up to $10 million for documented out-of-pocket expenses if, at a time when an alternative business proposal is pending, (A) National Grid terminates the Merger Agreement because: (1) NEES has materially breached its representations and warranties or has failed to materially perform and comply with its covenants under the Merger Agreement, or (2) NEES shareholder approval was not obtained, or (B) NEES terminates the Merger Agreement because the Closing has not occurred by the termination date, provided, that in the case of (A) or (B), NEES enters into a merger or acquisition agreement with the party offering such alternative proposal within two years of such termination; and (iii) documented out-of-pocket expenses up to $10 million if National Grid terminates at a time when no alternative business proposal was outstanding because of NEES' (A) material breach of its representations and warranties, (B) failure to perform and comply with its covenants under the Merger Agreement or (C) failure to obtain its shareholder vote. (See Article IX of the Merger Agreement.) If the Merger Agreement is terminated because either party's Board has withdrawn or changed its recommendation with respect to the Merger prior to such party's shareholder meeting, then the other party must pay a $100 million termination fee plus documented out-of-pocket expenses up to $10 million. (See Article IX of the Merger Agreement.) Eastern Utilities Associates Merger On February 1, 1999, NEES, Research Drive, and EUA entered into the EUA Agreement. Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA being the surviving entity and becoming a wholly-owned subsidiary of NEES (the EUA Surviving Entity). The EUA Merger, which was approved by the NEES Board of Directors, the EUA Board of Trustees and the Members of Research Drive, is expected to occur shortly after all of the conditions to the consummation of the EUA Merger, including the receipt of certain regulatory approvals, are met or waived. NEES anticipates that the EUA Merger will be consummated by early 2000. Under the terms of the EUA Agreement, each outstanding share of EUA's common stock (the EUA Common Stock), other than shares, if any, owned by EUA as treasury shares, NEES, Research Drive or any other wholly-owned subsidiary of NEES, will be converted into the right to receive $31.00 in cash, as may be adjusted (the EUA Merger Consideration). Such adjustment will occur as follows: if the EUA Closing Date does not occur on or prior to the date that is the six-month anniversary of the date on which EUA shareholders approve the EUA Merger (the Adjustment Date), then the per share amount shall be increased for each day after the Adjustment Date up to and including the day which is one day prior to the earlier of the EUA Closing Date and May 1, 2000 by an amount equal to $.003. The Board of Directors of NEES has received an opinion from its investment banker, Merrill Lynch, Pierce, Fenner & Smith Incorporated, to the effect that, as of January 30, 1999, the EUA Merger Consideration to be paid by NEES pursuant to the EUA Merger is fair from a financial point of view to NEES. The EUA Merger is subject to certain customary closing conditions, including, without limitation, the receipt of the required approval of EUA's shareholders by an affirmative vote of two-thirds of the outstanding EUA shares and the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including the consent or approval of certain state utility regulators, the approval of the FERC, the approval of the SEC under the 1935 Act, the approval of the NRC and the filing of the requisite notification with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA Merger is not dependent upon the National Grid merger. The EUA Agreement contains certain covenants of the parties pending the consummation of the EUA Merger. Generally, EUA must carry on its business in the ordinary course consistent with past practice, comply with all laws and preserve intact its goodwill. The EUA Agreement contains certain restrictions on EUA including limitations on, or procedures for: payment of dividends on EUA common shares and preferred shares of certain EUA subsidiaries, issuance of securities, amendment of the EUA's Declaration of Trust, or similar governing documents of EUA's subsidiaries, acquisitions, dispositions, incurrence of indebtedness, capital expenditures, modification of employee compensation and benefits, changes in accounting policies, amendment, termination or failure to renew material contracts, discharge of liabilities, rate matters, equity investments, loans to affiliates or other persons, and assessing the adequacy of EUA's Year 2000 Program. (See Article VI of the EUA Agreement.) Pursuant to the EUA Agreement, EUA agrees that neither it nor any of its subsidiaries shall knowingly initiate, solicit or encourage, directly or indirectly, any inquiry or proposal or offer relating to a business combination proposal or similar transaction including EUA or any of its significant subsidiaries other than EUA Cogenex Corporation, or engage in negotiations with, or provide confidential information to any third party, and requires EUA to terminate immediately any existing discussions or negotiations and notify NEES of any such inquiries relating to a business combination proposal, unless prior to EUA shareholder approval: (i) EUA's Board determines, in good faith based upon the advice of its outside legal counsel with respect to the Board's fiduciary duties, that taking such action is necessary for the Board to act in a manner consistent with its fiduciary duties under applicable law; (ii) EUA's Board reasonably concludes, in good faith after consultation with its financial advisors, that (A) the party making such proposal has adequate financing sources and (B) such proposal is likely to be more favorable to shareholders of EUA than the EUA Merger (a Superior Proposal); (iii) prior to furnishing nonpublic information or entering into negotiations, EUA notifies NEES in writing of such furnishing of information or negotiations (identifying the party making the proposal and the material terms of such proposal) and enters into a confidentiality agreement in customary form with such third party; and (iv) EUA keeps NEES promptly informed of the status and all material information with respect to such discussions or negotiations. EUA may terminate the EUA Agreement to accept a Superior Proposal (in which case, the termination fee provision described below would be applicable). However, before so terminating, EUA must negotiate with NEES to adjust the EUA Agreement so as to enable the parties to proceed with the adjusted EUA Agreement, and EUA's Board must determine that, based on advice of counsel with respect to the Board's fiduciary duties and notwithstanding a binding commitment to consummate the EUA Agreement and notwithstanding all concessions that may be offered by NEES in further negotiations with EUA, the Superior Proposal is more favorable to EUA's shareholders than the EUA Merger. (See Section 7.08 and Article IX of the EUA Agreement.) If the EUA Merger is consummated, then promptly following the merger contemplated by the merger agreement between NEES, National Grid and Holdings dated as of December 11, 1998 (the National Grid Merger Agreement), NEES shall take the necessary action to cause all of the members of the Board of Trustees of EUA to be appointed to serve on the advisory board to be formed pursuant to the National Grid Merger Agreement. (See Section 7.07 of the EUA Agreement.) The EUA Agreement may be terminated under certain circumstances, including: (i) by mutual written agreement of the Board of Directors of NEES and the Board of Trustees of EUA, (ii) by either party if the EUA Merger has not been effected by December 31, 1999 (the Initial Termination Date), provided, that if the parties are otherwise ready to close, but certain statutory approvals are not yet obtained, the Initial Termination Date will be extended for four months (the Extended Termination Date) and (iii) by either party if any law, rule or regulation is adopted which makes the EUA Merger illegal or any final order or injunction permanently prohibits the EUA Merger. NEES may terminate the EUA Agreement: (i) if EUA shareholder approval has not been obtained at a duly held meeting of such shareholders, including any adjournments thereof, (ii) if there has been a material breach of EUA's representations and warranties or a failure to perform and comply with its covenants under the Agreement and such breach or failure has not been cured, (iii) if EUA's Board withdraws or modifies its approval of the merger or its recommendation to its shareholders or resolves to take such action or (iv) if EUA's Board approves, recommends or takes no position with respect to an alternative proposal or resolves to take such action. In addition, EUA may terminate the EUA Agreement: (i) in order to accept a Superior Proposal if EUA's Board determines that such termination is necessary to act in a manner consistent with its fiduciary duties after following the applicable procedures, as described above, provided, that EUA's ability to terminate in accordance with this provision of the Agreement is conditioned upon concurrent payment by EUA to NEES of any applicable termination fees under the Agreement, (ii) if there has been a material breach of NEES's representations and warranties or a failure to perform and comply with its covenants under the Agreement and such breach or failure has not been cured or (iii) if NEES fails to deliver the EUA Merger Consideration at a time when all conditions to NEES's obligation to close have been satisfied or waived. (See Articles VIII and IX of the EUA Agreement.) EUA will pay NEES a termination fee of $20 million plus up to $5 million for documented out-of-pocket expenses: (i) if EUA terminates the EUA Agreement because EUA became the target of a third party alternative proposal, and EUA's Board determined in good faith based upon the advice of outside counsel with respect to the Board's fiduciary duties, that termination was necessary for the Board to act consistently with its fiduciary duties under applicable law or (ii) if, at a time when an alternative business proposal is pending, (A) NEES terminates the EUA Agreement because: (1) EUA shareholder approval was not obtained, (2) EUA has materially breached its representations and warranties or has failed to materially perform and comply with its covenants under the EUA Agreement, or (iii) the Board of EUA withdraws or modifies its approval of the EUA Merger or its recommendation to its shareholders, or approves, recommends, or takes no position with respect to a third party alternative proposal, or (B) EUA terminates the EUA Merger Agreement because the Closing has not occurred by the termination date, provided, that in the case of (A) or (B), EUA enters into a merger or acquisition agreement with the party offering such alternative proposal within two years of such termination. (See Article IX of the EUA Agreement.) NEES will pay EUA a termination fee of $10 million plus up to $5 million for documented out-of-pocket expenses if either NEES or EUA terminates because the Closing Date has not occurred on or before the Initial Termination Date, or if the Initial Termination Date is extended, the Extended Termination Date, and on the date of such termination: (i) all conditions to closing other than the condition requiring that certain statutory consents and approvals be obtained has not been fulfilled, provided, that such Closing Date has not failed to occur due to a failure on the part of the terminating party to fulfill any obligation under the EUA Agreement, (ii) if the date of termination is any date other than the Extended Termination Date or a date thereafter, all conditions of each party other than the conditions concerning (A) statutory consents and approvals and (B) the certification of performance of obligations on the part of NEES and Research Drive have been fulfilled or are capable of being fulfilled and (iii) the merger contemplated by the National Grid Merger Agreement has not been consummated. (See Articles VIII and IX of the EUA Agreement.) REGULATORY MERGER OUTLOOK The following are management's projections as to when shareholder votes will be taken and various regulatory filings will be made to secure approval for the NEES/National Grid and NEES/EUA proposed mergers. Actual timing and results could differ materially from those discussed here (see FORWARD LOOKING INFORMATION, page vi). NEES does not assume the obligation to update these projections. NEES/National Grid SEC - An SEC order under the 1935 Act allowing NEES to solicit its shareholders was issued on March 25, 1999. The NEES shareholder meeting is scheduled to take place on May 3, 1999. - The National Grid filing for approval of the Merger under the 1935 Act was made on March 26, 1999. NRC - A filing was submitted on March 16, 1999. FERC - NEES filed for approval on March 10, 1999. Hart-Scott-Rodino - A filing is expected to be made on March 31, 1999. Exon-Florio - The parties made a filing on March 29, 1999. State Public Utility Commissions - No formal approvals are required in Massachusetts and Rhode Island. However, written support from each of these state public utility commissions is necessary to obtain the SEC merger approval listed above. An informational filing was made with the MDTE on March 9, 1999, a courtesy copy of which was supplied to Rhode Island. - The New Hampshire Public Utilities Commission (NHPUC) approval is not required if NEES' subsidiaries which operate in New Hampshire represent to the NHPUC that the Merger will not adversely affect their rates, terms, service, or operations. On March 18, 1999, these NEES subsidiaries submitted the requisite representations. - Filings are expected to be made in March 1999 with the Connecticut Public Utility Commission and the Vermont Public Service Board. NEES/EUA SEC - EUA made a filing in March 1999 under the 1935 Act to secure permission to solicit EUA shareholders. The date of shareholder meeting for approval of the EUA Merger is dependent upon timing of receipt of an order. Management is hopeful that an SEC order will be issued in April 1999. The EUA shareholder meeting could then take place in May 1999. - A joint NEES/EUA filing for approval of the EUA Merger under the 1935 Act is expected to be made in May 1999. NRC - A filing is expected to be made in April 1999. FERC - NEES expects to file for approval of the EUA Merger and transmission rates in April 1999. Hart-Scott-Rodino - A filing is expected to be made in April 1999. State Public Utility Commissions - NEES expects to file for approval of the EUA Merger and rate plans in Massachusetts and Rhode Island in April 1999. - NHPUC approval is not required if EUA's subsidiary which operates in New Hampshire represents to the NHPUC that the EUA Merger will not adversely affect its rates, terms, service, or operations. It is expected that EUA's subsidiary will make the requisite representation. - A filing for approval from the Connecticut Public Utility Commission is expected to be made in April 1999. 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 35. The largest cities served are Worcester, Mass. (population 170,000) and Providence, Rhode Island (population 161,000). Mass. Electric Description of Business Mass. Electric provides approximately 980,000 customers with electric delivery service in an area comprising approximately 43 percent of The Commonwealth of Massachusetts. The population of the service area is about 2,160,000 or 36 percent of the total population of the Commonwealth (1990 Census). Mass. Electric's service area consists of 146 cities and towns including the highly diversified commercial and industrial cities of Worcester, Lowell, and Quincy, the Interstate 495 high technology belt, and many suburban communities and rural towns. The economy of the area is diversified. Principal industries served by Mass. Electric include computer manufacturing and related businesses, electrical and industrial machinery, plastic goods, fabricated metals and paper, and chemical products. In addition, a broad range of professional, banking, medical, and educational institutions is served. During 1998, 39 percent of Mass. Electric's revenue from the sale and delivery of electricity was derived from residential customers, 39 percent from commercial customers, 21 percent from industrial customers, and 1 percent from others. In 1998, the 20 largest customers of Mass. Electric accounted for approximately 7 percent of its electric revenue. Effective March 1, 1998, Mass. Electric's customers gained the right to choose their power supplier under Massachusetts legislation. (see INDUSTRY RESTRUCTURING, page 5). 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 per year 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. 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 was terminated effective March 31, 1998, with a final reconciliation of approximately $20.8 million in overcollection pending at the MDTE. With the implementation of retail choice on March 1, 1998, Mass. Electric also implemented various adjustment provisions which allow recovery, on a fully reconciling basis, of the costs of providing transmission service, standard offer service, and default service, to its customers as well as the cost of terminating its all-requirements service contract with NEP. These adjustment provisions are (1) the transmission service cost adjustment provision, (2) the standard service cost adjustment provision, (3) the default service adjustment provision, and (4) the transition cost adjustment provision. The rates of Mass. Electric after March 1, 1998, the effective date of retail choice, were, on average, ten percent less than the rates in effect on August 1, 1997, in accordance with the Massachusetts restructuring legislation. Following the divestiture by NEP of essentially all of its nonnuclear generating assets on September 1, 1998, Mass. Electric's rates to customers who did not select a competitive power supplier were, on average, 19 percent less than the August 1, 1997 rates. Narragansett Description of Business Narragansett provides approximately 335,000 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 1998, 44 percent of Narragansett's revenue from the sale and delivery of electricity was derived from residential customers, 40 percent from commercial customers, 14 percent from industrial customers, and 2 percent from others. In 1998, the 20 largest customers of Narragansett accounted for approximately 10 percent of its electric revenue. Effective January 1, 1998, Narragansett's customers gained the right to choose their power supplier under Rhode Island legislation (see INDUSTRY RESTRUCTURING, page 5). 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 January 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. 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 was terminated at the end of 1997, and all overcollections were refunded back to customers during 1998. With the implementation of retail choice on January 1, 1998, Narragansett also implemented various adjustment provisions which allow recovery, on a fully reconciling basis, of the costs of providing transmission service, standard offer service, and last resort service to its customers as well as the cost of terminating its all-requirements service contract with NEP. These adjustment provisions are (1) the transmission service cost adjustment provision, (2) the standard offer service adjustment provision, (3) the last resort service adjustment provision, and (4) the non- bypassable transition adjustment provision. The transmission service cost adjustment provision was not effective until January 1, 1999. The rates of Narragansett after January 1, 1998, the effective date of retail choice, and throughout 1998, were, on average, eight percent less than the rates in existence prior to retail choice. 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 37,000 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 1998, 49 percent of Granite State's revenue from the sale and delivery of electricity was derived from commercial customers, 36 percent from residential customers, 14 percent from industrial customers, and 1 percent from others. In 1998, the 10 largest customers of Granite State accounted for about 18 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 July 1998, the New Hampshire Public Utilities Commission approved a restructuring settlement agreement proposed by Granite State and its transmission affiliate, NEP, the Governor's office of the State of New Hampshire and a number of other interested parties. This settlement agreement enables customers to select their choice of competitive power suppliers and was the only such settlement approved in New Hampshire as of December 31, 1998. The settlement also provides for a distribution rate surcharge for storm costs and pilot program costs (see INDUSTRY RESTRUCTURING, page 5). Rates With the implementation of Granite State's Settlement Agreement and retail choice on July 1, 1998, Granite State also implemented various adjustment provisions which allow recovery, on a fully reconciling basis, of the costs of providing transmission service, transition service, and other system benefits, to its customers as well as the cost of terminating its all-requirements service contract with NEP. These adjustment provisions are (1) the transmission service cost adjustment provision, (2) the transition service cost adjustment provision and the electric service adjustment provision, (3) the system benefits charge provision and the interim low income energy assistance program provision, and (4) the stranded cost adjustment provision. The rates of Granite State in the second half 1998, following the effective date of the settlement agreement were, on average, ten percent less than the pre-settlement rates. Following the divestiture by NEP of essentially all of its nonnuclear generating assets on September 1, 1998, Granite State's rates to customers who did not select a competitive power supplier were, on average, 17 percent less than the pre-settlement rates. 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. Effective March 1, 1998, Nantucket's customers gained the right to choose their power supplier under Massachusetts legislation (see INDUSTRY RESTRUCTURING, page 5). During 1998, 62 percent of Nantucket's revenue from the sale and delivery of electricity was derived from residential customers, 37 percent from commercial customers, and 1 percent from others. During 1996, a 26-mile undersea electric 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. Standard Offer Service In September 1998, NEP completed the divestiture of substantially all of its nonnuclear generating business. Prior to that date, 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 conducted a similar competitive solicitation in April 1998. No other supplier bid to supply power to Narragansett. USGen and TransCanada Power Marketing, Ltd. retain the backstop obligation to supply the electric energy requirements of Mass. Electric, Nantucket, and Narragansett for retail customers eligible to continue to buy standard offer generation service from their electricity delivery company at regulated prices. NEP retains the obligation to provide standard offer generation service for a portion of Narragansett's retail customers. Granite conducted a competitive solicitation in December 1998. Constellation Power Source, Inc. was the winning bidder in the solicitation and has the obligation to provide 100 percent of Granite's standard offer generation service requirements. For a discussion of electric utility operations in a more competitive environment and the sale of NEP's nonnuclear generating business, see INDUSTRY RESTRUCTURING, page 5. 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 1998. Mass. Electric's expenditures were $48 million, $51 million, and $46 million in 1996, 1997, and 1998, respectively. Narragansett's expenditures were $10 million, $10 million, and $11 million in 1996, 1997, and 1998, respectively. Narragansett and Granite State have received approvals from their respective state regulatory agencies to recover their 1999 DSM program expenditures. The Massachusetts Settlement and statute provide for recovery of DSM-related costs. The Massachusetts Department of Telecommunications and Energy approved Mass. Electric's and Nantucket's DSM program expenditure recovery plans through 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 full incentives are recorded. Mass. Electric recorded $5.7 million, $7.0 million, and $6.6 million of before-tax incentives in 1996, 1997, and 1998, respectively. Narragansett recorded $0.2 million, $0.3 million, and $0.4 million of before-tax incentives in 1996, 1997, and 1998, respectively. Performance-Based Ratemaking Currently, there is much regulatory and other movement toward establishing performance-based rates (for more information, see Accounting Implications, Page 7). TRANSMISSION AND NUCLEAR GENERATION BUSINESS NEP Description of Business On September 1, 1998, NEP completed the sale of substantially all of its nonnuclear generating business to USGen. NEP's business had been principally generating, purchasing, transmitting, and selling electric energy in wholesale quantities. In 1998, 98 percent of NEP's all-requirement revenue from the sale of electricity was derived from sales for resale to affiliated companies and 2 percent from sales for resale to municipal and other utilities. NEP's primary business is now the transmission of electric energy in wholesale quantities to other electric utilities, principally its distribution affiliates, the Electricity Delivery Companies. NEP is also the owner of a system of transmission lines and substations (see Map - Electric Utility Properties, page 35). NEP continues to own minority interests in two joint owned nuclear generating units as well as minority equity interests in four nuclear generating companies (see Nuclear Units, page 36). For a discussion of electric utility operations in a more competitive environment and the sale of NEP's nonnuclear generating business, see INDUSTRY RESTRUCTURING, page 5. Rates From January 1995 to March 1998, NEP 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 was obligated to sell to its customers, and its customers were obligated to purchase from NEP, the requirements of its retail service territory, and they could 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. The settlement agreements between NEP and the Electricity Delivery Companies included an amendment to the Tariff No. 1 service agreement which reformed the contractual relationship to allow for the early termination of the Electricity Delivery Companies' obligation to purchase wholesale all-requirements service from NEP, in consideration for the payment of the contract termination charge. The Electricity Delivery Companies are recovering the contract termination charge through a transition access charge (see INDUSTRY RESTRUCTURING, page 5). NEP has also reached similar agreements with three unaffiliated wholesale customers. In addition, one unaffiliated wholesale customer has terminated service under Tariff No. 1. NEP has obtained FERC approval to collect the associated stranded costs. 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 consist of the contract termination charge, transmission charges, standard offer charges where applicable, and market revenues where applicable. The CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of NEP's nonnuclear generating business (see INDUSTRY RESTRUCTURING, page 5). 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 equals approximately 0.5 cents per kWh. The standard offer revenues equaled 3.2 cents per kWh in 1998 and, with respect to NEP's continuing obligation to supply standard offer service to Narragansett, the rate will escalate in the years thereafter. 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 collected under the unbundled tariffs for the time period between the time customers could 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 the northeast. 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. On February 12, 1999, NEES and AllEnergy acquired Griffith Consumers Company (Griffith Consumers), a full-service distributor of residential and commercial heating oil in Washington, D.C., and in parts of Maryland, Delaware, Virginia, and West Virginia. 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. Its focus is providing telecommunications infrastructure principally leasing fiber optic cable to the telecommunications industry. NEES Global is a wholly-owned nonutility subsidiary of NEES. Its principal purpose is to provide consulting services and product licenses to unaffiliated utilities in the areas of electric industry restructuring and customer choice. NEES Global also leases water heaters through its subsidiary NEWH. OPERATING REVENUES The following is the detail of consolidated kWh sales and deliveries, revenue from sales and deliveries of electricity by the System, and System operating income for the last three years.
Sales and Deliveries of Electricity (in thousands of kWh) ------------------------------------ Classification 1998 1997 1996 - -------------- ---- ---- ---- Residential 8,058,262 8,034,001 8,027,352 Commercial 9,115,396 8,829,266 8,595,814 Industrial 5,112,337 5,100,907 4,913,644 Other 136,202 133,184 137,378 ---------- ---------- ---------- Total Deliveries to Ultimate Customers 22,422,197 22,097,358 21,674,188 Sales for Resale 2,991,261 4,034,345 3,611,643 ---------- ---------- ---------- Total Sales and Deliveries 25,413,458 26,131,703 25,285,831 ========== ========== ========== Operating Revenues (in thousands of dollars) ------------------------------------ Classification 1998 1997 1996 - -------------- ---- ---- ---- Residential $ 805,105 $ 877,447 $ 849,070 Commercial 789,194 840,671 792,380 Industrial 382,267 403,868 383,659 Other 26,280 28,040 26,902 ---------- ---------- ---------- Total Deliveries to Ultimate Customers 2,002,846 2,150,026 2,052,011 Sales for Resale 84,565 149,339 140,110 ---------- ---------- ---------- Total 2,087,411 2,299,365 2,192,121 Other Operating Revenue 333,122 203,226 158,577 ---------- ---------- ---------- Total Operating Revenue $2,420,533 $2,502,591 $2,350,698 ========== ========== ========== Operating Income $ 308,839 $ 366,861 $ 348,118 ========== ========== ==========
Operating revenue decreased $82 million in 1998 and reflects a reduction in generation-related revenues, decreased oil and gas- related revenues, and the reversal in 1997 of certain refund revenues related to rate adjustment mechanisms. In 1998, kWh deliveries to ultimate customers increased 1.5 percent, reflecting a strong economy. For the year as a whole, weather had a negative impact on 1998 deliveries when compared with 1997. ELECTRIC UTILITY PROPERTIES Transmission, Distribution, and Nuclear Generation Properties On September 1, 1998, NEES' subsidiaries, NEP and Narragansett, completed the sale of substantially all of their nonnuclear generating business to USGen. NEP also plans to seek offers to sell its nuclear generating business. For more information, see INDUSTRY RESTRUCTURING, page 5 and Nuclear Units, page 36. 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 35. NEP's integrated system consists of 2,233 circuit miles of transmission lines, 110 substations with an aggregate capacity of 12,535,789 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, 1998, Mass. Electric owned 247 substations, which had an aggregate capacity of 2,951,270 kVA, 147,571 line transformers with the capacity of 8,318,059 kVA, and 17,204 pole or conduit miles of distribution lines. Mass. Electric also owns 83 circuit miles of transmission lines. At December 31, 1998, Narragansett owned 224 substations, which had an aggregate capacity of 4,003,695 kVA, 49,475 line transformers with the capacity of 2,133,156 kVA, and 4,644 pole or conduit miles of distribution lines. Narragansett, in addition, owns 327 circuit miles of transmission lines. Substantially all of the properties and franchises of Mass. Electric and Narragansett are subject to the liens of indentures under which mortgage bonds have been issued. 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 1998 annual reports. The properties of NEET are subject to a mortgage under its financing arrangements. 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 included: (1) the establishment of a regional transmission tariff that ensures 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 revised governance structure; and (4) the creation of the ISO to operate the bulk power system and administer the regional tariff and power exchange. FERC has accepted most of NEPOOL's proposals. In June 1997, FERC ordered the creation of the ISO-New England. ISO-New England was activated on July 1, 1997 and has been operating the control area since that time. It operates under contract with NEPOOL and is governed by an independent Board of Directors. NEPOOL's Open Access Transmission Tariff (NOATT), which covers service across pool transmission facilities, went into effect, subject to refund, in March 1997. Parts of the NOATT have been disputed, and the cost of service methodology is currently being litigated at FERC. The two most contested issues are the allowed ROE and the existence of Excepted Transactions. Excepted Transactions are transactions which were in effect prior to November 1996. The NOATT states that these transactions are not superseded by the NOATT and therefore the parties must continue to pay the transmission provider for service until the transaction ends. FERC issued an order in December 1998 accepting the basic structure of the NEPOOL markets. It is currently anticipated that these markets will become active on May 1, 1999. As ordered by FERC, NEPOOL is currently working to develop a Congestion Management System and a Multi-Settlement System, which will be incorporated into the market at some later date. FERC rejected NEPOOL's governance proposal. On December 31, 1998, NEPOOL filed a newly revised governance proposal which increased the committee representation and voting shares of smaller players beyond that which was contemplated in the original filing. FERC rejected NEPOOL's revised governance proposal on March 10, 1999 finding that the revised voting share formula continued to allow a select group of utilities to control all the actions of the Management Committee. FERC ordered NEPOOL to file within 60 days a new proposal concerning governance that eliminates the control of vertically integrated utilities. 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. 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. Under the support agreements, NEP has agreed to guarantee its share of debt financing for the second phase. At December 31, 1998, NEP had guaranteed approximately $23 million of project debt. NEP's rights and obligations under its support agreements were transferred to USGen upon completion of the sale of NEP's nonnuclear generating business, but NEP remains an obligor in the event of USGen nonperformance (see INDUSTRY RESTRUCTURING, page 5). Map - Electric Utility Properties (Displays electric utility properties of NEES subsidiaries) Nuclear Units General NEP has interests in six nuclear units. Three of the units have been permanently shut down. The remaining three are currently operating. 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. 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. NEP also 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. Yankee Atomic, Connecticut Yankee, and Maine Yankee have permanently ceased operations. NEP purchases the output of the Vermont Yankee plant in the same percentage as its stock ownership, less small entitlements taken by municipal utilities. 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. NEP pays its proportionate share of costs and receives its proportionate share of output from Millstone 3 and Seabrook 1. Listed below is certain information on each nuclear plant in which NEP has an ownership interest. Under restructuring settlement agreements approved by regulators in Massachusetts, New Hampshire and Rhode Island, NEP has agreed to attempt to divest its nuclear holdings (for more information, see INDUSTRY RESTRUCTURING, page 5). On February 25, 1999, the Board of Directors of Vermont Yankee granted an exclusive right to AmerGen Energy Company (AmerGen), a joint venture by PECO Energy and British Energy to conduct due diligence review over the next 120 days and negotiate a possible agreement to purchase the assets of Vermont Yankee, Vermont's sole nuclear generating plant. Provided the due diligence review leads to successful completion of negotiations for a sale, consummation of such a sale would be contingent on regulatory approvals by the NRC, the SEC, under the 1935 Act, and the Vermont Public Service Board, among others. The sale process could take eight to twelve months or longer. In past negotiations for the sale of nuclear plants, due diligence review has not guaranteed that a sale will occur. NEP has a 20 percent ownership interest in Vermont Yankee and an investment of approximately $11 million at December 31, 1998. Operating Nuclear Units
NEP's Share of NEP's Net Plant Ownership Assets Unit Interest (%) ($ in millions) ---- ------------ --------------- Vermont Yankee 20 34 Millstone 3 12 9* Seabrook 1 10 15* *See Note C of the 1998 NEES annual report for a discussion of an impairment writedown and establishment of an offsetting regulatory asset.
Decommissioning Estimates
NEP's share of ($ in millions) -------------------------------- Estimated Decommissioning Decommissioning Fund Costs Balances (1) License Unit (in 1998 $) (12/31/98) Expiration ---- --------------- --------------- ---------- Vermont Yankee $105 $38 2012 Millstone 3 $ 67 $21 2025 Seabrook 1 $ 50 $10 2026 (1) Certain additional amounts are anticipated to be available through tax deductions.
Nuclear Units Permanently Shut Down
NEP's Investment Future Estimated ------------------- Date Billings to NEP Unit % $(millions) Retired $(millions) ---- --- ----------- ------------ ---------------- Yankee Atomic 30 6 February 1992 24 Connecticut Yankee 15 16 December 1996 75 Maine Yankee 20 16 August 1997 143
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 33 to 36 of the 1998 NEES Annual Report. For information on legal proceedings related to Millstone 3 and Maine Yankee, see LEGAL PROCEEDINGS, page 52. High-Level Waste Disposal The Nuclear Waste Policy Act of 1982 provides a framework and timetable for selection of sites for repositories of high-level radioactive waste (spent nuclear fuel) from United States nuclear plants. The U.S. Department of Energy (DOE) has entered into contracts with the Yankee Companies, the Millstone 3 joint owners, and the Seabrook 1 joint owners for acceptance of title to, and transportation and storage of, this waste. Under these contracts, each operating unit will pay fees to the DOE to cover the development and creation of waste repositories. Fees for fuel burned since April 1983 have been collected by the DOE on an ongoing basis at the rate of one tenth of a cent per kWh of net generation. Fees for generation up through April 1983 were determined by the DOE as follows: $13.2 million for Yankee Atomic, $48.7 million for Connecticut Yankee, $50.4 million for Maine Yankee, and $39.3 million for Vermont Yankee. Neither Millstone 3 nor Seabrook 1 has been assessed any fees for fuel burned through April 1983 because they did not enter commercial operation until 1986 and 1990, respectively. The Yankee Companies had several options to pay these fees. Yankee Atomic paid its fee to the DOE for the period through April 1983. The other three Yankee Companies elected to defer payment until a future date, thereby incurring interest expense. However, payment to the DOE must occur prior to the first delivery of spent fuel. Connecticut, Maine, and Vermont Yankee have segregated a portion of their respective DOE obligations in external accounts. The remainder of the funds have been used to support general capital requirements. All expect to separately fund in full in external accounts their DOE obligation (including accrued interest) prior to payment to the DOE. To the extent that any of the three Yankee Companies is unable to fully meet its DOE obligation at the prescribed time, NEP might be required to provide additional funds. Prior to such time that the DOE takes delivery of a plant's spent nuclear fuel, it is stored on site in spent fuel pools. Millstone 3, Seabrook 1, and Vermont Yankee are in the process of reconfiguring their spent fuel pools to allow for additional storage capability. Upon successful completion of the reconfiguring, Millstone 3 will have sufficient spent fuel pool capacity to support plant operation through the expiration of its 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. Although separate bills passed the Senate and House in 1997, legislation was not enacted. Similar legislation providing authorization for DOE to build the central storage facility has been introduced in the House of Representatives. A companion bill is expected to be introduced in the Senate. In July 1996, the U.S. Court of Appeals for the District of Columbia Circuit issued its decision in a lawsuit petitioning the Court to declare the 1998 contract date a binding legal obligation. The Court stated that the DOE is obligated "to start disposing Spent Nuclear Fuel no later than January 31, 1998." The Court's decision did not specify a plan for ensuring that the DOE meets its obligations, but rather noted that it was premature to determine the appropriate remedy since the DOE had not yet defaulted upon either its statutory or contractual obligation. In January 1997, numerous utilities and 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. Court of Appeals for the District of Columbia (the Appeals Court) held that the DOE was obligated to begin disposing of utilities' spent nuclear fuel by January 31, 1998. The DOE failed to meet this deadline, and is not expected to have a temporary or permanent repository for spent nuclear fuel for many years. 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. In 1998, Maine Yankee petitioned the Appeals Court to compel the DOE to remove Maine Yankee's spent fuel from the site. The Appeals Court rejected the petitions of Maine Yankee and the other utilities and state regulatory commissions, stating that the issue of damages was a contractual matter. The operators of the units in which NEP has an obligation, including Maine Yankee, Connecticut Yankee, and Yankee Atomic, pursued damage claims against the DOE in the Federal Court of Claims (Claims Court). In October 1998, the Claims Court ruled that the DOE violated a commitment to remove spent fuel from Yankee Atomic. The Claims Court issued similar rulings in November 1998 related to cases brought by Connecticut Yankee and Maine Yankee. Further proceedings will be scheduled by the Claims Court to decide the amount of damages. In February 1999, the U.S. Energy Secretary announced a plan by which the DOE would become temporary owner of the spent nuclear fuel at each nuclear sites around the nation. The DOE would own the spent fuel until a permanent central storage site is found. The nuclear industry does not support this plan, as it would be seen as further delaying the shipment of spent fuel from existing sites. 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. Following a closure in the early 1990s, the Barnwell facility reopened its services to most nonregional generators on July 1, 1995 and is authorized to remain open until July 1, 2005. In 1996, the South Carolina Supreme Court upheld the constitutionality of the legislative action that reopened Barnwell to nonregional generators. Envirocare began accepting Class A low- level waste in 1995. Class A waste is the least contaminated of the three categories defining low-level waste. The Barnwell facility accepts all three categories of waste. All the units in which NEP has an interest 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. Recently, the State of South Carolina has begun contemplating the closure of the Barnwell site. Should the Barnwell facility become unavailable, the cost of decommissioning the Yankee Atomic, Connecticut Yankee, and Maine Yankee plants could increase. The States of Maine and Vermont have established a compact with Texas for the disposal of low-level waste at a yet to be determined location in Texas. The compact agreement has been approved in all three states, ratified by the U.S. Congress and signed into law by the President. NEP cannot predict when a disposal facility will be selected, licensed and become operational in Texas. The compact relieves Maine and Vermont from having to site an in-state disposal facility. Connecticut, Massachusetts, and New Hampshire are still required to pursue local or regional low-level waste disposal facilities. However, Massachusetts suspended its search for a local disposal facility in 1996. Nuclear Fuel Supply The utilities responsible for the fuel supply for these operating nuclear units are not experiencing any difficulty in obtaining commitments for the supply of each element of the nuclear fuel cycle. Other Items Federal legislation requires emergency response plans, approved by federal authorities, for nuclear generating units. The Yankee Companies, Seabrook 1, and Millstone 3 are not currently experiencing difficulty in maintaining approval of their emergency response plans. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. The definition of owner under the statute covers NEP and may cover companies affiliated with it. NEP and the Electricity Delivery Companies cannot determine, at this time, the constitutionality, applicability, or effect of this statute. If NEP or the Electricity Delivery Companies were required to make payments under this statute, they would assess their legal remedies at that time. In any event, NEP and the Electricity Delivery Companies would attempt to recover through rates any payments required. If any claim in excess of NEP's ownership share were enforced against a NEES company, that company would seek reimbursement from any other Maine Yankee stockholder which failed to pay its share of such costs. Divestiture of Nonnuclear Generating Business On September 1, 1998, NEES' subsidiaries NEP and Narragansett completed the sale of substantially all of their nonnuclear generating business to USGen. For more information, see INDUSTRY RESTRUCTURING, page 5. Natural Gas Contracts Upon completion of the sale of the NEES companies' nonnuclear generating business to USGen, NEP's rights under its natural gas contracts were effectively transferred to USGen through an agency agreement, pursuant to which USGen receives the benefits of those contracts and pays the ongoing costs and charges incurred. NEP and USGen have agreed to use reasonable efforts to have NEP's rights and obligations under those contracts permanently assigned to USGen. (For information on the sale of NEP's nonnuclear generating assets, see INDUSTRY RESTRUCTURING, page 5.) Oil and Gas Operations 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 5. Purchased Power Transfer Agreement As part of the sale of NEP's nonnuclear generating business to USGen on September 1, 1998, NEP signed a purchased power transfer agreement through which USGen purchased NEP's entitlement to approximately 1,100 MW of power procured under long-term contracts. For more information, see INDUSTRY RESTRUCTURING, page 5. 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 and accounting. In addition, the NRC has broad jurisdiction over nuclear units and federal environmental agencies have broad jurisdiction over environmental matters. The electric utility subsidiaries of NEES are also subject to the jurisdiction of regulatory bodies of the states and municipalities in which they operate. For more information, see INDUSTRY RESTRUCTURING, page 5; Mass. Electric, Narragansett, Granite State, and NEP Rates, pages 23 through 28; Nuclear Units, page 36; and Environmental Requirements, page 43. 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. Upon completion of the sale of substantially all of NEES' nonnuclear generating business to USGen, USGen assumed responsibility for environmental conditions at the Sellers' nonnuclear generating stations (see INDUSTRY RESTRUCTURING, page 5). Siting and Construction Activities for New Transmission 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. However, due to the divestiture of its nonnuclear generating business, the System estimates that capital expenditures for environmental protection facilities in 1999 and 2000 will not be material to the System. System capital expenditures for such facilities amounted to approximately $9 million in 1996, $7 million in 1997, and $2 million in 1998, including expenditures by NEP of approximately $3 million, $5 million, and $.3 million, respectively, for those years. 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 16 and 32 of the NEES 1998 Annual Report, Note E of the Notes to the Financial Statements of the NEP 1998 Annual Report, and Financial Review and Note D of the Notes to the Financial Statements of both the Mass. Electric 1998 Annual Report and the Narragansett 1998 Annual Report. Nuclear The NRC, along with other federal and state agencies, has extensive regulations pertaining to environmental aspects of nuclear reactors. Safety aspects of nuclear reactors, including design controls and inspection programs to mitigate any possibility of nuclear accidents and to reduce any damages therefrom, are also subject to NRC regulation. See Nuclear Units, page 36. Water The Federal Clean Water Act prohibits the discharge of any pollutant, except in compliance with a discharge permit issued by the states or the EPA for a term of no more than five years. NEET has received the required surface water discharge permits for all of its current operations. NEES subsidiaries Narragansett, Mass. Electric and Nantucket have received sewer discharge permits where necessary. CONSTRUCTION AND FINANCING Estimated construction expenditures (including nuclear fuel) for the System's electric utility companies are shown below for 1999 through 2001. 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, technological changes, and the availability and costs of external sources of capital.
Estimated Construction Expenditures ----------------------------------- 1999 2000 2001 Total ---- ---- ---- ----- ($ in Millions - excluding AFDC) NEP - --- Generation (1)(2) Nuclear 10 10 10 30 Transmission 55 35 35 125 ---- ---- ---- ---- Total NEP 65 45 45 155 ---- ---- ---- ---- Mass. Electric - -------------- Distribution 75 75 75 225 ---- ---- ---- ---- Narragansett - ------------ Transmission 2 2 2 6 Distribution 23 23 23 69 ---- ---- ---- ---- Total Narragansett 25 25 25 75 ---- ---- ---- ---- Granite State - ------------- Distribution 4 3 3 10 ---- ---- ---- ---- Nantucket - --------- Distribution 2 1 1 4 ---- ---- ---- ---- Combined Total - -------------- Generation (1)(2) 10 10 10 30 Transmission 57 37 37 131 Distribution 104 102 102 308 ---- ---- ---- ---- Grand Total 171 149 149 469 ---- ---- ---- ---- (1) Includes nuclear fuel. (2) For more information, see INDUSTRY RESTRUCTURING, page 5.
Financing All of NEP's and the Electricity Delivery Companies' construction expenditures during the period beginning in 1999 to 2001 are expected to be financed by internally generated funds. 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 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. NEES purchased approximately 5.7 million common shares in 1998 under a repurchase program authorized by the NEES Board of Directors in 1997 and 1998. It is unlikely that NEES will repurchase additional shares in 1999. The ability of NEP and the Electricity Delivery Companies to issue short-term debt is limited by the need to obtain regulatory approval from the SEC under the 1935 Act (and in the case of NEP and Granite State to also obtain approval from the New Hampshire Public Utilities Commission). The following table summarizes the short-term debt amounts for which regulatory approval has been granted at December 31, 1998, and the amount of outstanding short-term debt and lines of credit and standby bond facilities at such date.
($ millions) Lines of Credit/ Regulatory Standby Bond Limit Outstanding Facilities ---------- ----------- ---------------- NEP 375 0 455 Mass. Electric 150 81 55 Narragansett 100 27 41 Granite State 10 0 7 Nantucket 5 3 3
NEES and certain subsidiaries, with regulatory approval, operate a money pool to more effectively utilize cash resources and to reduce outside short-term borrowings. Short-term borrowing needs are met first by available funds of the money pool participants. Borrowing companies pay interest at a rate designed to approximate the cost of outside short-term borrowings. Companies which invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 1998, NEP, Mass. Electric, Narragansett, and Granite State each had money pool borrowings of approximately $0 million, $81 million, $27 million, and $0 million, respectively. In order to issue additional long-term debt, the Electricity Delivery Companies, excluding Nantucket, must comply with earnings coverage requirements contained in their respective mortgages and note agreements. The most restrictive of these provisions in each instance generally requires that for the issuance of additional mortgage bonds by 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 for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the proposed new issue. The respective long-term debt coverages of the Electricity Delivery Companies, excluding Nantucket, under their respective mortgage indentures and note agreements, are stated in the following table for the past three years:
Coverage ----------------------- 1998 1997 1996 ---- ---- ---- Mass. Electric - -------------- First Mortgage Bonds 4.24 5.09 3.25 Narragansett - ------------ First Mortgage Bonds 4.64 3.98 3.22 Granite State - ------------- Notes 4.17 3.39 2.82
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. Alfred D. Houston - Age: 58 - Elected Chairman in 1998 - Executive Vice President from 1994 to 1998 - 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. Richard P. Sergel - Age: 49 - 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. Michael E. Jesanis - Age: 42 - 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. Cheryl A. LaFleur - Age: 44 - 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 during 1992- 1993 and since 1995 - Vice President of NEP since 1995. John G. Cochrane - Age: 40 - Elected Vice President in 1999 - Elected Treasurer in 1998 - Treasurer of Mass. Electric, NEP, and the Service Company since 1998 - Vice President of the Service Company and Treasurer of Narragansett since 1993. David C. Kennedy - Age: 50 - Elected Vice President in 1998 - Vice President of the Service Company since 1985. NEP - --- The Treasurer is elected by the stockholders to hold office until the next annual meeting of stockholders and until the successor is duly chosen and qualified. The other executive officers are elected by the Board of Directors to hold office subject to the pleasure of the directors and until the first meeting of directors after the next annual meeting of stockholders and until their successors are duly chosen and qualified. Certain officers of NEP are, or at various times in the past have been, officers and/or directors of the System companies with which NEP has entered into contracts and had other business relations. Alfred D. Houston* - Elected Chairman in 1998. Peter G. Flynn - Age: 45 - Elected President in 1999 - Vice President and Director of Rates for the Service Company from 1996 to 1999 - Assistant General Counsel for the Service Company during 1996 - Senior Counsel for the Service Company from 1992 to 1996. Michael E. Jesanis* - Elected Vice President in 1998 - Treasurer from 1992 to 1998. Cheryl A. LaFleur* - Vice President since 1995. John F. Malley - Age: 50 - Vice President since 1992. James S. Robinson - Age: 45 - Elected Vice President in 1998 - Director of Nuclear Investments from 1997 to 1998 - Manager, Wholesale Business Administration from 1993 to 1997. Masheed H. Rosenqvist - Age: 44 - Elected Vice President in 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. John G. Cochrane* - Elected Treasurer in 1998. Howard W. McDowell - Age: 55 - Elected Assistant Treasurer in 1998 - Controller since 1987 - Controller of Mass. Electric and Narragansett since 1987 - Treasurer of Granite State since 1984. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - NEES for other information regarding this officer. Mass. Electric - -------------- The Treasurer is elected by the stockholders to hold office until the next annual meeting of stockholders and until the successor is duly chosen and qualified. The other executive officers are elected by the board of directors to hold office subject to the pleasure of the directors and until the first meeting of the directors after the next annual meeting of stockholders. Certain officers of Mass. Electric are, or at various times in the past have been, officers and directors of System companies with which Mass. Electric has entered into contracts and had other business relations. Robert L. McCabe - Age: 57 - Chairman since 1997 - President of Narragansett from 1986 to 1997. Lawrence J. Reilly - Age: 43 - 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: 45 - Senior Vice President since 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: 40 - Senior Vice President since 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. Nancy H. Sala - Age: 47 - Elected Senior Vice President in 1998 - Vice President from 1992 to 1998. William J. Flaherty - Age: 41 - Vice President since 1997 - Account Manager from 1993 to 1997. Andrea Foley-Stapleford - Age: 53 - Vice President since 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: 59 - Vice President since 1997 - Vice President of Narragansett since 1993. Rita A. Moran - Age: 35 - Elected Vice President in 1998 - Account Manager from 1993 to 1998. Joseph P. Newman - Age: 43 - Elected Vice President in 1998 - Director of Government Affairs for the Service Company from 1996 to 1998. Kwong O. Nuey, Jr. - Age: 50 - Vice President since 1997 - Director of Retail Information Services for the Service Company from 1993 to 1997. Timothy R. Roughan - Age: 38 - Elected Vice President in 1998 - Account Manager for the Service Company from 1995 to 1998 - Account Manager from 1993 to 1995. William T. Sherry - Age: 38 - Elected Vice President in 1998 - Account Manager for Granite State Electric Company from 1995 to 1998 - Account Manager from 1993 to 1995. John G. Upham II - Age: 41 - Vice President since 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* - Chairman since 1997 - President from 1986 to 1997. Lawrence J. Reilly* - President since 1997. Lydia M. Pastuszek* - Senior Vice President since 1997. Christopher E. Root* - Senior Vice President since 1997. Richard W. Frost* - Vice President since 1993 - District Manager - Southern District from 1990 to 1993. Michael E. Jesanis** - Elected Vice President in 1998. Richard Nadeau - Age: 63 - Vice President since 1994 - Director of Customer Service since 1993 - Assistant to the President from 1990 to 1993. Michael F. Ryan - Age: 47 - Vice President since 1994 - Rhode Island Director for U.S. Senator John H. Chafee from 1986 to 1994. Peter T. Zschokke - Age: 41 - Elected Vice President in 1998 - Manager of Retail Rates for the Service Company from 1992 to 1998. John G. Cochrane** - Elected Treasurer in 1998. Howard W. McDowell - Controller since 1987 - Reference is made to the material supplied under the caption EXECUTIVE OFFICERS - NEP for other information regarding Mr. McDowell. *Please refer to the material supplied under the caption EXECUTIVE OFFICERS - Mass. Electric for other information regarding these officers. **Please refer to the material supplied under the caption EXECUTIVE OFFICERS - NEES for other information regarding these officers. ITEM 2. PROPERTIES See ITEM 1. Business - Transmission, Distribution, and Nuclear Generation Properties, page 32. ITEM 3. LEGAL PROCEEDINGS See Item 1. BUSINESS - Nuclear Units, page 36. In August 1997, NEP sued Northeast Utilities (NU) in Massachusetts Superior Court for damages resulting from the tortious conduct of NU that caused the shutdown of Millstone 3. NEP's damages include the costs of replacement power during the outage, costs necessary to return Millstone 3 to safe operation, and other additional costs. Most of NEP's incremental replacement power costs have been recovered from customers, either through fuel adjustment clauses or through provisions in the Settlement Agreements. NEP also seeks punitive damages. 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. The arbitration is scheduled for October 1999. In July 1998, the court denied NU's motion to dismiss and its motion to stay pending arbitration. NEP subsequently amended its complaint by, among other things, adding NU's Trustees as defendants. In December 1998, NU moved for summary judgment. NEP's suit has been consolidated with suits filed by other joint owners. The court is in the process of scheduling a trial date. Some or all of the damages awarded from the lawsuit would be refunded to customers. NEP and several other shareholders (Sponsors) of Maine Yankee are parties to 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlements 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, claiming that such agreements excuse further payments upon plant shutdown. In February 1999, a settlement agreement which fully resolves the dispute between the Sponsors and Secondary Purchasers was filed with the FERC, under which the Secondary Purchasers would be required to make certain payments to Maine Yankee, and in turn to NEP, related to both past and future obligations under the Secondary Purchase Agreements. This settlement agreement requires FERC approval. Shutdown costs are recoverable from customers under the Settlement Agreements. In September 1998, the United States District Court (District Court) for the District of Massachusetts dismissed the lawsuit filed in April 1997 by the Town of Norwood, Massachusetts against NEES and NEP. NEP had been a wholesale power supplier for Norwood pursuant to rates approved by the FERC. In the lawsuit, Norwood had alleged that NEP's divestiture of its power generating assets would violate the terms of a 1983 power contract. Norwood also alleged that the divestiture and recovery of stranded investment costs contravened federal antitrust laws. The District Court judge granted NEES' and NEP's motion for dismissal on the grounds that the contract did not require NEP to retain its generating units, that the FERC-approved filed rates govern these matters, and that Norwood had adequate opportunity at the FERC to litigate these matters. Norwood filed a motion to alter or amend the order of dismissal, which was denied. In December 1998, Norwood filed a second motion to amend judgment and also filed an appeal with the First Circuit Court of Appeals (First Circuit). In March 1999, the District Court denied Norwood's second motion to amend judgment. 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 began taking power from another supplier commencing in April 1998. In May 1998, the FERC ruled that NEP could assess a CTC to any of NEP's unaffiliated customers that choose to terminate their wholesale power contracts early. Norwood claimed that the CTC approved by the FERC did not apply to Norwood; however, in denying Norwood's motion for rehearing, the FERC ruled that the charge did apply to Norwood. Norwood has appealed this decision to the First Circuit. NEP's billings to Norwood for this charge through December 1998 have been approximately $6 million, which remain unpaid. NEP filed a collection action with the Massachusetts Superior Court in December 1998 to recover these amount. Norwood filed a motion to dismiss or stay in January 1999. Norwood also appealed the FERC's orders approving the divestiture and the Massachusetts and Rhode Island industry restructuring settlement agreements (including modification of NEP's contracts with Mass. Electric and Narragansett) to the First Circuit, despite the FERC's finding that those settlement agreements do not apply to Norwood. The First Circuit has consolidated all three of Norwood's appeals from the FERC's orders with two other appeals filed by the Northeast Center for Social Issue Studies, which challenge the FERC's approval of NEP's sale of its hydroelectric facilities. The case is to be fully briefed by May 1999. 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. The dispute concerned the components of a pricing formula and additional costs under the contract. In March 1999, the New England utilities and Hydro-Quebec signed a settlement agreement. Under the settlement agreement, NEP will receive approximately $7.5 million, a portion of which NEP had previously paid into escrow. In addition, NEP will receive a payment of approximately $90,000 as NEP's share of a compromise of a metering dispute. In exchange, NEP will make a payment to Hydro- Quebec of $258,000. The refunded amounts will be returned to customers. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Security holders during the last quarter of 1998. 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 1998 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. The approximate number of beneficial holders of NEES common shares at March 1, 1999 was 87,552. 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 1998 Annual Report. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to page 20 of the NEES 1998 Annual Report. NEP --- The information required by this item is incorporated herein by reference to Selected Financial Information, Note L of the NEP 1998 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 1998 Annual Report. Narragansett ------------ The information required by this item is incorporated herein by reference to Selected Financial Information, Note L of the Narragansett 1998 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 19 of the NEES 1998 Annual Report. NEP --- The information required by this item is incorporated herein by reference to the Financial Review section of the NEP 1998 Annual Report. Mass. Electric -------------- The information required by this item is incorporated herein by reference to the Financial Review section of the Mass. Electric 1998 Annual Report. Narragansett ------------ The information required by this item is incorporated herein by reference to the Financial Review section of the Narragansett 1998 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NEES ---- The information required by this item is incorporated herein by reference to the Risk Management section of the NEES 1998 Annual Report on page 18. NEP --- The information required by this item is incorporated herein by reference to the Risk Management section of the NEP 1998 Annual Report. Mass. Electric -------------- The information required by this item is incorporated herein by reference to the Risk Management section of the MEC 1998 Annual Report. Narragansett ------------ The information required by this item is incorporated herein by reference to the Risk Management section of the NEC 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NEES ---- The information required by this item is incorporated herein by reference to pages 20 through 44 of the NEES 1998 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 1998 Annual Report. Mass. Electric -------------- The information required by this item is incorporated herein by reference to the financial statements and Notes to Financial Statements in the Mass. Electric 1998 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 1998 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 26, 1999, for the 1999 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. Peter G. Flynn* - Elected Director in 1999. Alfred D. Houston* - Director since 1984. Directorships of NEES System companies: Granite State Energy, Inc., NEES Communications, Inc., NEES Energy, Inc., NEES Global, Inc., New England Electric System, New England Electric Transmission Corporation, New England Energy Incorporated, New England Hydro Finance Company, Inc., New England Hydro-Transmission Corporation, New England Hydro-Transmission Electric Company, Inc., New England Power Service Company, and New England Water Heater Co., Inc. 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, NEES Communications, Inc., NEES Energy, Inc., NEES Global, 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., New England Power Service Company, and New England Water Heater Co., Inc. 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 Energy, Inc., NEES Global, Inc., New England Electric System, New England Energy Incorporated, New England Electric Transmission Corporation, New England Hydro Finance Company, Inc., New England Hydro-Transmission Corporation, New England Hydro-Transmission Electric Company, Inc., New England Power Service Company, and New England Water Heater 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* - Director since 1997. Robert L. McCabe* - Director since 1997. Directorships of NEES System affiliates: Granite State Electric Company, Nantucket Electric Company, and The Narragansett Electric Company. Other directorship: Citizens Savings Bank. Lydia M. Pastuszek* - Director since 1997. Directorships of NEES System affiliates: Granite State Electric Company and Nantucket 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* - Director since 1997. Directorships of NEES System affiliates: Granite State Electric Company and Nantucket Electric Company. Nancy H. Sala* - Elected Director in 1998. Directorships of NEES System affiliates: Nantucket Electric Company. Richard P. Sergel* - Director since 1993. *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: 62 - Director since 1997 - Manager of Labor Relations since 1997 - Human Resources Manager from 1979 to 1997. *Please refer to the material supplied under the caption DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - NEP and/or Mass. Electric in this Item for other information regarding this director. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the System's officers and directors, and persons who own more than 10 percent of a registered class of the System's equity securities, to file reports on Forms 3, 4, and 5 of share ownership and changes in share ownership with the SEC and the New York Stock Exchange and to furnish the System with copies of all Section 16(a) forms they file. Based solely on NEP's, Mass. Electric's, and Narragansett's review of the copies of such forms received by them, or written representations from certain reporting persons that such forms were not required for those persons, NEP, Mass. Electric, and Narragansett believe that, during 1998, 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 OF 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 26, 1999, for the 1999 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 1996 through 1998 to or for the benefit of the Chief Executive Officer and the four other most highly compensated executive officers for each company. NEP SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation (b) Compensation -------------------------- ------------------- Other Restricted Name and Annual & Deferred All Other Principal Compensa- Share LTIP Compensa- Position Year Salary Bonus tion Awards Payouts tion (a) ($) ($)(c) ($)(d) ($)(e) ($) ($)(f) - ---------- ---- ------- ------ --------- ---------- ------- --------- Lawrence E. 1998 164,340 85,287 14,155 35,369 14,469 408,571 (h) Bailey 1997 156,516 188,214 3,316 0 0 600 Former 1996 151,956 101,667 116 0 0 3,776 President (g) Alfred D. 1998 49,236 32,804 1,137 18,677 17,545 288 Houston Chairman Peter G. 1998 57,838 29,383 1,151 12,176 6,864 75 Flynn President (i) John F. 1998 144,492 71,636 7,292 29,328 31,472 183 Malley 1997 140,280 96,072 2,922 0 0 375 Vice 1996 133,394 104,885 116 0 0 3,141 President Masheed H. 1998 113,697 44,654 2,285 17,618 0 366 Rosenqvist Vice President
(a) Certain officers of NEP are also officers of NEES and various other System companies. (b) Includes deferred compensation in category and year earned. (c) The bonus figure represents: cash bonuses under an incentive compensation plan, the all-employee goals program, the variable match of the incentive thrift plan, including related deferred compensation plan matches, special cash bonuses, and unrestricted shares under the incentive share plan. In 1996 and 1997, the bonus amounts were all cash or contributions to the incentive thrift plan, including related deferred compensation plan matches. See descriptions under Plan Summaries. (d) Includes amounts reimbursed by NEP for the payment of taxes on certain noncash benefits and NEP contributions to the incentive thrift plan 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 (1996 - 1998) and the other named executives (in 1998 only) 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 in 1996 and 1997 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1998, the following executive officers held the amount of restricted and deferred shares with the value indicated: Mr. Bailey 4,031 shares, $193,991 value; Mr. Houston 13,216 shares, $636,020 value; Mr. Flynn 2,838 shares, $136,578 value; and Mr. Malley 3,901 shares, $187,735 value. The value was calculated by multiplying the closing market price on December 31, 1998 by the number of shares. (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 NEP contributions to the incentive thrift plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. (g) Mr. Bailey retired effective December 31, 1998. (h) Under the terms of the severance plan described on page 69, Mr. Bailey received a lump sum payment of $408,131 upon his retirement on December 31, 1998. (i) Mr. Flynn was elected President effective January 1, 1999. MASS. ELECTRIC SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation (b) Compensation -------------------------- ------------------- Other Restricted Name and Annual & Deferred All Other Principal Compensa- Share LTIP Compensa- Position Year Salary Bonus tion Awards Payouts tion (a) ($) ($)(c) ($)(d) ($)(e) ($) ($)(f) - ---------- ---- ------- ------ --------- ---------- ------- --------- Lawrence J. 1998 113,414 59,341 5,413 24,421 19,632 215 Reilly 1997 160,515 168,637 6,910 0 0 448 President 1996 96,163 70,177 2,467 46,082 0 2,250 Robert L. 1998 140,682 59,448 6,753 24,226 31,075 830 McCabe Chairman Nancy H. 1998 128,592 53,247 1,392 21,763 15,975 195 Sala 1997 124,344 60,661 2,603 0 0 283 Senior Vice 1996 118,251 65,493 116 0 0 2,730 President Lydia M. 1998 104,345 51,761 2,228 21,134 22,531 140 Pastuszek 1997 125,481 81,944 2,544 0 0 241 Senior Vice 1996 86,068 52,017 69 22,115 0 1,893 President Kwong O. 1998 96,311 37,716 2,115 15,135 11,542 186 Nuey Vice President
(a) Certain officers of Mass. Electric are also officers of NEES and various other System companies. (b) Includes deferred compensation in category and year earned. (c) The bonus figure represents: cash bonuses under an incentive compensation plan, the all-employee goals program, the variable match of the incentive thrift plan, and unrestricted shares under the incentive share plan or special share bonuses. In 1996 and 1997, the bonus amounts were all cash or contributions to the incentive thrift plan, including related deferred compensation plan matches. See descriptions under Plan Summaries. (d) Includes amounts reimbursed by Mass. Electric for the payment of taxes on certain noncash benefits and Mass. Electric contributions to the incentive thrift plan that are not bonus contributions including related deferred compensation plan match. See description under Plan Summaries. (e) In 1998, the incentive share awards for the named executives 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 named officers in 1996 and 1997 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1998, the following executive officers held the amount of restricted and deferred shares with the value indicated: Mr. Reilly 6,064 shares, $291,830 value; Mr. McCabe 6,979 shares, $335,864 value; Ms. Sala 2,058 shares, $99,041 value; Ms. Pastuszek 3,117 shares, $150,005 value; and Mr. Nuey 2,033 shares, $97,838 value. The value was calculated by multiplying the closing market price on December 31, 1998 by the number of shares. (f) Includes Mass. Electric contributions to life insurance. See description under Plan Summaries. The life insurance contribution is calculated based on the value of term life insurance for the named individuals. The premium costs for most of these policies have been or will be recovered by Mass. Electric. Prior to 1997, this column also included Mass. Electric contributions to the incentive thrift plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. NARRAGANSETT SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation (b) Compensation -------------------------- ------------------- Other Restricted Name and Annual & Deferred All Other Principal Compensa- Share LTIP Compensa- Position Year Salary Bonus tion Awards Payouts tion (a) ($) ($)(c) ($)(d) ($)(e) ($) ($)(f) - ---------- ---- ------- ------ --------- ---------- ------- --------- Lawrence J. 1998 52,729 27,589 2,517 11,354 9,127 99 Reilly 1997 679 452 29 0 0 1 President 1996 16,329 11,916 419 7,825 0 382 Robert L. 1998 40,283 17,022 1,933 6,937 8,898 237 McCabe 1997 179,460 148,868 9,881 0 0 1,528 Chairman 1996 127,388 88,905 4,819 50,308 0 3,424 Richard W. 1998 119,544 41,969 2,746 16,320 15,346 438 Frost 1997 113,856 52,347 2,396 0 0 596 Vice 1996 108,432 57,680 119 0 0 2,888 President Michael F. 1998 112,368 42,237 2,393 16,856 0 108 Ryan 1997 103,983 52,060 2,197 0 0 220 Vice 1996 64,555 18,397 77 0 0 1,473 President Richard 1998 102,912 18,655 2,681 4,433 0 160 Nadeau Vice President
(a) Certain officers of Narragansett are also officers of NEES and various other System companies. (b) Includes deferred compensation in category and year earned. (c) The bonus figure represents: cash bonuses under an incentive compensation plan, the all-employee goals program, the variable match of the incentive thrift plan, and unrestricted shares under the incentive share plan or special share bonuses. In 1996 and 1997, the bonus amounts were all cash or contributions to the incentive thrift plan, including related deferred compensation plan matches. See descriptions under Plan Summaries. (d) Includes amounts reimbursed by Narragansett for the payment of taxes on certain noncash benefits and Narragansett contributions to the incentive thrift plan that are not bonus contributions including related deferred compensation plan match. See description under Plan Summaries. (e) In 1998, the incentive share awards for the named executives 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 in 1996 and 1997 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1998, the following executive officers held the amount of restricted and deferred shares with the value indicated: Mr. Reilly 6,064 shares, $291,830 value; Mr. McCabe 6,979 shares, $335,864 value; Mr. Frost 819 shares, $39,414 value; Mr. Ryan 11 shares, $529 value; Mr. Nadeau 65 shares, $3,128 value. The value was calculated by multiplying the closing market price on December 31, 1998 by the number of shares. (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 Narragansett contributions to the incentive thrift plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. Directors' Compensation Since all members of the NEP, Mass. Electric, and Narragansett Boards are employees of NEES System companies, no fees are paid for service on the Boards. 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 1999. PENSION TABLE
Five-Year Average 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years Compensa- of of of of of of tion Service Service Service Service Service Service - --------- -------- -------- -------- -------- -------- -------- $100,000 18,926 29,276 39,626 49,976 60,326 70,676 $150,000 29,276 42,414 57,439 72,464 87,489 102,514 $200,000 39,626 57,439 75,251 94,951 114,651 134,351 $250,000 49,976 72,464 94,951 116,814 141,064 165,314 $300,000 60,326 87,489 114,651 141,064 167,477 184,123 $350,000 70,676 102,514 134,351 165,314 196,277 215,865 $400,000 81,026 117,539 154,051 189,564 225,077 241,590 $450,000 91,376 132,564 173,751 213,814 253,877 279,315 $500,000 101,726 147,589 193,451 238,064 282,677 311,040
For purposes of the retirement plans, Messrs. Bailey, Houston, Flynn, and Malley and Ms. Rosenqvist currently have 30, 20, 17, 27, and 17 credited years of service, respectively. Mr. Reilly, Mr. McCabe, Ms. Sala, Ms. Pastuszek, and Mr. Nuey currently have 17, 30, 29, 18, and 8 credited years of service, respectively. Mr. Reilly, Mr. McCabe, Mr. Frost, Mr. Ryan, and Mr. Nadeau currently have 17, 30, 36, 4, and 43 credited years of service, respectively. Benefits under the pension plans are computed using formulae based on percentages of highest average compensation computed over five consecutive years. The compensation covered by the pension plan includes salary, bonus, and incentive share awards. Long-Term Performance Share awards will not be included. 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 Plan Table above does not include annuity payments to be received in lieu of life insurance for Mr. Houston. The payments 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. Frost, McCabe, and Nadeau were all eligible for, and accepted, 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. Frost, McCabe, and Nadeau's, benefits under the offer and the contract cannot be determined until their retirement. 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 is a party to agreements with each of Mr. Flynn, Mr. Houston, Mr. McCabe, and Mr. Reilly (each, an Executive), which agreements remain in effect for the three-year period following a change in control (as defined below) or a major transaction (as defined in the agreements). The term of the agreements are for three years with automatic annual extensions, unless terminated by NEES. If, following the described event, the Executive's employment is terminated other than for cause (as defined in the agreements) or if the Executive terminates employment for good reason (as defined in the agreements), NEES will pay to the Executive a lump sum cash payment equal to three times (two times for some Executives) the sum of the Executive's most recent annual base compensation and the average of his bonus amounts for the prior three years. Payments and benefits to the Executive will be reduced to the extent necessary to avoid imposition of any federal excise tax due under Section 280G of the Internal Revenue Code; however, such payments and benefits will be reduced only if such reduction would yield a greater result to the Executive than actual payment by the Executive of the excise tax. In addition, NEES will provide disability and health benefits to the Executive for two to three years, provide such post-retirement health and welfare benefits as the Executive would have earned within such two to three years, and grant two to 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. Executive officers (including those listed in the summary compensation table, but excluding Mr. Houston) would receive a benefit equal to one and one-half times (one times in certain cases) annual compensation, for a severance other than one for cause or following a change in control. NEP, MASS. ELECTRIC, AND NARRAGANSETT PLAN SUMMARIES A brief description of the various plans through which compensation and benefits are provided to the named executive officers is presented below to better enable shareholders to understand the information presented in the tables shown earlier. The amounts of compensation and benefits provided to the named executive officers under the plans described below (and charged to NEP, Mass. Electric, or Narragansett) are presented in the Summary Compensation Tables. Goals Program The Goals Program establishes goals annually. For 1998, these goals related to core operating income, costs for customers for electricity delivery, safety, absenteeism, demand-side management results, transmission and distribution 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 to core operating income, 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 1998, the salary reduction amount was limited to $10,000. 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 common 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. Houston may elect, commencing at age 55 or later, to receive an annuity income equal to 22.5 percent of 1998 annual salary plus 40 percent of final annual salary. In that event, the life insurance is reduced over 15 years to an amount equal to his final annual salary. Incentive Compensation Plan Under the System bonus plan for certain senior employees, bonuses are tied to achievement of core business operating income and strategic objectives. Annual income targets and strategic objectives are established for each year. For 1998, those objectives were: 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. 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. 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 provides awards based on various measures of NEES performance over a three-year period. Each award factor functions independently. The performance targets for each cycle are set by the Compensation Committee of the NEES Board. Performance is rated on rolling three-year periods, with a new cycle beginning each year. An individual's potential award under the plan is a fixed percentage (ranging from 15 percent to 50 percent) of base pay. At the end of the three-year cycle, the participant receives NEES shares based upon the performance against the various factors. The measures of performance for the cycle commencing January 1, 1998 are as follows: total shareholder return; maintenance or improvement of bond ratings; redeployment of the generation sale proceeds; and System service levels, including customer satisfaction, reliability, safety, and compliance. 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, 1998. The NEES System's performance will be measured over the three-year period ending December 31, 2000. However, upon the completion of the merger with National Grid, the executives will receive awards based upon an average of incentive compensation target achievement for the prior three years and not upon the measures specified below. NEP --- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ------------------------------------------------
Number of Common Share Performance Name Equivalents(a) Period Threshold(b) Target(c) ---- -------------- ----------- ------------ --------- Lawrence E. Bailey 977 3 years 8 977 Alfred D. Houston 4,310 3 years 34 4,310 Peter G. Flynn 853 3 years 7 853 John F. Malley 859 3 years 7 859 Masheed H. Rosenqvist (d) - - - -
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 1,036 3 years 9 1,036 Robert L. McCabe 1,119 3 years 9 1,119 Nancy H. Sala 464 3 years 4 464 Lydia M. Pastuszek 866 3 years 7 866 Kwong O. Nuey 461 3 years 4 461
Narragansett ------------ 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 1,036 3 years 9 1,036 Robert L. McCabe 1,119 3 years 9 1,119 Richard W. Frost 427 3 years 4 427 Michael F. Ryan 401 3 years 4 401 Richard Nadeau (d) - - - -
(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) Did not participate in this plan for 1998. 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 SHARE OWNERSHIP in the definitive proxy statement of NEES, dated March 26, 1999, for the 1999 Annual Meeting of Shareholders, provided that the information under the headings "Report of the Compensation Committee on Executive Compensation" and "Corporate Performance" are not so incorporated. NEP, Mass. Electric, and Narragansett ------------------------------------- NEES owns 100 percent of the voting securities of Mass. Electric and Narragansett. NEES owns 99.97 percent of the voting securities of NEP. SECURITY OWNERSHIP The following tables list the holdings of NEES common shares as of March 10, 1999 by NEP, Mass. Electric, and Narragansett directors, the executive officers named in the Summary Compensation Tables, and all directors and executive officers, as a group. NEP ---
Shares Deferred Beneficially Share Name Owned (a) Equivalents (b) Total (c) ---- ------------ --------------- --------- Lawrence E. Bailey 5,490 4,973 10,463 Peter G. Flynn 6,671 3,564 10,235 Alfred D. Houston 14,359 15,489 29,848 Cheryl A. LaFleur 3,595 7,147 10,742 John F. Malley 3,952 3,549 7,501 Masheed H. Rosenqvist 1,802 364 2,166 Richard P. Sergel 8,574 12,069 20,643 All directors and executive officers, as a group (11 persons) 62,372 (d) 58,664 121,036
Mass. Electric --------------
Shares Deferred Beneficially Share Name Owned (a) Equivalents (b) Total (c) ---- ------------ --------------- --------- Cheryl A. LaFleur 3,595 7,147 10,742 Robert L. McCabe 10,691 7,944 18,635 Kwong O. Nuey 1,667 1,874 3,541 Lydia M. Pastuszek 8,242 2,712 10,954 Lawrence J. Reilly 4,010 7,161 11,171 Christopher E. Root 2,256 3,519 5,775 Nancy H. Sala 6,348 (e) 2,541 8,889 Richard P. Sergel 8,574 12,069 20,643 All directors and executive officers, as a group (18 persons) 75,786 (d) 50,973 126,759
Narragansett ------------
Shares Deferred Beneficially Share Name Owned (a) Equivalents (b) Total (c) ---- ------------ --------------- --------- Richard W. Frost 7,035 530 7,565 Cheryl A. LaFleur 3,595 7,147 10,742 Robert L. McCabe 10,691 7,944 18,635 Richard Nadeau 5,029 0 5,029 Lawrence J. Reilly 4,010 7,161 11,171 Michael F. Ryan 1,316 11 1,327 Richard P. Sergel 8,574 12,069 20,643 Ronald L. Thomas 1,614 0 1,614 All directors and executive officers, as a group (14 persons) 68,891 (d) 53,000 121,891
(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) Potential share awards under the Long-Term Performance Share Award Plan are not included in this table. (d) Amount is less than 1 percent of the total number of shares of NEES outstanding. (e) Ms. Sala disclaims a beneficial ownership interest in 283 shares held in a custodial account. 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-three 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); Twenty-third Supplemental Indenture (filed herewith). (c) 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 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 (Exhibit 10(a)(i) to 1997 Form 10-K, File No. 1-3446). (ii) Boston Edison Company et al. and New England Power Company: Security Analysis Service Agreement dated on or about July 1, 1994 (Exhibit 10(a)(ii) to 1997 Form 10-K, File No. 1-3446). (b) The Connecticut Light and Power Company et al. and New England Power Company: Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendment dated as of August 1, 1974 (Exhibit 10-5, File No. 2-52820); Amendments dated as of December 15, 1975 and April 1, 1986; (Exhibit 10(b), to 1990 Form 10-K, File No. 1-3446). Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to NEP with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (Exhibit 10-6(b), File No. 2-57831). (c) Connecticut Yankee Atomic Power Company et al. and New England Power Company: Stockholders Agreement dated July 1, 1964 (Exhibit 13-9-A, File No. 2-23006); Power Purchase Contract dated July 1, 1964 (Exhibit 13-9-B, File No. 2-23006); Additional Power Contract dated as of April 30, 1984 and 1996 Amendatory Agreement dated as of December 4, 1996 (Exhibit 10(c) to 1996 Form 10-K, File No. 1-3446); Supplementary Power Contract dated as of April 1, 1987 (Exhibit 10(c) to 1987 Form 10-K, File No. 1-3446); Capital Funds Agreement dated September 1, 1964 (Exhibit 13-9-C, File No. 2-23006); Transmission Agreement dated October 1, 1964 (Exhibit 13-9-D, File No. 2-23006); Agreement revising Transmission Agreement dated July 1, 1979 (Exhibit to 1979 Form 10-K, File No. 1-3446); Amendment revising Transmission Agreement dated as of January 19, 1994 (Exhibit 10(c) to 1995 Form 10- K, File No. 1-3446); Five Year Capital Contribution Agreement dated November 1, 1980, (Exhibit to 10(e) to 1980 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 (Exhibit 10(d) to 1997 Form 10-K, File No. 1-3446). (e) 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). (f) 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). (g) 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). (h) 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 and; Amendment dated as of November 15, 1997 (Exhibits 10(i) to 1997 Form 10- K, File No. 1-3446). (i) 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). (j) Vermont Yankee Nuclear Power Corporation et al. and New England Power Company: Capital Funds Agreement dated February 1, 1968, Amendment dated March 12, 1968, and Power Purchase Contract dated February 1, 1968 (Exhibit 4-6, File No. 2-29145); Amendments dated as of June 1, 1972 and April 15, 1983 (Exhibit 10(k) to 1983 Form 10-K, File No. 1-3446) and April 24, 1985 (Exhibit 10(k) to 1985 Form 10-K, File No. 1-3446); Amendment dated as of June 1, 1985 (Exhibit 10(k) to 1987 Form 10-K, File No. 1-3446); Amendments dated as of May 6, 1988 (Exhibit 10(k) to 1988 Form 10-K, File No. 1-3446); Amendment dated as of June 15, 1989 (Exhibit 10(k) to 1989 Form 10-K, File No. 1-3446); Additional Power Contract dated as of February 1, 1984 (Exhibit 10(k) to 1983 Form 10-K, File No. 1-3446); Guarantee Agreement dated as of November 5, 1981 (Exhibit 10(j) to 1981 Form 10-K, File No. 1-3446). (k) 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). *(l) New England Electric Companies' Deferred Compensation Plan as amended through February 28, 1998 (filed herewith). *(m) 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). *(n) New England Electric Companies' Executive Supplemental Retirement Plan as amended through December 11, 1998 (filed herewith). *(o) New England Electric Companies' Executive Retirees Health and Life Insurance Plan as Amended and Restated January 1, 1996 (filed herewith). *(p) New England Electric Companies' Incentive Compensation Plan I as amended through January 1, 1998 (filed herewith). *(q) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1998 (filed herewith). *(r) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1998 (filed herewith). *(s) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1998 (filed herewith). *(t) New England Electric System Directors Deferred Compensation Plan as amended through February 28, 1998 (filed herewith). *(u) 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). *(v) 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). *(w) New England Electric Companies' Long-Term Performance Share Award Plan amended through August 25, 1998 (filed herewith). *(x) New England Electric System Directors' Retirement Plan amended through December 11, 1998 (filed herewith). *(y) Forms of Severance Protection Agreement (Exhibit 10(z) to 1996 Form 10-K, File No. 1-3446). Forms of Severance Protection Agreements (filed herewith). *(z) 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). *(aa) New England Power Service Company and Robert L. McCabe: Employment Agreement entered into as of March 11, 1998 (Exhibit 10(ll) to NEES' 1997 Form 10-K, File No. 1-3446). *(bb) New England Electric System and Richard P. Sergel Agreement dated March 1, 1998 (filed herewith). *(cc) New England Power Service Company and the Company: Form of Supplemental Pension Service Credit Agreement (Exhibit 10(ee) to 1992 Form 10-K, File No. 1-3446). (dd) New England Power Company and New England Hydro-Transmission Electric Company, Inc. et al: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(t) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(t) to 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, September 1, 1987, and October 1, 1987 (Exhibit 10(u) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(u) to 1988 Form 10-K, File No. 1-3446); Amendment dated January 1, 1989 (Exhibit 10(u) to 1990 Form 10-K, File No. 1-3446). (ee) New England Power Company and New England Hydro-Transmission Corporation et al: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(u) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(u) to 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, September 1, 1987, and October 1, 1987 (Exhibit 10(v) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1,1988 (Exhibit 10(v) to 1988 Form 10-K, File No. 1-3446); Amendments dated January 1, 1989 and January 1, 1990 (Exhibit 10(v) to 1990 Form 10-K, File No. 1-3446). (ff) New England Power Company et al: Phase II New England Power AC Facilities Support Agreement dated as of June 1, 1985 (Exhibit 10(v) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(v) to 1986 Form 10-K, File No. 1-3446); Amendments dated as of February 1, 1987, June 1, 1987, and September 1, 1987 (Exhibit 10(w) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(w) to 1988 Form 10-K, File No. 1-3446). (gg) New England Hydro-Transmission Electric Company, Inc. and New England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 (Exhibit 10(w) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(w) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1987 (Exhibit 10(x) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(x) to 1988 Form 10-K, File No. 1-3446). (hh) New England Hydro-Transmission Corporation and New England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 (Exhibit 10(x) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of May 1, 1986 (Exhibit 10(x) to 1986 Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1987 (Exhibit 10(y) to 1987 Form 10-K, File No. 1-3446); Amendment dated as of August 1, 1988 (Exhibit 10(y) to 1988 Form 10-K, File No. 1-3446). (ii) NEES Energy, Inc./AllEnergy Marketing Company, L.L.C.: Agreement and Plan of Merger dated December 31, 1998 (filed herewith). (jj) USGen, New England, 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). (kk) The National Grid Group plc, Iosta LLC: Agreement and Plan of Merger, dated as of December 11, 1998 (Exhibit 10(mm) to Form 8-K dated December 11, 1998, File No. 1-3446). * Compensation related plan, contract, or arrangement. (13) 1998 Annual Report to Shareholders (Exhibit 13 to Form 8-K dated March 25, 1999, File No. 1-3446). (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 25, 1987 (Exhibit 3(a) to 1988 Form 10-K, File No. 0-1229). (b) By-laws of the Company as amended December 12, 1997 (Exhibit 3(b) to 1997 Form 10-K, File No. 0-1229). (10) Material Contracts (a) Boston Edison Company et al. and the Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and the Company: REMVEC II Agreement dated on or about July 1, 1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10- K, File No. 1-3446). (ii) Boston Edison Company et al. and the Company: Security Analysis Services Agreement dated on or about July 1, 1997 (Exhibit 10(a)(ii) to NEES' 1997 Form 10-K, File No. 1-3446). (b) The Connecticut Light and Power Company et al. and the Company: Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendment dated as of August 1, 1974 (Exhibit 10-5, File No. 2-52820); Amendments dated as of December 15, 1975 and April 1, 1986 (Exhibit 10(b) to NEES' 1990 Form 10-K File No. 1-3446). Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to the Company with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (Exhibit 10-6(b), File No. 2-57831). (c) Connecticut Yankee Atomic Power Company et al. and the Company: Stockholders Agreement dated July 1, 1964 (Exhibit 13-9-A, File No. 2-2006); Power Purchase Contract dated July 1, 1964 (Exhibit 13-9-B, File No. 2-23006); Additional Power Contract dated as of April 30, 1984 and 1996; Amendatory Agreement dated as of December 4, 1996 (Exhibit 10(c) to 1996 Form 10-K, File No. 1-3446); Supplementary Power Contract dated as of April 1, 1987 (Exhibit 10(c) to 1987 Form 10-K, File No. 0-1229); Capital Funds Agreement dated September 1, 1964 (Exhibit 13-9-C, File No. 2-23006); Transmission Agreement dated October 1, 1964 (Exhibit 13-9-D, File No. 2-23006); Agreement revising Transmission Agreement dated July 1, 1979 (Exhibit to NEES' 1979 Form 10-K, File No. 1-3446); Amendment revising Transmission Agreement dated as of January 19, 1994 (Exhibit 10(c) to NEES' 1995 Form 10-K, File No. 1-3446); Five Year Capital Contribution Agreement dated November 1, 1980 (Exhibit 10(e) to NEES' 1980 Form 10-K, File No. 1-3446). (d) Maine Yankee Atomic Power Company et al. and the Company: Capital Funds Agreement dated May 20, 1968 and Power Purchase Contract dated May 20, 1968 (Exhibit 4-5, File No. 2-29145); Amendments dated as of January 1, 1984, March 1, 1984 (Exhibit 10(d) to NEES' 1983 Form 10-K, File No. 1-3446); October 1, 1984, and August 1, 1985 (Exhibit 10(d) to NEES' 1985 Form 10-K, File No. 1-3446); Stockholders Agreement dated May 20, 1968 (Exhibit 10-20; File No. 2-34267); Additional Power Contract dated as of February 1, 1984 (Exhibit 10(d) to NEES' 1985 Form 10-K, File No. 1-3446); 1997 Amendatory Agreement dated as of August 6, 1997 (Exhibit 10(d) to NEES' 1997 Form 10-K, File No. 1-3446). (e) Mass. Electric and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 5-17(a), File No. 2-52969); Amendment of Service Agreement dated June 22, 1983 (Exhibit 10(b) to Mass. Electric's 1986 Form 10-K, File No. 0-5464); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(e) to 1993 Form 10-K, File No. 0-1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(e) to 1994 Form 10-K, File No. 0-1229); Amendment of Service Agreement effective July 1, 1996 and, Amendment to Service Agreement dated as of February 1, 1997 (Exhibit 10(e) to 1997 Form 10-K, File No. 1-3446); Supplement to Amendment to Service Agreement dated as of March 1, 1998 (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 and, Amendment to Service Agreement dated as of February 1, 1997 (Exhibit 10(f) to 1997 Form 10-K, File No. 1-3446); Supplement to Amendment to Service Agreement dated as of December 31, 1998 (filed herewith). (g) New England Electric Transmission Corporation et al. and the Company: Phase I Terminal Facility Support Agreement dated as of December 1, 1981 (Exhibit 10(g) to NEES' 1981 Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1982 and November 1, 1982 (Exhibit 10(f) to NEES' 1982 Form 10-K, File No. 1-3446); Agreement with respect to Use of the Quebec Interconnection dated as of December 1, 1981 (Exhibit 10(g) to NEES' 1981 Form 10-K, File No. 1-3446); Amendments dated as of May 1, 1982 and November 1, 1982 (Exhibit 10(f) to NEES' 1982 Form 10-K, File No. 1-3446); Amendment dated as of January 1, 1986 (Exhibit 10(f) to NEES' 1986 Form 10-K, File No. 1-3446); Agreement for Reinforcement and Improvement of the Company's Transmission System dated as of April 1, 1983 (Exhibit 10(f) to NEES' 1983 Form 10-K, File No. 1-3446); Lease dated as of May 16, 1983 (Exhibit 10(f) to NEES' 1983 Form 10-K, File No. 1-3446); Upper Development-Lower Development Transmission Line Support Agreement dated as of May 16, 1983 (Exhibit 10(f) to NEES' 1983 Form 10-K, File No. 1-3446). (h) Vermont Electric Transmission Company, Inc. et al. and the Company: Phase I Vermont Transmission Line Support Agreement dated as of December 1, 1981; Amendments dated as of June 1, 1982 and November 1, 1982 (Exhibit 10(g) to NEES' 1982 Form 10-K, File No. 1-3446); Amendment dated as of January 1, 1986 (Exhibit 10(h) to NEES' 1986 Form 10-K, File No. 1-3446). (i) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, March 1, 1973 (Exhibit 10-15, File No. 2-48543); Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to NEES' 1983 Form 10-K, File 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10(i) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated April 30, 1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 NEES Form 10-K, File No. 1-3446); Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 NEES Form 10-K, File No. 1-3446); Amendment dated October 1, 1990 Exhibit 10(i) to 1990 NEES Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to 1992 NEES Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to 1995 NEES Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1-3446). Amendment dated as of September 1, 1997 and Amendment dated as of November 15, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-3446). (j) New England Power Service Company and the Company: Specimen of Service Contract (Exhibit 10(l) to 1994 Form 10-K, File No. 0-1229). (k) 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). (l) 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). (m) Public Service Company of New Hampshire et al. and the Company: Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units dated as of May 1, 1973; Amendments dated May 24, 1974, June 21, 1974, September 25, 1974 and October 25, 1974 (Exhibit 10-18(b), File No. 2-52820); Amendment dated January 31, 1975 (Exhibit 10-16(b), File No. 2-57831); Amendments dated April 18, 1979, April 25, 1979, June 8, 1979, October 11, 1979, December 15, 1979, June 16, 1980, and December 31, 1980 (Exhibit 10(i) to NEES' 1980 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, April 27, 1984, and June 15, 1984 (Exhibit 10(j) to NEES' 1984 Form 10-K, File No. 1-3446); Amendments dated March 8, 1985, March 14, 1986, May 1, 1986, and September 19, 1986 (Exhibit 10(j) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated November 12, 1987 (Exhibit 10(j) to NEES' 1987 Form 10-K, File No. 1-3446); Amendment dated January 13, 1989 (Exhibit 10(j) to NEES' 1990 Form 10-K, File No. 1-3446); Seventh Amendment as of November 1, 1990 (Exhibit 10(m) to NEES' 1991 Form 10-K, File No. 1-3446). Transmission Support Agreement dated as of May 1, 1973 (Exhibit 10-23, File No. 2-49184); Instrument of Transfer to the Company with respect to the New Hampshire Nuclear Units and Assumptions of Obligations dated December 17, 1975 and Agreement Among Participants in New Hampshire Nuclear Units, certain Massachusetts Municipal Systems and Massachusetts Municipal Wholesale Electric Company dated May 28, 1976 (Exhibit 16(c), File No. 2-57831); Seventh Amendment To and Restated Agreement for Seabrook Project Disbursing Agent dated as of November 1, 1990 (Exhibit 10(m) to NEES' 1991 Form 10-K, File No. 1-3446); Amendments dated as of June 29, 1992 (Exhibit 10(j) to NEES' 1992 Form 10-K, File No. 1- 3446). Settlement Agreement dated as of July 19, 1990 between Northeast Utilities Service Company and the Company (Exhibit 10(m) to NEES' 1991 Form 10-K, File No. 1-3446). Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992, Amendment to Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992 (Exhibit 10(j) to NEES' 1992 Form 10-K, File No. 1- 3446). (n) 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). (o) 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). *(p) New England Electric Companies' Deferred Compensation Plan as amended through February 28, 1998 (Exhibit 10(l) to NEES' 1998 Form 10-K, File No. 1-3446). *(q) 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). *(r) New England Electric Companies' Executive Supplemental Retirement Plan I as amended through December 11, 1998 (Exhibit 10(n) to NEES' 1998 Form 10-K, File No. 1-3446). *(s) New England Electric Companies Executive Retirees Health and Life Insurance Plan as Amended and Restated January 1, 1996 (Exhibit 10(o) to NEES' 1998 Form 10-K, File No. 1-3446). *(t) New England Electric Companies' Incentive Compensation Plan I as amended through January 1, 1998 (Exhibit 10(p) to NEES' 1998 Form 10-K, File No. 1-3446). *(u) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1998 (Exhibit 10(q) to NEES' 1998 Form 10-K, File No. 1-3446). *(v) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1998 (Exhibit 10(r) to NEES' 1998 Form 10-K, File No. 1-3446). *(w) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1998 (Exhibit 10(s) to NEES' 1998 Form 10-K, File No. 1-3446). *(x) 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). *(y) 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). *(z) New England Electric System Directors' Retirement Plan amended through December 11, 1998 (Exhibit 10(x) to NEES' 1998 Form 10-K, File No. 1-3446). *(aa) Forms of Severance Protection Agreement (Exhibit 10(z) to NEES' 1996 Form 10-K, File No. 1-3446). Forms of Severance Protection Agreements (Exhibit 10(y) to NEES' 1998 Form 10-K, File No. 1-3446). *(bb) New England Electric Companies' Long-Term Performance Share Award Plan amended through August 25, 1998 (Exhibit 10(w) to NEES' 1998 Form 10-K, File No. 1-3446). (cc) 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). (dd) 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). (ee) 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). (ff) USGen New England Contracts (i) Asset Purchase Agreement between the Company and The Narragansett Electric Company dated as of August 5, 1997 (Exhibit 2 to NEES' Form 10-Q for period ended September 30, 1997, File No. 1-3446). (ii) Wholesale Sales Agreement between the Company and USGen New England, Inc. dated as of August 5, 1997 (Exhibit 10(gg)(ii) to 1997 Form 10-K, File No. 1-6564). (iii) PPA Transfer Agreement between the Company and USGen New England, Inc. dated as of August 5, 1997 (Exhibit 10(gg)(iii) to 1997 Form 10-K, File No. 1-6564). (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 (Exhibit 10(gg)(iv) to 1997 Form 10-K, File No. 1-6564). (v) Quebec Interconnection Transfer Agreement between the Company, The Narragansett Electric Company, and USGen New England, Inc. dated as of September 1, 1998 (filed herewith). * Compensation related plan, contract, or arrangement. (13) 1998 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 11, 1993 (Exhibit 3(a) to 1993 Form 10-K, File No. 0-5464). (b) By-Laws of the Company as amended December 12, 1997 (Exhibit 3(b) to 1997 Form 10-K, File No. 0-5464). (4) First Mortgage Indenture and Deed of Trust, dated as of July 1, 1949, and twenty-one supplements thereto (Exhibit 7-A, File No. 1-8019; Exhibit 7-B, File No. 2-8836; Exhibit 4-C, File No. 2-9593; Exhibit 4 to 1980 Form 10-K, File No. 2-8019; Exhibit 4 to 1982 Form 10-K, File No. 0-5464; Exhibit 4 to 1986 Form 10-K, File No. 0-5464); Exhibit 4 to 1988 Form 10-K, File No. 0-5464; Exhibit 4(a) to 1989 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1992 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1993 NEES Form 10-K, File No. 1-3446; Exhibit 4(a) to 1995 NEES Form 10-K, File No. 1-3446). (10) Material Contracts (a) Boston Edison Company et al. and Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and Company: REMVEC II Agreement dated on or about July 1, 1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10- K, File No. 1-3446). (ii) Boston Edison Company et al. and Company: Security Analysis Services Agreement dated on or about July 1, 1997 (Exhibit 10(a)(ii) to NEES' 1997 Form 10-K, File No. 1-3446). (b) New England Power Company and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 5-17(a), File No. 2-52969); Amendment of Service Agreement dated July 22, 1983 (Exhibit 10(b) to 1986 Form 10-K, File No. 0-5464); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(e) to 1993 NEP Form 10-K, File No. 0- 1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(e) to 1994 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective July 1, 1996 (Exhibit 10(e) to 1997 NEP Form 10-K, File No. 0-1229); Amendment to Service Agreement dated as of February 1, 1997 (Exhibit 10(e) to 1997 NEP Form 10-K, File No. 0-1229); Supplement to Amendment to Service Agreement dated as of March 1, 1998 (Exhibit 10(e) to 1998 NEP Form 10-K, File No. 0-1229). (c) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, and March 1, 1973 (Exhibit 10-15, File No. 2-48543); Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to NEES' 1983 Form 10-K, File No. 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10(i) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form 10-K, File No. 1-3446); Amendments dated April 30, 1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 NEES Form 10-K, File No. 1-3446). Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 NEES Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to 1992 NEES Form 10-K, File No. 1-3446). Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to 1995 NEES Form 10-K, File No. 1- 3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1- 3446); Amendment dated as of November 28, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1- 3446); Amendment dated as of September 1, 1997 and Amendment dated as of November 15, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-3446). (d) New England Power Service Company and the Company: Specimen of Service Contract (Exhibit 10(l) to 1994 NEP Form 10-K, File No. 0-1229). (e) New England Power Company et al. and the Company: Form of Mutual Assistance Agreement (Exhibit 10(n) to 1996 NEP Form 10-K, File No. 0-1229). (f) New England Power Company et al. and the Company: Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities February 26, 1997 (Exhibit 10(o) to 1996 Form 10-K, File No. 0-1229). (g) New England Telephone and Telegraph Company and the Company: Specimen of Joint Ownership Agreement for Wood Poles (Exhibit 4(e), File No. 2-24458). *(h) New England Electric Companies' Deferred Compensation Plan as amended through February 28, 1998 (Exhibit 10(l) to NEES' 1998 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 December 11, 1998 (Exhibit 10(n) to NEES' 1998 Form 10-K, File No. 1-3446). *(k) New England Electric Companies' Executive Retirees Health and Life Insurance Plan as Amended and Restated January 1, 1996 (Exhibit 10(o) to NEES' 1998 Form 10-K, File No. 1-3446). *(l) New England Electric Companies' Incentive Compensation Plan I as amended through January 1, 1998 (Exhibit 10(p) to NEES' 1998 Form 10-K, File No. 1-3446). *(m) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1998 (Exhibit 10(q) to NEES' 1998 Form 10-K, File No. 1-3446). *(n) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1998 (Exhibit 10(r) to NEES' 1998 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, 1998 (Exhibit 10(s) to NEES' 1998 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 August 25, 1998 (Exhibit 10(w) to NEES' 1998 Form 10-K, File No. 1-3446). *(t) New England Electric System Directors' Retirement Plan as amended through December 11, 1998 (Exhibit 10(x) to NEES' 1998 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). Forms of Severance Protection Agreements (Exhibit 10(y) to NEES' 1998 Form 10-K, File No. 1-3446). *(v) New England Power Service Company and the Company: Form of Supplemental Pension Service Credit Agreement (Exhibit 10(ee) to 1992 NEES Form 10-K, File No. 1-3446). (w) Amended and Restated Wholesale Standard Offer Service Agreement among the Company, Nantucket Electric Company, and USGen New England, Inc. dated as of October 29, 1997 (Exhibit 10(w) to 1997 Form 10-K, File No. D-5464). * 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) 1998 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-three 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; Exhibit 4(b) to 1998 NEES Form 10-K, File No. 1-3446). (b) The Narragansett Electric Company Preference Provisions, as amended, dated December 15, 1997 (Exhibit 4(c) to 1997 NEES Form 10-K, File No. 1- 3446). (10) Material Contracts (a) Boston Edison Company et al. and the Company: Amended REMVEC Agreement dated August 12, 1977 (Exhibit 5-4(d), File No. 2-61881). (i) Boston Edison Company et al. and the Company: REMVEC II Agreement dated on or about July 1, 1997 (Exhibit 10(a)(i) to NEES' 1997 Form 10- K, File No. 1-3446). (ii) Boston Edison Company et al. and the Company: Security Analysis Services Agreement dated on or about July 1, 1997 (Exhibit 10(a)(ii) to NEES' 1997 Form 10-K, File No. 1-3446). (b) New England Power Company and the Company: Primary Service for Resale dated February 15, 1974 (Exhibit 4-1(b), File No. 2-51292); Amendment of Service Agreement dated July 26, 1990 (Exhibit 10(f) to 1990 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement dated July 24, 1991 (Exhibit 4(f) to 1991 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective November 1, 1993 (Exhibit 10(f) to 1993 NEP Form 10-K, File No. 0- 1229); Memorandum of Understanding effective May 22, 1994 (Exhibit 10(f) to 1994 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective January 1, 1995 (Exhibit 10(f) to 1995 NEP Form 10-K, File No. 0-1229); Amendment of Service Agreement effective October 30, 1995, Amendment of Service Agreement dated as of February 1, 1997 (Exhibit 10(f) to 1997 NEP Form 10-K, File No. 0-1229). Supplement to Amendment to Service Agreement dated as of December 31, 1998 (Exhibit 10(f) to 1998 NEP Form 10-K, File No. 0-1229). (c) New England Power Pool Agreement: (Exhibit 4(e), File No. 2-43025); Amendments dated July 1, 1972, and March 1, 1973 (Exhibit 10-15, File No. 2-48543); Amendment dated March 15, 1974 (Exhibit 10-5, File No. 2-52775); Amendment dated June 1, 1975 (Exhibit 10-14, File No. 2-57831); Amendment dated September 1, 1975 (Exhibit 10-13, File No. 2-59182); Amendments dated December 31, 1976, January 31, 1977, July 1, 1977, and August 1, 1977 (Exhibit 10-16, File No. 2-61881); Amendments dated August 15, 1978, January 3, 1980, and February 1980 (Exhibit 10-3, File No. 2-68283); Amendment dated September 1, 1981 (Exhibit 10(h) to NEES' 1981 Form 10-K, File No. 1-3446); Amendment dated December 1, 1981 (Exhibit 10(h) to NEES' 1982 Form 10-K, File No. 1-3446); Amendments dated June 1, 1982, June 15, 1983, and October 1, 1983 (Exhibit 10(i) to NEES' 1983 Form 10-K, File No. 1-3446); Amendments dated August 1, 1985, August 15, 1985, September 1, 1985, and January 1, 1986 (Exhibit 10 (i) to NEES' 1985 Form 10-K, File No. 1-3446); Amendment dated September 1, 1986 (Exhibit 10(i) to NEES' 1986 Form 10-K, File No. 1-3446); Amendment dated April 30, 1987 (Exhibit 10(i) to NEES' 1987 Form 10-K, File No. 1-3446); Amendments dated March 1, 1988 and May 1, 1988 (Exhibit 10(i) to NEES' 1988 Form 10-K, File No. 1-3446); Amendment dated March 15, 1989 (Exhibit 10(i) to 1989 NEES Form 10-K, File No. 1-3446). Amendment dated October 1, 1990 (Exhibit 10(i) to 1990 NEES' Form 10-K, File No. 1-3446); Amendment dated as of September 15, 1992 (Exhibit 10(i) to NEES' 1992 Form 10-K, File No. 1-3446); Amendments dated as of June 1, 1993, July 1, 1995, and September 1, 1995 (Exhibit 10(i) to NEES' 1995 Form 10-K, File No. 1-3446); Amendment dated as of December 1, 1996 (Exhibit 10(i) to 1996 NEES Form 10-K, File No. 1-3446); Amendment dated as of September 1, 1997 and Amendment dated as of November 15, 1997 (Exhibit 10(i) to 1997 NEES Form 10-K, File No. 1-3446). (d) New England Power Service Company and the Company: Specimen of Service Contract (Exhibit 4(l) to 1994 NEP Form 10-K, File No. 0-1229). (e) New England Power Company et al. and the Company: Form of Mutual Assistance Agreement (Exhibit 10 (n) to 1996 Form 10-K, File No. 0-1229). (f) New England Telephone and Telegraph Company and the Company: Specimen of Joint Ownership Agreement for Wood Poles (Exhibit 3(d), File No. 2-24458). *(g) New England Electric Companies' Deferred Compensation Plan, as amended through February 28, 1998 (Exhibit 10(l) to NEES' 1998 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 December 11, 1998 (Exhibit 10(n) to NEES' 1998 Form 10-K, File No. 1-3446). *(j) New England Electric Companies' Executive Retirees Health and Life Insurance Plan as Amended and Restated January 1, 1996 (Exhibit 10(o) to NEES' 1998 Form 10-K, File No. 1-3446). *(k) New England Electric Companies' Incentive Compensation Plan I, as amended through January 1, 1998 (Exhibit 10(p) to NEES' 1998 Form 10-K, File No. 1-3446). *(l) New England Electric Companies' Incentive Compensation Plan II as amended through January 1, 1998 (Exhibit 10(q) to NEES' 1998 Form 10-K, File No. 1-3446). *(m) New England Electric Companies' Incentive Compensation Plan III as amended through January 1, 1998 (Exhibit 10(r) to NEES' 1998 Form 10-K, File No. 1-3446). *(n) New England Electric Companies' Form of Deferred Compensation Agreement for Directors (Exhibit 10(p) to NEES' 1980 Form 10-K, File No. 1-3446). *(o) New England Electric Companies' Senior Incentive Compensation Plan as amended through January 1, 1998 (Exhibit 10(s) to NEES' 1998 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 August 25, 1998 (Exhibit 10(w) to NEES' 1998 Form 10-K, File No. 1-3446). *(t) New England Electric System Directors' Retirement Plan amended through December 11, 1998 (Exhibit 10(x) to NEES 1998 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). Forms of Severance Protection Agreements (Exhibit 10(y) to NEES' 1998 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 (Exhibit 10(w) to 1997 Form 10-K, File No. 0-5464). * 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) 1998 Annual Report to Stockholders (filed herewith). (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (filed herewith). Reports on Form 8-K NEES ---- NEES filed a report on Form 8-K dated December 11, 1998 which contained ITEM 5. NEP --- NEP filed a report on Form 8-K dated December 11, 1998 which contained ITEM 5. Mass. Electric -------------- Mass. Electric filed a report on Form 8-K dated December 11, 1998 which contained ITEM 5. Narragansett ------------ Narragansett filed a report on Form 8-K dated December 11, 1998 which contained ITEM 5. NEW ENGLAND ELECTRIC SYSTEM SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM* s/Richard P. Sergel Richard P. Sergel President and Chief Executive Officer March 31, 1999 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 Vice President and 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, 1999 *The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an agreement and declaration of trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of the Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor. NEW ENGLAND POWER COMPANY SIGNATURES Pursuant to the Requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company. NEW ENGLAND POWER COMPANY s/Peter G. Flynn Peter G. Flynn 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/Peter G. Flynn Peter G. Flynn 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) Peter G. Flynn Alfred D. Houston Cheryl A. LaFleur s/John G. Cochrane Richard P. Sergel All by: John G. Cochrane Attorney-in-fact Date (as to all signatures on this page) March 31, 1999 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 Nancy H. Sala All by: Richard P. Sergel John G. Cochrane Attorney-in-fact Date (as to all signatures on this page) March 31, 1999 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, 1999 NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
References (Page) ----------------------- 1998 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 45 Statements of Consolidated Income, Year Ended December 31, 1998, 1997 and 1996............. 21 Statements of Consolidated Retained Earnings, Year Ended December 31, 1998, 1997 and 1996............. 21 Consolidated Balance Sheets, December 31, 1998 and 1997... 22 Consolidated Statements of Cash Flows, Year Ended December 31, 1998, 1997 and 1996............. 23 Consolidated Statements of Capitalization, December 31, 1998 and 1997.............................. 24 Notes to Financial Statements............................... 26-44 For the Year Ended December 31, 1998, 1997 and 1996: Consent of Independent Accountants........................ 104 * Incorporated by Reference
CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the registration statements of New England Electric System (the "System") on Form S-3 of the Dividend Reinvestment and Common Share Purchase Plan (File No. 33-12313), on Forms S-4 (File Nos. 333-47383 and 333-60315) 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 February 23, 1999 on our audits of the consolidated financial statements of New England Electric System and subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 which report is incorporated by reference in this Annual Report on Form 10-K from the System's filing on Form 8-K, dated March 25, 1999. We also consent to the incorporation by reference in the registration statements of 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 February 23, 1999 on our audits of the financial statements of Massachusetts Electric Company and The Narragansett Electric Company, respectively, as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which reports are incorporated by reference in this Annual Report on Form 10-K. s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 31, 1999 NEW ENGLAND POWER COMPANY INDEX TO FINANCIAL STATEMENTS
References (Page) ---------------------- 1998 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 1 Statements of Income, Year Ended December 31, 1998, 1997 and 1996............... 12 Statements of Retained Earnings, Year Ended December 31, 1998, 1997 and 1996............... 12 Balance Sheets, December 31, 1998 and 1997.................. 13 Statements of Cash Flows, Year Ended December 31, 1998, 1997 and 1996............... 14 Notes to Financial Statements............................... 15-34 For the Year Ended December 31, 1998, 1997 and 1996: Consent of Independent Accountants........................ 104 * Incorporated by Reference.
MASSACHUSETTS ELECTRIC COMPANY INDEX TO FINANCIAL STATEMENTS
References (Page) ---------------------- 1998 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 1 Statements of Income, Year Ended December 31, 1998, 1997 and 1996............... 10 Statements of Retained Earnings, Year Ended December 31, 1998, 1997 and 1996............... 10 Balance Sheets, December 31, 1998 and 1997.................. 11 Statements of Cash Flows, Year Ended December 31, 1998, 1997 and 1996............... 12 Notes to Financial Statements............................... 13-26 For the Year Ended December 31, 1998, 1997 and 1996: Consent of Independent Accountants........................ 104 * Incorporated by Reference.
THE NARRAGANSETT ELECTRIC COMPANY INDEX TO FINANCIAL STATEMENTS
References (Page) ---------------------- 1998 Annual Form Report to 10-K Shareholders* ---- ------------- Report of Independent Accountants........................... 1 Statements of Income, Year Ended December 31, 1998, 1997 and 1996............... 10 Statements of Retained Earnings, Year Ended December 31, 1998, 1997 and 1996............... 10 Balance Sheets, December 31, 1998 and 1997.................. 11 Statements of Cash Flows, Year Ended December 31, 1998, 1997 and 1996............... 12 Notes to Financial Statements............................... 13-26 For the Year Ended December 31, 1998, 1997 and 1996: Consent of Independent Accountants........................ 104 * Incorporated by Reference.
EX-99 2 NEES EXHIBIT INDEX --------------- Exhibit No. Description Page - ----------- ----------- ---- (3) Agreement and Declaration of Incorporated Trust dated January 2, 1926, by Reference as amended through April 28, 1992 (4)(a) Massachusetts Electric Company Incorporated First Mortgage Indenture and by Reference Deed of Trust, dated as of July 1, 1949, and twenty-one supplements thereto (4)(b) The Narragansett Electric Filed herewith Company First Mortgage Indenture and Deed of Trust, dated as of September 1, 1944, and twenty-three supplements thereto (4)(c) The Narragansett Electric Incorporated Company Preference Provisions, by Reference as amended, dated December 15, 1997 (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 Incorporated New England Power Company: REMVEC by Reference II Agreement dated on or about July 1, 1994 (10)(a)(ii) Boston Edison Company et al. and Incorporated New England Power Company: by Reference Security Analysis Service Agreement dated on or about July 1, 1994 (10)(b) The Connecticut Light and Power Incorporated Company et al. and New England by Reference Power Company: Sharing Agreement for Joint Ownership, Construction and Operation of Millstone Unit No. 3 dated as of September 1, 1973, and Amendments thereto; Transmission Support Agreement dated August 9, 1974; Instrument of Transfer to NEP with respect to the 1979 Connecticut Nuclear Unit, and Assumption of Obligations, dated December 17, 1975 (10)(c) Connecticut Yankee Atomic Power Incorporated Company et al. and New England by Reference Power Company: Stockholders Agreement dated July 1, 1964; Power Purchase Contract dated July 1, 1964; Additional Power Contract dated as of April 30, 1984 and 1996 Amendatory Agreement dated as of December 4, 1996; Supplementary Power Contract dated as of April 1, 1987; Capital Funds Agreement dated September 1, 1964; Transmission Agreement dated October 1, 1964; Agreement revising Transmission Agreement dated July 1, 1979 and Amendment thereto dated January 19, 1994; Five Year Capital Contribution Agreement dated November 1, 1980 (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 as of August 6, 1997 (10)(e) 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)(f) New England Electric Transmission Incorporated Corporation and PruCapital by Reference Management, Inc. et al: Note Agreement dated as of September 1, 1986; Mortgage, Deed of Trust and Security Agreement dated as of September 1, 1986; Equity Funding Agreement with New England Electric System dated as of December 1, 1985 (10)(g) 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)(h) New England Power Pool Incorporated Agreement and Amendments thereto by Reference (10)(i) 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)(j) Vermont Yankee Nuclear Power Incorporated Corporation et al. and New by Reference England Power Company: Capital Funds Agreement dated February 1, 1968, Amendment dated March 12, 1968, and Power Purchase Contract dated February 1, 1968 and Amendments thereto; Additional Power Contract dated as of February 1, 1984; Guarantee Agreement dated as of November 5, 1981 (10)(k) 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)(l) New England Electric Companies' Filed herewith Deferred Compensation Plan as amended through February 28, 1998 (10)(m) New England Electric System Incorporated Companies Retirement Supplement by Reference Plan as amended through June 1, 1996 (10)(n) New England Electric Companies' Filed herewith Executive Supplemental Retirement Plan as amended through December 11, 1998 (10)(o) New England Electric Companies' Filed herewith Executive Retirees Health and Life Insurance Plan as Amended and Restated January 1, 1996 (10)(p) New England Electric Companies' Filed herewith Incentive Compensation Plan I as amended through January 1, 1998 (10)(q) New England Electric Companies' Filed herewith Incentive Compensation Plan II as amended through January 1, 1998 (10)(r) New England Electric Companies' Filed herewith Incentive Compensation Plan III as amended through January 1, 1998 (10)(s) New England Electric Companies' Filed herewith Senior Incentive Compensation Plan as amended through January 1, 1998 (10)(t) New England Electric System Filed herewith Directors Deferred Compensation Plan as amended through February 28, 1998 (10)(u) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(v) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(w) New England Electric Companies' Filed herewith Long-Term Performance Share Award Plan amended through August 25, 1998 (10)(x) New England Electric System Filed herewith Directors' Retirement Plan amended through December 11, 1998 (10)(y) Forms of Severance Protection Filed herewith Agreements (10)(z) New England Power Service Incorporated Company and Joan T. Bok: by Reference Service Credit Letter dated October 21, 1982 (10)(aa) New England Power Service Company Incorporated and Robert L. McCabe: Employment by Reference Agreement entered into as of March 11, 1998 (10)(bb) New England Electric System Filed herewith and Richard P. Sergel Agreement dated March 1, 1998 (10)(cc) New England Power Service Incorporated Company and the Company: by Reference Form of Supplemental Pension Service Credit Agreement (10)(dd) New England Power Company and Incorporated New England Hydro-Transmission by Reference Electric Company, Inc. et al: Phase II Massachusetts Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(ee) New England Power Company and Incorporated New England Hydro-Transmission by Reference Corporation et al: Phase II New Hampshire Transmission Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(ff) New England Power Company et Incorporated al: Phase II New England Power by Reference AC Facilities Support Agreement dated as of June 1, 1985 and Amendments thereto (10)(gg) New England Hydro-Transmission Incorporated Electric Company, Inc. and New by Reference England Electric System et al: Equity Funding Agreement dated as of June 1, 1985 and Amendments thereto (10)(hh) New England Hydro-Transmission Incorporated Corporation and New England by Reference Electric System et al: Equity Funding Agreement dated as of June 1, 1985 and Amendments thereto (10)(ii) NEES Energy, Inc./AllEnergy Filed herewith Marketing Company, L.L.C.: Agreement and Plan of Merger dated December 31, 1998 (10)(jj) USGen, New England, Inc. and Incorporated New England Power Company by Reference and The Narragansett Electric Company: Asset Purchase Agreement dated as of August 5, 1997 (10)(kk) The National Grid Group plc, Incorporated Iosta LLC: Agreement and Plan of by Reference Merger, dated as of December 11, 1998 (13) 1998 Annual Report to Incorporated Shareholders by Reference (21) Subsidiary list Incorporated by Reference (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith NEP EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Organization as Incorporated amended through June 25, 1987 by Reference (3)(b) By-laws of the Company as Incorporated amended December 12, 1997 by Reference (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; 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; (10)(c) Capital Funds Agreement dated (cont.) 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 (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 effective July 1, 1996; Amendment to Service Agreement dated as of February 1, 1997 Supplement to Amendment to Filed herewith Service Agreement dated as of March 1, 1998 (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 effective October 30, 1995; Amendment to Service Agreement dated as of February 1, 1997 Supplement to Amendment to Filed herewith Service Agreement dated as of December 31, 1998 (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 Power Pool Incorporated Agreement and Amendments by Reference thereto (10)(j) New England Power Service Incorporated Company and the Company: by Reference Specimen of Service Contract (10)(k) Massachusetts Electric Incorporated Company, et al. and the by Reference Company: Form of Mutual Assistance Agreement (10)(l) Massachusetts Electric Incorporated Company, et al. and the by Reference Company: Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities (10)(m) 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 of July 19, 1990 between Northeast Utilities Service Company and the Company; Seabrook Project Managing Agent Operating Agreement dated as of June 29, 1992; and Amendment thereto (10)(n) 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)(o) Yankee Atomic Electric Company Incorporated et al. and the Company: by Reference Amended and Restated Power Contract dated April 1, 1985 and Amendments thereto (10)(p) New England Electric Companies' Incorporated Deferred Compensation Plan as by Reference amended through February 28, 1998 (10)(q) New England Electric System Incorporated Companies Retirement Supplement by Reference Plan as amended through June 1, 1996 (10)(r) New England Electric Companies' Incorporated Executive Supplemental Retirement by Reference Plan I as amended through December 11, 1998 (10)(s) New England Electric Companies' Incorporated Executive Retirees Health and Life by Reference Insurance Plan as Amended and Restated January 1, 1996 (10)(t) New England Electric Companies' Incorporated Incentive Compensation Plan I as by Reference amended through January 1, 1998 (10)(u) New England Electric Companies' Incorporated Incentive Compensation Plan II as by Reference amended through January 1, 1998 (10)(v) New England Electric Companies' Incorporated Incentive Compensation Plan III as by Reference amended through January 1, 1998 (10)(w) New England Electric Companies' Incorporated Senior Incentive Compensation by Reference Plan as amended through January 1, 1998 (10)(x) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(y) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(z) New England Electric System Incorporated Directors' Retirement Plan by Reference amended through December 11, 1998 (10)(aa) Forms of Severance Protection Incorporated Agreements by Reference (10)(bb) New England Electric Companies' Incorporated Long-Term Performance Share by Reference Award Plan amended through August 25, 1998 (10)(cc) 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)(dd) 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)(ee) 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)(ff)(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)(ff)(ii) Wholesale Sales Agreement between Incorporated the Company and USGen New England, by Reference Inc. dated as of August 5, 1997 (10)(ff)(iii) PPA Transfer Agreement between Incorporated the Company and USGen New England, by Reference Inc. dated as of August 5, 1997 (10)(ff)(iv) Form of PSA Performance Support Incorporated Agreement between the Company, by Reference USGen New England, Inc., and various Wholesale Customers dated as of August 5, 1997 (10)(ff)(v) Quebec Interconnection Transfer Filed herewith Agreement between the Company, The Narragansett Electric Company, and USGen New England, Inc., dated as of September 1, 1998 (13) 1998 Annual Report to Filed herewith Stockholders (21) Subsidiary list Filed herewith (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith Mass. Electric -------------- EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Organization of the Incorporated Company as amended through by Reference November 11, 1993 (3)(b) By-Laws of the Company as Incorporated amended December 12, 1997 by Reference (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; Supplement to Amendment to Service Agreement dated as of March 1, 1998 (10)(c) New England Power Pool Incorporated Agreement and Amendments by Reference thereto (10)(d) New England Power Service Incorporated Company and the Company: by Reference Specimen of Service Contract (10)(e) New England Power Company Incorporated et al. and the Company: by Reference Form of Mutual Assistance Agreement (10)(f) New England Power Company Incorporated et al. and the Company: by Reference Restructuring Settlement Agreement approved by the Massachusetts Department of Public Utilities February 26, 1997 (10)(g) New England Telephone and Incorporated Telegraph Company and the by Reference Company: Specimen of Joint Ownership Agreement for Wood Poles (10)(h) New England Electric Companies' Incorporated Deferred Compensation Plan as by Reference amended through February 28, 1998 (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 through December 11, 1998 (10)(k) New England Electric Companies' Incorporated Executive Retirees Health and Life by Reference Insurance Plan as Amended and Restated January 1, 1996 (10)(l) New England Electric Companies' Incorporated Incentive Compensation Plan I by Reference as amended through January 1, 1998 (10)(m) New England Electric Companies' Incorporated Incentive Compensation Plan II by Reference as amended through January 1, 1998 (10)(n) New England Electric Companies' Incorporated Incentive Compensation Plan III by Reference as amended through January 1, 1998 (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, 1998 (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 August 25, 1998 (10)(t) New England Electric System Incorporated Directors' Retirement Plan by Reference as amended through December 11, 1998 (10)(u) Forms of Severance Protection Incorporated Agreements by Reference (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 Incorporated Standard Offer Service Agreement by Reference 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) 1998 Annual Report to Filed herewith Stockholders (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith Narragansett ------------- EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- (3)(a) Articles of Incorporation as Incorporated amended June 9, 1988 by Reference (3)(b) By-Laws of the Company Incorporated by Reference (4)(a) First Mortgage Indenture and Incorporated Deed of Trust, dated as of by Reference September 1, 1944, and twenty-three 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; Supplement to Amendment to Service Agreement dated as of December 31, 1998 (10)(c) New England Power Pool Agreement Incorporated and Amendments thereto by Reference (10)(d) New England Power Service Incorporated Company and the Company: by Reference Specimen of Service Contract (10)(e) New England Power Company Incorporated et al. and the Company: by Reference Form of Mutual Assistance Agreement (10)(f) New England Telephone and Incorporated Telegraph Company and the by Reference Company: Specimen of Joint Ownership Agreement for Wood Poles (10)(g) New England Electric Companies' Incorporated Deferred Compensation Plan by Reference as amended through February 28, 1998 (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 December 11, 1998 (10)(j) New England Electric Companies' Incorporated Executive Retirees Health and Life by Reference Insurance Plan as Amended and Restated January 1, 1996 (10)(k) New England Electric Companies' Incorporated Incentive Compensation Plan I, by Reference as amended through January 1, 1998 (10)(l) New England Electric Companies' Incorporated Incentive Compensation Plan II, by Reference as amended through January 1, 1998 (10)(m) New England Electric Companies' Incorporated Incentive Compensation Plan III, by Reference as amended through January 1, 1998 (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, 1998 (10)(p) Forms of Life Insurance Program Incorporated and Form of Life Insurance by Reference (Collateral Assignment) (10)(q) New England Electric Companies' Incorporated Incentive Share Plan as amended by Reference through February 24, 1997 (10)(r) New England Power Service Incorporated Company and the Company: by Reference Form of Supplemental Pension Service Credit Agreement (10)(s) New England Electric Companies' Incorporated Long-Term Performance Share by Reference Award Plan as amended through August 25, 1998 (10)(t) New England Electric System Incorporated Directors' Retirement Plan by Reference amended through December 11, 1998 (10)(u) Forms of Severance Protection Incorporated Agreements by Reference (10)(v)(i) Asset Purchase Agreement between Incorporated USGen New England, Inc., the by Reference Company and New England Power Company dated as of August 5, 1997 (10)(v)(ii) Amended and Restated Wholesale Incorporated Standard Offer Service by Reference 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) 1998 Annual Report to Filed herewith Stockholders (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith EX-4 3 NEES EXHIBIT 4(B) THE NARRAGANSETT ELECTRIC COMPANY TO BANKBOSTON N.A., TRUSTEE (successor to RHODE ISLAND HOSPITAL TRUST NATIONAL BANK and to RHODE ISLAND HOSPITAL TRUST COMPANY) TWENTY-THIRD SUPPLEMENTAL INDENTURE DATED AS OF JUNE 1, 1998 SUPPLEMENTAL TO FIRST MORTGAGE INDENTURE AND DEED OF TRUST DATED AS OF SEPTEMBER 1, 1944 AS AMENDED AND SUPPLEMENTED BY PRIOR SUPPLEMENTAL INDENTURES TO SECURE FIRST MORTGAGE BONDS THE NARRAGANSETT ELECTRIC COMPANY TWENTY-THIRD SUPPLEMENTAL INDENTURE DATED AS OF JUNE 1, 1998 TABLE OF CONTENTS (NOT PART OF THE INDENTURE) PAGE PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RECITALS Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Recital of Validity. . . . . . . . . . . . . . . . . . . . . . . . . 3 GRANTING CLAUSES Recital of Consideration.. . . . . . . . . . . . . . . . . . . . . . 3 Grant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Description of Mortgaged Property. . . . . . . . . . . . . . . . . . 4 Reservations and Exceptions. . . . . . . . . . . . . . . . . . . . . 6 Habendum.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE I. PARTICULAR COVENANTS OF THE COMPANY REGARDING THE MORTGAGED PROPERTY Section 1. Covenant against Encumbrances . . . . . . . . . . . . . . . 7 Section 2. Covenant of Seizin. . . . . . . . . . . . . . . . . . . . . 8 ARTICLE II. COVENANTS OF THE COMPANY Section 1. Warranty as to Default. . . . . . . . . . . . . . . . . . . 8 Section 2. Existence and Authority . . . . . . . . . . . . . . . . . . 8 ARTICLE III. Amendment to the Indenture . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV CONCERNING THE TRUSTEE Acceptance of Trusts and Conditions Thereof. . . . . . . . . . . . . . 10 (a) Identity of Trustee . . . . . . . . . . . . . . . . . . . . . 10 (b) Recitals by Company, not Trustee. . . . . . . . . . . . . . . 10 (c) Limit of Responsibility . . . . . . . . . . . . . . . . . . . 10 ARTICLE V. Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VI. MISCELLANEOUS Section 1. Supplemental to Original Indenture. . . . . . . . . . . . . . 11 Section 2. For Benefit of Parties and Bondholders Only . . . . . . . . . 11 Section 3. Date of Supplemental Indenture. . . . . . . . . . . . . . . . 11 Section 4. Original Counterparts . . . . . . . . . . . . . . . . . . . . 11 Section 5. Cover, Headings, etc. . . . . . . . . . . . . . . . . . . . . 12 TESTIMONIUM CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SCHEDULE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ACKNOWLEDGMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 RECORDING NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 THIS TWENTY-THIRD SUPPLEMENTAL INDENTURE, dated as of the 1st day of June, in the year one thousand nine hundred and ninety-eight, between THE NARRAGANSETT ELECTRIC COMPANY (hereinafter generally called the Company), a corporation duly organized and existing under the laws of the State of Rhode Island and having its principal place of business in Providence, Rhode Island, and a mailing address of 280 Melrose Street, Providence, Rhode Island 02907, and BANKBOSTON N.A. (successor by merger to Rhode Island Hospital Trust National Bank and to Rhode Island Hospital Trust Company, and hereinafter generally called the Trustee), a national banking association duly incorporated and existing under the laws of the United States of America, having its principal place of business and address at 225 Franklin Street, Boston, Massachusetts 02110, and duly authorized to execute the trusts hereof. WITNESSETH THAT: WHEREAS, the Company heretofore executed and delivered to the Trustee a First Mortgage Indenture and Deed of Trust (hereinafter singly generally called the Original Indenture, and with this and all other indentures supplemental thereto collectively called the Indenture), dated as of September 1, 1944, and recorded among other places in the records of land-evidence of the City of Providence, R.I., Book 781, Page 1, to which this instrument is supplemental pursuant to the terms thereof, whereby the Company has mortgaged, conveyed, pledged, assigned and transferred to the Trustee all and singular the property therein specified, whether owned at the time of the execution or thereafter acquired by the Company, to secure its First Mortgage Bonds (hereinafter generally called the Bonds) of an unlimited (except as therein provided) permitted aggregate principal amount, to be issued in one or more series as provided in the Original Indenture; and WHEREAS, the Company has heretofore executed and delivered to the Trustee Twenty-two Supplemental Indentures, viz.: Supplemental Indenture Dated As Of First Supplemental Indenture May 1, 1948 Second Supplemental Indenture March 1, 1952 Third Supplemental Indenture March 1, 1953 Fourth Supplemental Indenture March 1, 1956 Fifth Supplemental Indenture January 1, 1964 Sixth Supplemental Indenture February 1, 1968 Seventh Supplemental Indenture April 1, 1970 Eighth Supplemental Indenture March 1, 1972 Ninth Supplemental Indenture March 1, 1974 Tenth Supplemental Indenture August 1, 1974 Eleventh Supplemental Indenture March 1, 1975 Twelfth Supplemental Indenture August 1, 1980 Thirteenth Supplemental Indenture February 1, 1982 Fourteenth Supplemental Indenture January 1, 1984 Fifteenth Supplemental Indenture January 1, 1986 Sixteenth Supplemental Indenture June 1, 1986 Seventeenth Supplemental Indenture November 1, 1987 Eighteenth Supplemental Indenture May 1, 1991 Nineteenth Supplemental Indenture August 1, 1991 Twentieth Supplemental Indenture May 1, 1992 Twenty-First Supplemental Indenture October 1, 1993 Twenty-Second Supplemental Indenture June 1, 1995 (hereinafter referred to as the Prior Supplemental Indentures) each of which is supplemental to the Original Indenture, whereby the Company has mortgaged, conveyed, pledged, assigned and transferred to the Trustee all and singular the property therein specified, whether owned at the time of the execution of each of said Supplemental Indentures or thereafter acquired by the Company, to secure its Bonds issued or to be issued in one or more series as provided in the Original Indenture; and WHEREAS, the Company under the Indenture has heretofore issued and has outstanding as of the date hereof the following aggregate principal amounts of its First Mortgage Bonds: SERIES PERCENT DUE AMOUNT S 9 1/8% 2021 $ 22,200,000 T 8 7/8% 2021 $ 22,000,000 U Various Various $ 67,500,000 V Various Various $ 45,000,000 W Various Various $ 28,000,000 (hereinafter referred to as the Outstanding Bonds); and WHEREAS, Sections 4.07 and 4.17 of the Original Indenture and Articles I, Sections 2 of the Prior Supplemental Indentures provide that the Company will from time to time give further assurances to the Trustee, and will from time to time subject to the lien of the Indenture all after-acquired property included in the granting clauses of the Indenture, and Section 12.01 of the Original Indenture provides, among other things, that the Company and the Trustee from time to time may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of conveying, mortgaging, pledging, assigning or transferring to the Trustee any other property or properties to be held subject to the lien of the Indenture with the same force and effect as if included in the granting clauses thereof; and of making such provisions, for the purpose of curing any ambiguity or in regard to matters or questions arising under the Indenture, as may be necessary or desirable and not inconsistent with the security and protection intended to be conferred upon the Trustee and the Bondholders; and WHEREAS, the parties hereto desire to amend the Indenture in order to remove provisions made obsolete by the passage of time and neither necessary nor desirable and no longer necessary for the security and protection intended to be conferred upon bondholders; and WHEREAS, the Company desires pursuant to said provisions and as hereinafter provided to convey, mortgage, pledge, assign and transfer to the Trustee certain other properties hereinafter specified, to be held subject to the lien of the Indenture; to add certain covenants and agreements; to make such provision in regard to the Indenture as may be necessary or desirable and not inconsistent with the security and protection intended to be conferred upon the Trustee and the Bondholders; and AND WHEREAS, all things necessary to make this Twenty-Third Supplemental Indenture a valid, legal and binding instrument supplemental to and confirmatory of the Original Indenture enforceable in accordance with its terms for the uses and purposes herein set forth, have been in all respects duly authorized: NOW, THEREFORE, in consideration of the premises and of the sum of $10 duly paid to the Company by the Trustee, and of other good and valuable considerations, receipt whereof upon the ensealing and delivery of this Twenty-Third Supplemental Indenture the Company hereby acknowledges, and for the purpose of confirming the Original Indenture and the Prior Supplemental Indentures, and as an indenture hereby expressly stated to be supplemental to the Original Indenture, and, except as herein otherwise provided, in order to secure equally the pro rata payment of both the principal of and the interest on all of the Bonds at any time certified, issued and outstanding under the Indenture, according to their tenor, purport and effect and the provisions of the Indenture, and to secure the faithful performance and observance of all the covenants, obligations, conditions and provisions therein and in the Indenture contained, all as hereinafter provided, THE COMPANY does hereby confirm the pledge, mortgage, conveyance, assignment and transfer of the property set forth and described in the Original Indenture and the Prior Supplemental Indentures, except such properties or interests therein as may have been released by the Trustee or sold or disposed of in whole or in part as permitted by the provisions of the Original Indenture and the Prior Supplemental Indentures, or as were specifically reserved, excepted and excluded by the Original Indenture and the Prior Supplemental Indentures; and has given, granted, bargained, sold, warranted, pledged, assigned, transferred, mortgaged and conveyed, and by these presents does give, grant, bargain, sell, warrant, pledge, assign, transfer, mortgage and convey, unto the Trustee, and its successors in the trusts of the Indenture, and its and their assigns, upon and for the trusts thereby and hereby established and confirmed, all and singular the following described land and personal properties, franchises, rights and privileges acquired by the Company since the execution and delivery of the Twenty-second Supplemental Indenture or to be acquired by the Company hereafter as by the terms of the Original Indenture and the Prior Supplemental Indentures or by reason of being affixed to the freehold described in the Original Indenture and the Prior Supplemental Indentures, or for any other reason whatsoever are subject to or to be subjected to the lien of the Original Indenture and the Prior Supplemental Indentures, including, but without in any way limiting the generality of the foregoing, all the right, title and interest of the Company in and to the property and interests in property, with the buildings thereon and the appurtenances thereto particularly described in Schedule I hereto attached and hereby made a part hereof as fully as if repeated herein at length (all of the foregoing, with all other property, and rights and interests in property, intended to be hereby or by the Original Indenture and the Prior Supplemental Indentures conveyed, mortgaged, pledged, assigned and transferred, or at any time conveyed, mortgaged, pledged, assigned, transferred or delivered, and all proceeds of any of the foregoing at any time conveyed, mortgaged, pledged, assigned, transferred, and/or delivered, to and from time to time held by the Trustee upon the trusts hereof and of the Original Indenture and the Prior Supplemental Indentures, being herein generally called, collectively, the Mortgaged Property): FIRST. REAL ESTATE AND RIGHTS AND INTERESTS IN REAL ESTATE. Subject to the exceptions and reservations hereinafter set forth all the real estate, rights and interests in real estate, lands, buildings, structures, rights and interests in lands, easements, leases of land and every right appurtenant thereto, franchises, rights of way, rights to construct, maintain and operate overhead and underground systems for the generation, distribution and transmission of electric current or other agencies for the supplying of light, heat and power, transmission, service and distribution lines and systems, and all releases of damages, water, flowage and riparian and shore rights, now owned by the Company, including, without limitation, all property particularly described in Schedule I hereto attached and hereby made a part hereof as fully as if repeated herein at length. SECOND. PROPERTY HEREAFTER CONVEYED, ETC. Any and all cash, stocks, shares, bonds, notes, securities or other property which at any time hereafter, by delivery or writing of any kind for the purposes hereof, may, at the option of the Company, be expressly conveyed, mortgaged, pledged, delivered, assigned or transferred to or deposited with the Trustee hereunder by the Company or by a successor corporation, or with its consent by any one on its behalf, as and for any additional security for the Bonds issued and to be issued hereunder, the Trustee being authorized at any and all times to receive such conveyance, mortgage, pledge, delivery, assignment, transfer or deposit and to hold and apply any and all such cash, stock, shares, bonds, notes, securities or other property subject to all the provisions hereof and/or of such writing. THIRD. MISCELLANEOUS PROPERTY. All other, if any, lands, easements, leases of land and every right appurtenant thereto, rights of way, rights to construct, maintain and operate overhead and underground systems for the distribution and transmission of electric current or other agencies for the supplying of light, heat and power, all releases of damages, water, flowage and riparian and shore rights, dams, wharves, tracks, switches, terminal facilities and other interests in lands, including (without in any wise limiting or impairing by the enumeration of the same the generality, scope and intent of the foregoing or of any general description contained in this Twenty-third Supplemental Indenture) buildings, electric generating, light, heat and power, and gas, ice and refrigerating, plants and systems, transmission, service and distribution lines and systems and steam heating plants and systems, water and/or water works, plants and systems, manufactories, power houses, stations, substations, pipe lines, pipes, mains, conduits, towers, tunnels, subways, bridges, poles, wires, cables, fittings, connections and all other structures, machinery, engines, boilers, pumps, valves, pipings, connections, dynamos, meters, transformers, generators, motors, storage batteries, electrical and mechanical machinery, appliances, equipment and appurtenances of every description and character, tools, implements, wagons, fixtures, appliances, appurtenances, accessories, and all other physical assets and all rights, grants, privileges, leases and leasehold interests, licenses, permits, locations, consents, franchises, grants and immunities, and all rights to compensation upon the termination in any manner of any of the same, and any and all interest in property of the character included in this Division Third, whether now owned by the Company or at any time hereafter acquired. TOGETHER WITH all the Company's now-existing or hereafter-acquired right, title and interest in and to any and all physical property of the Company, now or hereafter subject to any prior mortgage, pledge, charge and/or other encumbrance or lien, and the cash and/or other proceeds therefrom, to the extent that such property, cash and/or proceeds shall not be otherwise held and/or applied pursuant to the requirements of any such mortgage, pledge, charge and/or other encumbrance or lien. AND TOGETHER WITH all and singular the now-existing and hereafter-acquired rights, privileges, tenements, hereditaments and appurtenances belonging or in any wise appertaining in and to the aforesaid property or any part thereof, and the reversion and reversions, remainder and remainders and, subject to the provisions of Section 6.01 of the Original Indenture, all tolls, rents, revenues, earnings, interest, dividends, royalties, issues, income and profits thereof, and all the estate, right, title, interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire, in and to all and every part and parcel of the foregoing, it being the intention to include herein and to subject to the lien hereof all land, interest in land, real estate, physical assets and franchises whether now owned by the Company or which it may hereafter acquire and wherever situated, as if the same were now owned by the Company and were specifically described and conveyed hereby except as hereinafter specified. RESERVATIONS AND EXCEPTIONS. SUBJECT, HOWEVER, as to all property, and rights and interests in and to property, of any character hereinbefore described, in so far as affected thereby, to any mortgages or other encumbrances or liens on such property constituting permitted liens as in the Original Indenture defined; AND SUBJECT FURTHER as to the property in Divisions First and Third above described, insofar as affected thereby, to the liens, encumbrances, reservations, restrictions, conditions, limitations, covenants, interests and exceptions, if any, set forth or referred to in the descriptions thereof hereinbefore and in said Schedule I contained, none of which substantially interferes with the free use and enjoyment by the Company of the property and rights hereinbefore described for the general purposes and uses of the Company's business; AND SPECIFICALLY RESERVING, EXCEPTING AND EXCLUDING from this instrument, and from the grant, conveyance, mortgage, transfer and assignment herein contained, (a) all property expressly excepted in the Original Indenture, the Prior Supplemental Indentures and herein and in schedules of property thereto and hereto; (b) all property, permits, licenses, franchises and rights, whether now owned or hereafter acquired by the Company, which are intended to be hereby granted, conveyed, mortgaged, assigned and transferred, but which can not be so granted, conveyed, mortgaged, assigned or transferred without the consent of other parties whose consent is not secured, or without subjecting the Trustee to a liability not otherwise contemplated by the provisions of the Indenture, or which otherwise may not be, or are not, hereby lawfully and/or effectively granted, conveyed, mortgaged, assigned and transferred by the Company; (c) the last day of the term of each leasehold estate (oral or written, and/or any agreement therefor) now or hereafter enjoyed by the Company, and whether falling within a general or particular description of property herein; and (d) all the Company's present and future fuel, automobiles, automotive equipment, merchandise held for sale, cash on hand or in bank, furniture, office equipment, books, choses in action, contracts, shares of stock, bonds and other securities, documents and accounts and bills receivable (except proceeds of the Mortgaged Property, and insurance and other monies, and purchase money obligations, required by the provisions of the Original Indenture and hereof to be paid to or deposited with the Trustee), and materials, stores, supplies and other personal property which are consumable (otherwise than by ordinary wear and tear) in their use in the operation of the plants or systems of the Company. TO HAVE AND TO HOLD the Mortgaged Property, with all of the privileges and appurtenances thereunto belonging (but subject to the foregoing specified exceptions and reservations) unto the Trustee, its successors in the trusts of the Indenture, and its and their assigns, to its and their own use, forever; BUT IN TRUST NEVERTHELESS for the equal pro rata benefit, security and protection (except as provided in the Indenture, and except insofar as a sinking or analogous fund or funds, established in accordance with the provisions of the Indenture, may afford particular security for Bonds of one or more series, and except independent security as provided in Section 2.02 of the Original Indenture) of the bearers and the registered owners of the Bonds from time to time certified, issued and outstanding under the Indenture, and the bearers of the coupons thereunto belonging, without (except as aforesaid) any preference, priority or distinction whatever of any one Bond over any other Bond by reason of priority in the issue, sale or negotiation thereof, or otherwise. The Company hereby declares that it holds and will hold and apply all property described in the foregoing clauses (b) and (c) as specifically reserved and excepted, upon the trusts in the Indenture set forth and as the Trustee (or any purchaser thereof upon any sale thereof under the Indenture) shall for such purpose direct from time to time, to the fullest extent permitted by law or in equity, as fully as if the same could be and had been hereby granted, conveyed, mortgaged, assigned and transferred to and vested in the Trustee. In addition to and in confirmation and performance of the covenants, declarations, agreements, conditions and provisions of the Original Indenture and the Prior Supplemental Indentures, it is hereby further covenanted, declared and agreed, upon the trusts and for the purposes aforesaid, that the trusts, terms and conditions, upon which the Mortgaged Property hereby granted, mortgaged, conveyed, assigned and transferred or intended so to be is to be held and disposed of, are as set forth in the Original Indenture and the Prior Supplemental Indentures and in the following covenants, agreements, conditions and provisions, viz.: ARTICLE I. PARTICULAR COVENANTS OF THE COMPANY REGARDING THE MORTGAGED PROPERTY. The Company covenants and agrees, in particular, but without limiting other covenants and provisions hereof, or of the Original Indenture and the Prior Supplemental Indentures, as hereinafter in this Article set forth, namely: SECTION 1. The Mortgaged Property specifically described in the granting clauses of this Twenty-third Supplemental Indenture, including Schedule I hereof, is now wholly free from and unencumbered by any defect, mortgage, pledge, charge or other encumbrance or lien, of any kind, superior to or on a parity with the lien of the Indenture, except only taxes for the current year not yet due, permitted liens and those encumbrances, if any, referred to in said granting clauses and Schedule I hereof; and the Company will duly and punctually remove, perform, pay and discharge, or if it contests, will stay (and indemnify the Trustee from time to time to the satisfaction of the Trustee against) the enforcement of, all obligations and claims arising or to arise out of or in connection with each and all thereof. The Company will not create or suffer any other mortgage, pledge, charge or material encumbrance or lien, of any kind, superior to or on a parity with the lien of the Indenture, upon the Mortgaged Property, or any part thereof, now owned or hereafter acquired, except only such as are permitted under the provisions of Section 4.16 of the Original Indenture. SECTION 2. The Company is lawfully seized in fee simple of the real estate, and owns outright and is lawfully possessed in its own right, absolutely and unconditionally, of the property and rights, constituting the Mortgaged Property specifically described in the granting clauses of this Twenty-third Supplemental Indenture, including Schedule I hereof, and has good title to, and full power and authority to sell, transfer, assign, mortgage, pledge and convey the property, rights and interests hereby presently sold, transferred, assigned, mortgaged, pledged and conveyed or purported or intended so to be, all subject only to taxes not yet due, to those liens, encumbrances and defects, if any, referred to in the granting clauses and said Schedule I hereof; and the Company will warrant and defend the title to the Mortgaged Property, and every part thereof (subject as aforesaid), to the Trustee, against all claims and demands whatsoever of any person and all persons claiming or to claim the same or any interest therein, subject only as aforesaid and to mortgages, encumbrances and liens on after-acquired property to the extent permitted by Section 4.16 of the Original Indenture. The Company will keep this Twenty-third Supplemental Indenture at all times properly filed and recorded, and refiled and rerecorded, in such manner and in such places, and will do such other acts, as may be necessary or desirable to establish and maintain the superior lien of the Indenture upon the Mortgaged Property, and for the proper protection of the Trustee and the Bondholders. The Company will also from time to time subject to the lien of the Indenture all of its hereafter-acquired property which is included in the granting clauses hereof or which the Company is required by any of the provisions of the Indenture to subject to the lien thereof. ARTICLE II. COVENANTS OF THE COMPANY. SECTION 1. The Company warrants that at the date of the execution and delivery of this Twenty-third Supplemental Indenture the Company is not in default in any respect under any of the provisions of the Original Indenture, of the Prior Supplemental Indentures or of the Outstanding Bonds, and covenants that it will perform and fulfill all the terms, covenants and conditions of the Indenture to be performed and fulfilled by the Company. SECTION 2. The Company is duly organized and existing under the laws of the State of Rhode Island, and is duly authorized under all applicable provisions of law and all corporate action on its part to execute this Twenty- third Supplemental Indenture, and for the execution and delivery of this Twenty-third Supplemental Indenture, has been duly and effectively taken. This Twenty-third Supplemental Indenture is and will be a valid and enforceable obligation of the Company in accordance with the provisions hereof. ARTICLE III. AMENDMENTS TO THE INDENTURE The Original Indenture, as previously amended, is hereby further amended as set forth below. Section 4.02 of the Original Indenture is amended to read as follows: 4.02. The Company covenants and agrees that whenever necessary to avoid or fill a vacancy in the office of Trustee, the Company will in the manner provided in section 10.19 appoint a Trustee so that there shall at all times be a Trustee hereunder which shall at all times be a bank or trust company which shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory or of the District of Columbia with a capital and surplus of at least One Million Dollars ($1,000,000) and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal, state, territorial or District of Columbia authority. Section 10.22 of the Original Indenture is amended to read as follows: 10.22. Any corporation into which the Trustee may be merged or with which it may be consolidated or any corporation resulting from any merger or consolidation to which the Trustee shall be a party or any corporation to which substantially all the business and assets of the Trustee may be transferred or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee including, without limitation, State Street Bank and Trust Company as successor in September 1995 to substantially all of the corporate trust business of Rhode Island Hospital Trust National Bank, provided such corporation shall be eligible under the provisions of sections 4.02 and 10.01 and qualified under section 10.15 shall be the successor trustee under this Indenture, without the execution or filing of any paper or the performance of any further act on the part of any other parties hereto, anything herein to the contrary notwithstanding. In case any of the Bonds contemplated to be issued hereunder shall have been authenticated but not delivered, any such successor to the Trustee may, subject to the same terms and conditions as though such successor had itself authenticated such Bonds, adopt the certificate of authentication of the original Trustee or of any successor to it as trustee hereunder, and deliver the said Bonds so authenticated; and in case any of said Bonds shall not have been authenticated, any successor to the Trustee may authenticate such Bonds either in the name of any predecessor hereunder or in the name of the successor trustee, and in all such cases such certificate shall have the full force which it is anywhere in said Bonds or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to authenticate Bonds in the name of the Trustee shall apply only to its successor or successors by merger or consolidation or sale as aforesaid. ARTICLE IV. CONCERNING THE TRUSTEE. The Trustee accepts and agrees to execute the trusts, powers, rights and duties of the Trustee under this Twenty-third Supplemental Indenture upon and only upon and subject to the terms and conditions of this Twenty-third Supplemental Indenture and the terms and conditions of the Original Indenture relating to the Trustee thereunder, all of which the Company agrees are applicable to the Trustee hereunder, expressly including, but without limiting the foregoing, or other provisions of the Indenture and hereof protecting the Trustee, and without limiting or affecting any right, power or discretion of the Trustee thereunder or hereunder, or otherwise existing, the following: (a) The Trustee for the time being under the Original Indenture shall ex officio be the Trustee under this Twenty-third Supplemental Indenture. The word "Trustee" wherever used herein shall be taken to apply to the Trustee for the time being under the Original Indenture and hereunder. (b) The recitals of fact contained herein shall be taken as the statements of the Company and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the value of the mortgaged and pledged property or any part thereof, or as to the title of the Company thereto, or as to the validity or adequacy of the security afforded thereby and hereby, or as to the validity of this Twenty-third Supplemental Indenture. (c) The Trustee in respect of all provisions hereof, of all moneys held by it hereunder, of all property herein embraced and of all action or omission to act hereunder (i) shall be held to no responsibility or liability hereunder in any way greater than the responsibility or liability to which the Trustee under the Original Indenture is held thereunder and (ii) shall be entitled to, may exercise and shall be protected by (to the full extent that the same are applicable) all estate, rights, powers, conditions, duties, privileges, immunities, exemptions, authorities, protection and provisions set forth in Article 10 of the Original Indenture as applying to the Trustee thereunder, all of which mutatis mutandis are hereby adopted and made applicable in respect of such provisions hereof, moneys held hereunder, property herein embraced and action or omission to act hereunder as fully as if the provisions concerning the same were set forth herein at length. ARTICLE V. DEFEASANCE. All the property hereby mortgaged and pledged or intended so to be shall revert to the Company and the estate, right, title and interest of the Trustee in respect thereof shall cease, determine and become void and the Trustee shall execute to the Company or its order proper instruments acknowledging satisfaction of this Twenty-third Supplemental Indenture and surrendering to the Company or its order all cash and deposited securities, if any, which shall then be held hereunder in the manner and with the effect provided in Article 15 of the Original Indenture, but only upon the discharge of the Original Indenture by the Trustee thereunder pursuant to the provisions thereof. ARTICLE VI. MISCELLANEOUS. SECTION 1. This Twenty-third Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and as provided in the Original Indenture this Twenty-third Supplemental Indenture forms a part thereof and, except as herein expressly otherwise defined, the use of terms and expressions herein is in accordance with the definitions, uses and constructions contained in the Original Indenture. Pursuant to Section 12.01 of the Original Indenture, it is hereby stipulated that the Trustee shall not be taken impliedly to waive hereby any right it would otherwise have. SECTION 2. All the covenants and provisions of this Twenty-third Supplemental Indenture are for the sole and exclusive benefit of the parties hereto and the holders of the Bonds, and no others shall have any legal, equitable or other right, remedy or claim under or by reason of this Twenty- third Supplemental Indenture. SECTION 3. This Twenty-third Supplemental Indenture is stated to be dated as of June 1, 1998. This is intended as and for a date for reference and for identification, the actual time of the execution hereof being the date set forth in the testimonium clause hereof. SECTION 4. This Twenty-third Supplemental Indenture may be executed in any number of counterparts, each of which shall be deemed an original; and such counterparts shall constitute but one and the same instrument, which shall for all purposes be sufficiently evidenced by any such original counterpart. SECTION 5. The cover of this Twenty-third Supplemental Indenture and all article headings, and the table of contents and marginal notes, if any, are inserted for convenience only, and shall not affect any construction or interpretation hereof. IN WITNESS WHEREOF, The Narragansett Electric Company has caused this Twenty-third Supplemental Indenture to be executed, and its corporate seal to be hereto affixed, by its officers thereunto duly authorized, and BankBoston N.A. has caused this Twenty-third Supplemental Indenture to be executed, and its corporate seal to be hereto affixed, by its officers thereunto duly authorized, all as of the day and year first above written, but actually executed on July 28, 1998. THE NARRAGANSETT ELECTRIC COMPANY By /s/ R. Nadeau _____________________________________________ R. Nadeau, Vice President ATTEST: [Corporate Seal] /s/ Robert King Wulff _______________________________________ Robert King Wulff, Assistant Secretary BANKBOSTON N.A. By /s/ Paul M. Lenahan ____________________________________________ Paul M. Lenahan, Vice President ATTEST: [Corporate Seal] /s/ Robert N. Gaumont _______________________________________ Robert N. Gaumont, Vice President SCHEDULE I The property and interests in property situated in the Towns of Barrington, Bristol, Burrillville, Charlestown, Coventry, East Greenwich, Exeter, Foster, Glocester, Hopkinton, Johnston, Lincoln, Little Compton, Narragansett, North Kingstown, North Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Westerly, West Greenwich and West Warwick, Rhode Island, and in the Cities of Cranston, East Providence, Providence and Warwick, Rhode Island, by the following instruments: BARRINGTON Recorded in Barrington Land Records Grantors Date Book Page Prop. No. Connor Lane, LLC. July 17, 1995 294 169 Gen. 7562 GHG Fowler, Inc. Nov. 25, 1996 334 26 Gen. 7563 United States of America Jan. 18, 1997 337 36 Gen. 7564 Town of Barrington May 6, 1997 345 311 Gen. 7565 BRISTOL Recorded in Bristol Land Records Grantors Date Book Page Prop. No. Edward J. Mack July 6, 1995 548 63 Gen. 11,730 Mildred Balzano Dec. 8, 1995 562 54 Gen. 11,731 Goetz Realty, Inc. April 4, 1996 573 3 Gen. 11,732 Shannon Yachts Limited Partnership May 7, 1996 581 241 Gen. 11,733 Ursula M. Beauregard, Tr. Feb. 12, 1997 600 8 Gen. 11,734 The Rhode Island Five Jan. 27, 1997 598 85 Gen. 11,735 57 Assoc. Jan. 27, 1997 598 83 Gen. 11,736 Ursula M. Beauregard, Tr. Apr. 18, 1997 606 102 Gen. 11,737 The Rhode Island Five Apr. 18, 1997 606 100 Gen. 11,738 57 Assoc. Apr. 18, 1997 606 98 Gen. 11,739 Joseph M Casalino IV et al Aug. 4, 1997 618 237 Gen. 11,740 CML Development Corp. Sept. 30, 1997 625 20 Gen. 11,741 Elder Care Two, Inc. Jan. 8, 1997 596 308 Gen. 11,742 Francesca Development Corporation Feb. 8, 1998 638 90 Gen. 11,743 BURRILLVILLE Recorded in Burrillville Land Records Grantors Date Book Page Prop. No. Kevin R. Paine et als (Fee) May 28, 1998 204 239 KC-S 218 CHARLESTOWN Recorded in Charlestown Land Records Grantors Date Book Page Prop. No. J.F. Smith Builders, Inc. Mar. 30, 1995 144 515 Gen. 4711 Michael Vickers Jan. 15, 1995 144 158 Gen. 4712 H. Grant Kettelle et al May 27, 1995 145 1080 Gen. 4714 David M. Howard, Jr. et al June 6, 1995 145 1082 Gen. 4715 MTS Builders of Rhode Island, Inc. June 7, 1995 145 1084 Gen. 4716 Carol A. Cox Sept. 13, 1995 147 799 Gen. 4717 Margaret G. Mathews Sept. 25, 1995 147 801 Gen. 4718 Brian R. Bootay Jan. 20, 1996 150 995 Gen. 4719 Michael Clemons et al Mar. 21, 1996 151 287 Gen. 4720 Sheelagh M. Brockmyre June 27, 1996 153 595 Gen. 4721 William F. Arnold, Jr. et al June 20, 1996 153 592 Gen. 4722 Peter W. Arnold et ali June 11, 1996 153 589 Gen. 4723 David A. Greene et al Dec. 11, 1996 156 159 Gen. 4724 George W. Greene, Jr. et ali Dec. 12, 1996 156 162 Gen. 4725 The Charlestown Land Group, LLC Nov. 18, 1996 156 725 Gen. 4726 Walter B. Brown Nov. 26, 1996 156 157 Gen. 4727 William E. Follett, Sr. Jan. 3, 1997 156 722 Gen. 4728 Paul E. Kaplan et al Mar. 21, 1997 158 71 Gen. 4729 Richard S. Allison et al May 8, 1997 159 251 Gen. 4730 Albert J. Scott Apr. 30, 1997 158 568 Gen. 4731 Ellen M. Thweatt June 4, 1997 159 254 Gen. 4732 Scot V. Hallberg June 11, 1997 159 463 Gen. 4733 John F. Smith et al Sept. 5, 1997 161 720 Gen. 4734 Kevin J. O'Leary et al Oct. 1, 1997 162 665 Gen. 4735 Harold L. Hopkins July 29, 1997 161 237 Gen. 4736 Catherine V. Schoeninger July 26, 1997 161 255 Gen. 4737 Henry Langdon Heminway et al Apr. 19, 1996 152 135 Gen. 4738 Arthur H. Henyon et als Jan. 12, 1998 164 623 Gen. 4739 Everett J. Hopkins Dec. 19, 1997 164 900 Gen. 4740 Steven A. Persson et al Apr. 24, 1998 167 376 Gen. 4741 Gudny Persson Apr. 27, 1998 167 373 Gen. 4742 Anne M. Nelson et al Apr. 27, 1998 167 378 Gen. 4743 COVENTRY Recorded in Coventry Land Records Grantors Date Book Page Prop. No. James Steitz et al May 12, 1995 502 27 Gen. 6251 Putnam Associates Mar. 15, 1995 500 53 Gen. 6263 Howard E. Wahl, Jr. et al Mar. 29, 1995 500 55 Gen. 6264 A & R Properties, Inc. Apr. 6, 1995 500 57 Gen. 6265 COVENTRY Recorded in Coventry Land Records Grantors Date Book Page Prop. No. Major Realty, LLC Apr. 24, 1995 500 59 Gen. 6266 Pettine Associates, Inc. Apr. 24, 1995 500 61 Gen. 6267 A & R Properties, Inc. Apr. 27, 1995 500 63 Gen. 6268 W.F.D. Associates, L.P. July 6, 1995 510 262 Gen. 6269 W.F.D. Associates, L.P. July 17, 1995 510 265 Gen. 6270 Alpine Realty, L.L.C. June 22, 1995 510 259 Gen. 6271 Donald F. Fisher et al June 12, 1995 505 175 Gen. 6272 Capital Modular Development Corporation May 25, 1995 505 177 Gen. 6273 John Joly Enterprises Inc. Aug. 16, 1995 518 3 Gen. 6274 Midwestern Homes, Inc. Aug. 7, 1995 518 5 Gen. 6275 David m. Bedard Sept. 21, 1995 520 75 Gen. 6276 Walter Arcand Sept. 28, 1995 520 301 Gen. 6277 A & R Properties, Inc. Oct. 4, 1995 522 18 Gen. 6278 David W. Krahn et al Sept. 30, 1995 522 22 Gen. 6279 Wal-Mart Stores, Inc. Oct. 2, 1995 524 188 Gen. 6280 Deborah Gail Guthrie et al Oct. 5, 1995 524 186 Gen. 6281 Linda Gay Oct. 5, 1995 524 184 Gen. 6282 John J. Perrotti et al Oct. 19, 1995 524 182 Gen. 6283 Walter Arcand Nov. 17 1995 529 255 Gen. 6284 Todd P. Langlais et al Oct. 25, 1995 528 277 Gen. 6285 Michelle C. Ricci et al Jan. 29, 1996 539 45 Gen. 6286 Padula Builders, Inc. Feb. 27, 1996 541 245 Gen. 6287 Paul Andrukiewicz Mar. 25, 1996 546 125 Gen. 6288 Frontier Properties, Inc. Mar. 26, 1996 547 284 Gen. 6289 Scott Rose Feb. 12, 1996 547 286 Gen. 6290 Alice St. Jean July 15, 1996 565 219 Gen. 6291 Walter W. Arcand June 26, 1996 562 128 Gen. 6292 William C. Eccleston et al June 26, 1996 562 125 Gen. 6293 Waterford Homes, Inc. Apr. 18, 1996 562 110 Gen. 6294 Joseph L. Peltier, Jr.et ali Jan. 20, 1996 563 89 Gen. 6295 Scott Pellett Apr. 17, 1996 562 104 Gen. 6296 Bruce J. Johnson et al Apr. 16, 1996 562 106 Gen. 6297 Michael P. Chabot Apr. 2, 1996 562 108 Gen. 6298 COVENTRY Recorded in Coventry Land Recorrds Grantors Date Book Page Prop. No. Raymond J. Stewart et al Sept. 19, 1996 578 282 Gen. 6299 J & R Contractors, Inc. Sept. 13, 1996 578 284 Gen. 6300 Edward W. Cerio et al Sept. 17, 1996 578 111 Gen. 6301 James Dionne et al Sept. 16, 1996 578 108 Gen. 6302 Weaver Hill Estates, Inc. July 24, 1996 570 192 Gen. 6303 J & R Contractors, Inc. Aug. 29, 1996 575 238 Gen. 6306 Highwood Associates, LLC Aug. 26, 1996 575 235 Gen. 6304 Resource Construction, Inc. Aug. 26, 1996 575 242 Gen. 6305 The Town of Coventry Sept. 30, 1996 580 279 Gen. 6307 Michael R. Durand et al Oct. 7, 1996 583 136 Gen. 6308 Padula Builders, Inc. Oct. 1, 1996 583 139 Gen. 6309 Harry J. Masiello Oct. 9, 1996 585 120 Gen. 6310 Kevin M. Magnone Sept. 2, 1996 589 56 Gen. 6311 Norman Marsocci Oct. 31, 1996 591 150 Gen. 6312 Northstar Development Corporation Dec. 13, 1996 595 209 Gen. 6313 Carmine DeCesare, Jr. et al Dec. 15, 1996 595 207 Gen. 6314 Donald Edward Gomes et al Dec. 15, 1996 595 205 Gen. 6315 Thomas E. Pimentel Dec. 11, 1996 595 202 Gen. 6316 Eugene Walter Dec. 16, 1996 595 211 Gen. 6317 Riverview Nursing Home, Inc. Dec. 4, 1996 598 182 Gen. 6318 Alfonso DiGiacomo et al Jan. 6, 1997 598 180 Gen. 6319 Walter Arcand Jan. 3, 1997 597 257 Gen. 6320 W.F.D. Associates, LP Jan. 13, 1997 599 278 Gen. 6321 J&R Contractors, Inc. Jan. 17, 1997 599 284 Gen. 6322 Matteson Estates Homeowners Association Jan. 17, 1997 599 282 Gen. 6323 Ingrid L. Fratantuono Jan. 17, 1997 599 276 Gen. 6324 James J. Jordan et al Dec. 17, 1996 601 105 Gen. 6325 David P. Cayouette Jan. 20, 1997 600 181 Gen. 6326 Patricia L. Rendine et al Jan. 24, 1997 601 298 Gen. 6327 Elaine Enterprises, Inc. Feb. 20, 1997 611 100 Gen. 6328 Padula Builders, Inc. Mar. 31, 1997 611 97 Gen. 6329 Holly Tattrie Apr. 14, 1997 613 229 Gen. 6330 Quidnick Reservoir Company Feb. 13, 1997 617 4 Gen. 6331 Steven L. Cayouette et al May 12, 1997 618 302 Gen. 6332 W.F.D. Associates, L.P. June 17, 1997 624 280 Gen. 6333 Niagra Pool Filling Co., Inc June 10, 1997 624 276 Gen. 6334 Enea M. DeSimone et al July 14, 1997 630 184 Gen. 6335 Wood Estates, Inc. Aug. 19, 1997 638 157 Gen. 6336 John Joly et al Sept. 2, 1997 639 292 Gen. 6337 Brian Andrea et al July 1, 1997 651 274 Gen. 6338 Town of Coventry Oct. 20, 1997 651 272 Gen. 6339 Maple Root Corporation July 30, 1996 585 123 Gen. 6340 Noel Daigneault et al Dec. 3, 1997 666 182 Gen. 6341 Henry F. DiPietro et al Dec. 1, 1997 666 180 Gen. 6342 Rachel G. Fontaine Dec. 30, 1997 668 188 Gen. 6343 COVENTRY Recorded in Coventry Land Records Grantors Date Book Page Prop. No. Adam W. Schmitt et al Oct. 22, 1997 666 205 Gen. 6344 Town of Coventry Jan. 7, 1998 670 59 Gen. 6345 Stephen A. DiMuccio et al Jan. 6, 1998 670 61 Gen. 6346 Johnston Corporation Dec. 31, 1997 668 190 Gen. 6347 Ronald R.S. Picerne, Tr. Feb. 2, 1998 674 206 Gen. 6348 J & R Contractors, Inc. Feb. 5, 1998 675 132 Gen. 6349 Putnam Associates Feb. 13, 1998 676 277 Gen. 6350 The Greene Company Jan. 13, 1998 676 275 Gen. 6351 Brookfield Development, Inc. Mar. 13, 1998 684 14 Gen. 6352 Anthony S. Buglio et al Mar. 6, 1998 685 77 Gen. 6353 Centerville Builders, Inc. Mar. 26, 1998 687 108 Gen. 6354 Capital Modular Development Corporation Apr. 6, 1998 690 163 Gen. 6355 Nucore Development Company, Inc. Mar. 17, 1998 689 139 Gen. 6356 Coventry Lake CVS, Inc. Apr. 3, 1998 689 137 Gen. 6357 Andre B. Leblanc et al Apr. 6, 1998 690 161 Gen. 6358 Town of Coventry Apr. 14, 1998 696 23 Gen. 6359 J & R Contractors, Inc. Apr. 22, 1998 693 212 Gen. 6360 Ronald P. Mailloux et al Apr. 30, 1998 696 29 Gen. 6361 Sally A. Ruzanski Apr. 29, 1998 696 27 Gen. 6362 John A. Ruzanski et al Apr. 30, 1998 696 25 Gen. 6363 Jon L. Jarvis et al Apr. 28, 1998 693 210 Gen. 6364 CRANSTON Recorded in Cranston Land Records Grantors Date Book Page Prop. No. F. Paolino Homes, Inc. Dec. 5, 1994 884 103 Gen. 10,061 Dalo Associates, Inc. Dec. 8, 1994 884 328 Gen. 10,062 Ralph Shippee Jan. 17, 1995 887 776 Gen. 10,063 Broadwal Associates Apr. 17, 1995 894 746 Gen. 10,064 Fleet National Bank, Executor May 23, 1995 898 63 Gen. 10,065 D.W. Daniel Contracting and Estimating, Inc. Aug. 7, 1995 908 132 Gen. 10,066 Sanrose Realty Associates Aug. 2, 1995 908 130 Gen. 10,067 Geigy Chemical Corporation Aug. 16, 1995 908 134 Gen. 10,068 F. Paolino Homes, Inc. Sept. 20, 1995 913 215 Gen. 10,069 Meadowbrook Estates, LLC Dec. 21, 1995 919 594 Gen. 10,070 The Emeline Company Dec. 13, 1995 918 464 Gen. 10,071 Capuano Associates Dec. 13, 1995 918 467 Gen. 10,072 Santurri Realty Inc. Aug. 16, 1996 946 727 Gen. 10,073 Doe Family Trust II Aug. 5, 1996 946 729 Gen. 10,074 F & J Realty June 27, 1996 940 737 Gen. 10,075 CRANSTON Recorded in Cranston Land Records Grantors Date Book Page Prop. No. Pauline R. Savicki June 21, 1996 939 947 Gen. 10,076 Malco Saw Co., Inc. Mar. 26, 1996 929 38 Gen. 10,077 Gusty Paliotta July 10, 1996 947 381 Gen. 10,078 575 Realty Associates Sept. 24, 1996 951 985 Gen. 10,079 City of Cranston Oct. 27, 1996 952 920 Gen. 10,080 Paul E. Mastrobuono June 21, 1996 939 945 Gen. 10,081 Clara Cardi, Tr. Oct. 26, 1996 953 666 Gen. 10,082 W.F.D. Associates L.P. Oct. 15, 1996 953 664 Gen. 10,083 Benjamin J. Scaralia et ali Nov. 4, 1996 954 404 Gen. 10,084 Jorgen W. Rasmussen Sept. 26, 1996 954 401 Gen. 10,085 City of Cranston Jan. 29, 1997 965 113 Gen. 10,086 Zarrella Development Corp. Jan. 31, 1997 963 974 Gen. 10,087 David J. Sasso et al Feb. 12, 1997 965 116 Gen. 10,088 Rodio Contractors, Inc. Dec. 17, 1996 959 539 Gen. 10,089 R.C. Investments, Inc. Nov. 21, 1996 956 588 Gen. 10,090 Anthony Barile et al Dec. 4, 1996 958 134 Gen. 10,091 Vincent J. Confreda Feb. 14, 1997 966 691 Gen. 10,092 Rosel, Inc. Mar. 10, 1997 967 807 Gen. 10,093 Marandola Development, Inc. Mar. 24, 1997 969 927 Gen. 10,094 The Rossini & Smith Companies, Inc. Mar. 25, 1997 969 925 Gen. 10,095 Joseph A. Turchetta et al July 28, 1997 984 578 Gen. 10,096 Sandy Delfino, Jr. May 2, 1997 986 231 Gen. 10,097 Frank P. Fede et al June 11, 1997 986 233 Gen. 10,098 Theodore H.Lichtenfels d/b/a July 10, 1997 982 804 Gen. 10,099 Edward L. Rodi et al July 22, 1997 983 558 Gen. 11,000 Thomas J. Flatley d/b/a Aug. 6, 1997 986 904 Gen. 12,900 Fleet Construction Co., Inc. Sept. 15, 1997 989 990 Gen. 12,901 Russell H. Wilbur et al Sept. 15, 1997 989 987 Gen. 12,902 Dennis H. Psilopoulos, LLC July 24, 1997 992 12 Gen. 12,903 City of Cranston June 30, 1997 992 15 Gen. 12,904 John W. Mastrobuono et al Oct. 17, 1997 994 416 Gen. 12,905 Ross-Simons of Warwick, Inc. Oct. 29, 1997 997 496 Gen. 12,906 George P. Pelletier, Jr. et al Aug. 4, 1997 986 906 Gen. 12,907 Lavigne Realty Company, Inc. Nov. 14, 1997 999 956 Gen. 12,908 United Home Construction Co., Inc. Nov. 13, 1997 999 954 Gen. 12,909 Michael A. Caparrelli et al Nov. 18, 1997 999 952 Gen. 12,910 W.F.D. Associates L.P. Nov. 24, 1997 1000 762 Gen. 12,911 J. Gannon Realty Co. Dec. 23, 1997 1005 787 Gen. 12,912 Cranwar LLC Feb. 23, 1998 1011 589 Gen. 12,913 Raymond Charlonne et al Feb. 9, 1998 1010 918 Gen. 12,914 Anthony A. DiFazio Jan. 17, 1998 1011 592 Gen. 12,915 EAST GREENWICH Recorded in East Greenwich Land Records Grantors Date Book Page Prop. No. John T. Hannah, Sr. et al (Fee) Jan. 2, 1995 197 517 RPT 74 George W. McKeen, III June 30, 1995 201 753 Gen. 11,141 P & W Building Components June 28, 1995 201 755 Gen. 11,142 The Stanley Works June 2, 1995 200 384 Gen. 11,143 Wings Financial Marketing, Inc. Aug. 2, 1995 202 787 Gen. 11,144 DDJJBK Co. Inc. Sept. 25, 1995 203 618 Gen. 11,145 United States of America Sept. 9, 1995 203 616 Gen. 11,146 David B. Munroe et al Oct. 3, 1995 203 707 Gen. 11,147 James Malm et al Sept. 29, 1995 203 986 Gen. 11,148 Jeffrey R. Cammans et al Oct. 27, 1995 205 49 Gen. 11,149 Jeffrey R. Cammans et al Oct. 27, 1995 204 889 Gen. 11,149 Stephen Andruchow, Inc. July 9, 1996 211 147 Gen. 11,150 Gerald P. Zarrella et al June 5, 1996 209 768 Gen. 11,151 David P. Weindel May 29, 1996 209 766 Gen. 11,152 Deblois Building Company July 25, 1996 211 781 Gen. 11,153 Levesque Construction, Inc. June 27, 1996 211 762 Gen. 11,154 Regal Court Associates, L.P. Dec. 27, 1996 215 915 Gen. 11,155 Milton Holdings, Inc. Jan. 31, 1997 216 979 Gen. 11,156 Pine Glen Condominium Association Apr. 14, 1997 218 185 Gen. 11,157 C & M Realty, Inc. May 14, 1997 219 116 Gen. 11,158 Fonnie C. Soderstrom Sept. 4, 1997 105 40 Gen. 11,159 Frenchtown Mini-Storage,Inc. Nov. 10, 1997 225 172 Gen. 11,160 Thomas Graul et al Nov. 26, 1997 225 645 Gen. 11,161 Richard D. Graham et al Nov. 24, 1997 225 647 Gen. 11,162 Independence Center, Inc. Mar. 6, 1997 217 349 Gen. 11,163 EAST PROVIDENCE Recorded in East Providence Land Records Grantors Date Book Page Prop. No. Woodstone, Inc. Apr. 5, 1995 1151 61 Gen. 1187 Kenneth E. Knox et al Dec. 12, 1995 1187 315 Gen. 1188 Roger N. Cournoyer Feb. 21, 1996 1195 211 Gen. 1189 Beverly Corrente Feb. 19, 1996 1195 209 Gen. 1190 Harborside Park, LLC Aug. 13, 1996 1233 226 Gen. 1191 Providence Country Day School Dec. 12, 1996 1252 295 Gen. 1192 Stephen Gentile et al Feb. 27, 1997 1261 340 Gen. 1193 Industrial Heights Condominiums Association Feb. 27, 1997 1261 342 Gen. 1194 New England Telephone and Telegraph Company May 6, 1997 1273 21 Gen. 1195 SFX Broadcasting of Rhode Island, Inc. Aug. 25, 1997 1296 59 Gen. 1196 EAST PROVIDENCE Recorded in East Providence Land Records Grantors Date Book Page Prop. 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Kenyon et ux Aug. 21, 1995 601 1 Gen. 12,239 Frederick Kenyon, Jr. et ux Aug. 25, 1995 601 3 Gen. 12,240 Denison Associates Sept. 28, 1995 603 177 Gen. 12,241 Martha M. Culp June 20, 1995 603 172 Gen. 12,242 Judith Whitford Adams et al Aug. 22, 1995 603 165 Gen. 12,243 Grace Hawkins et al June 27, 1995 603 158 Gen. 12,244 Bryan F. Bliven Sept. 15, 1995 603 152 Gen. 12,245 Kenneth L. Bliven Sept. 18, 1995 603 147 Gen. 12,246 Barbara E. Keszyinki et al July 31, 1995 603 141 Gen. 12,247 Louis D'Abrosca Sept. 29, 1995 603 135 Gen. 12,248 Donald W. Jackson et ali Oct. 20, 1995 605 230 Gen. 12,249 Reinaldo Vilardo et al Oct. 18, 1995 605 232 Gen. 12,250 Paul Drumm, Jr. et al Oct. 19, 1995 605 234 Gen. 12,251 Arthur W. Dexter et al Sept. 27, 1995 605 236 Gen. 12,252 Pearl F. Frisella Dec. 21, 1995 611 397 Gen. 12,253 Thomas S. Filiberto et al Mar. 6, 1996 619 403 Gen. 12,254 N & G Land Co. Inc. June 27, 1996 632 321 Gen. 12,255 CRT, Inc. July 1, 1996 632 324 Gen. 12,256 George E. Sherman et al June 27, 1996 632 318 Gen. 12,257 Wakefield Mill Properties Apr. 29, 1996 632 315 Gen. 12,258 Pascack Homes of South Kingstown, LLC May 3, 1996 632 308 Gen. 12,259 Wakefield Mill Properties Apr. 29, 1996 632 312 Gen. 12,260 Michael D. O'Brien et al July 16, 1996 634 199 Gen. 12,261 National Railroad Passenger Corporation Aug. 23, 1996 637 242 Gen. 12,262 Stephen Garnett Sept. 12, 1996 638 295 Gen. 12,263 Roxane E. Chase Nov. 1, 1996 644 301 Gen. 12,264 Union Fire District of South Kingstown Sept. 16, 1996 644 298 Gen. 12,265 Housing Authority of the Town of South Kingstown Jan. 6, 1997 651 87 Gen. 12,266 Theodore J Truslow III et al Nov. 1, 1996 644 304 Gen. 12,267 Shirley A. Lovesky et al Dec. 16, 1996 651 89 Gen. 12,268 Louis R. Fusco et al Apr. 17, 1997 661 108 Gen. 12,269 Thomas Bryant et al Jan. 15, 1997 652 310 Gen. 12,270 Christopher A. Louzon et al Jan. 8, 1997 652 306 Gen. 12,271 John Spirito et al Jan. 21, 1997 652 313 Gen. 12,272 Peter D. Anderson et al Jan. 16, 1997 657 99 Gen. 12,273 Green Hill Builders, Inc. June 2, 1997 665 446 Gen. 12,274 Patrick D. Masson et al June 4, 1997 667 377 Gen. 12,275 Property Shop, Inc. June 26, 1997 669 360 Gen. 12,276 David C. Perchman June 26, 1997 669 356 Gen. 12,277 Theatre Inn, Inc. June 25, 1997 669 358 Gen. 12,278 Town of South Kingstown July 17, 1997 672 449 Gen. 12,279 SOUTH KINGSTOWN Recorded in South Kingstown Land Records Grantors Date Book Page Prop. No. Wakefield Mall Associates Sept. 4, 1997 678 320 Gen. 12,280 Warner R. Sweet, Sr. et al Nov. 5, 1997 684 447 Gen. 12,281 Scott M. Wallace et al Nov. 23, 1997 688 170 Gen. 12,282 James S. Dufficy et al Dec. 7, 1997 688 445 Gen. 12,283 Philip J. Rosch et al Dec. 7, 1997 688 443 Gen. 12,284 West Bay Builders, Inc. Oct. 15, 1997 682 362 Gen. 12,285 John P. Dana Oct. 15, 1997 682 359 Gen. 12,286 Pleasant Hill Development, Ltd. Aug. 20, 1997 682 355 Gen. 12,287 O'Donnell Development Company, LLC Aug. 8, 1997 682 350 Gen. 12,288 Joseph Miller Aug. 13, 1997 682 347 Gen. 12,289 Lynne Miller Aug. 14, 1997 682 344 Gen. 12,290 Robert Prosser Oct. 15, 1997 682 341 Gen. 12,291 John T. Whitford et al Dec. 18, 1997 691 467 Gen. 12,292 Oliver W. Greene III et al Nov. 12, 1997 684 450 Gen. 12,293 Wesley Grant III Dec. 10, 1997 691 462 Gen. 12,294 Green Hill Builders, Inc. Dec. 19, 1997 691 470 Gen. 12,295 New England Telephone and Telegraph Company Dec. 29, 1997 693 242 Gen. 12,296 Tuckertown Village Park, L.L.C. Jan. 26, 1998 699 258 Gen. 12,297 Landev Associates, Inc et al May 14, 1997 663 477 Gen. 12,298 John Spirito et al Feb. 26, 1998 702 175 Gen. 12,299 John M. Ferry et al Mar. 6, 1998 702 173 Gen. 12,300 Jane P. Moffett Mar. 2, 1998 702 171 Gen. 12,976 Frank M. Carrano et al Apr. 24, 1998 707 133 Gen. 12,977 TIVERTON Recorded in Tiverton Land Records Grantors Date Book Page Prop. No. Stone Church Properties, Inc Nov. 15, 1995 455 333 Gen. 5498 Field Stone Farm, Inc. Nov. 15, 1995 455 330 Gen. 5499 Lillian Medeiros Nov. 10, 1995 455 352 Gen. 12,500 Kingfisher Housing Asociation Limited Partnership Nov. 13, 1995 455 350 Gen. 12,501 Nicholaos Realty Co. Aug. 8, 1996 478 221 Gen. 12,509 Julie M. Lannan Aug. 20, 1996 478 148 Gen. 12,510 William B. Sanford et al Feb. 26, 1996 466 341 Gen. 12,502 Richard Leblanc Apr. 26, 1996 467 336 Gen. 12,503 Peter A. Rowley et al Apr. 27, 1996 467 334 Gen. 12,504 Mark D. Brodeur et al Apr. 3, 1996 467 115 Gen. 12,505 Julie M. Lannan June 13, 1996 473 351 Gen. 12,506 TIVERTON Recorded in Tiverton Land Records Grantors Date Book Page Prop. No. Julie M. Lannan July 15, 1996 475 135 Gen. 12,507 Leon J. Sylvia July 16, 1996 475 133 Gen. 12,508 Countryside Acres Development Corporation Sept. 23, 1996 480 53 Gen. 12,511 John M. Lannan et ali Sept. 30, 1996 480 55 Gen. 12,512 Michael P. Aprea et al Feb. 15, 1997 488 72 Gen. 12,513 Arthur F. Smith, Sr. et ux Feb. 12, 1997 488 70 Gen. 12,514 Michael P. Lydon et al Dec. 27, 1996 489 212 Gen. 12,515 Julie M. Lannan Feb. 21, 1997 488 320 Gen. 12,516 Julie M. Lannan Mar. 3, 1997 489 125 Gen. 12,517 Ronald K. Moniz Apr. 9, 1997 491 284 Gen. 12,518 Robert G. Faria et al Mar. 20, 1997 491 282 Gen. 12,519 Linda M. Phipps Mar. 24, 1997 491 280 Gen. 12,520 P.D. Humphrey Co., Inc. May 5, 1997 494 316 Gen. 12,521 Richard D. LeBlanc Apr. 30, 1997 494 256 Gen. 12,522 Donald T. Hudson et al June 2, 1997 495 352 Gen. 12,523 Manuel M. Isidore June 19, 1997 496 355 Gen. 12,524 Town of Tiverton Sept. 18, 1997 504 115 Gen. 12,525 Mary T. Briere Sept. 20, 1997 504 96 Gen. 12,526 Aquidneck Fasteners, Inc. Sept. 29, 1997 504 309 Gen. 12,527 Alfred J. Arruda et al June 16, 1997 449 225 Gen. 12,528 Gary R. Pelletier et al Oct. 7, 1997 505 317 Gen. 12,529 Julie M. Lannan Sept. 12, 1997 503 280 Gen. 12,530 Roy A. Ferrell et al Aug. 12, 1997 501 41 Gen. 12,531 James W. Maling et al Aug. 11, 1997 501 43 Gen. 12,532 Alvin D. Simpson July 10, 1997 499 227 Gen. 12,533 Mark B. Gousie Aug. 28, 1997 502 303 Gen. 12,534 John F. Viveiros et al Jan. 14, 1998 514 36 Gen. 12,535 Paul L. Duclos Oct. 10, 1997 505 174 Gen. 12,536 William Mello et al Feb. 24, 1998 517 328 Gen. 12,537 Alvin D. Simpson Mar. 20, 1998 520 124 Gen. 12,538 Ravenswood, Inc. Apr. 3, 1998 521 233 Gen. 12,539 Roy A. Ferrell et al Apr. 3, 1998 521 231 Gen. 12,540 Gorton-Harvey, Inc. Apr. 30, 1998 524 51 Gen. 12,541 WARREN Recorded in Warren Land Records Grantors Date Book Page Prop. No. Brito Associates Feb. 14, 1995 233 135 Gen. 179 William C. Rodrigues et al July 28, 1997 274 146 Gen. 180 WARWICK Recorded in Warwick Land Records Grantors Date Book Page Prop. No. Johnston Corporation Mar. 2, 1995 2346 54 Gen. 7286 Amalia Shevlin Fund, LLC. Mar. 10, 1995 2346 56 Gen. 7287 Ryder Truck Rental Mar. 8, 1995 2346 58 Gen. 7288 Sundown Corporation Apr. 6, 1995 2355 281 Gen. 7289 Scott W. Ramsay et al, Trs. Mar. 31, 1995 2364 199 Gen. 7290 Cowesett Partners, L.P. Apr. 13, 1995 2364 203 Gen. 7291 C.H.I.L.D, Inc. June 15, 1995 2421 141 Gen. 7293 A. Middleton Gammell Aug. 21, 1995 2421 145 Gen. 7294 A. Middleton Gammell et ali Aug. 21, 1995 2421 143 Gen. 7295 James M. Jaques III et al Aug. 21, 1995 2421 147 Gen. 7296 Jewish Home for the Aged of Rhode Island Aug. 21, 1995 2422 51 Gen. 7297 Shalom II Housing, Inc. Aug. 9, 1995 2422 48 Gen. 7298 Centerville Builders, Inc. Sept. 18, 1995 2439 193 Gen. 7299 Johnston Corporation of Warwick, Rhode Island Oct. 10, 1995 2443 19 Gen. 7300 Raymond J. Jezak et al Sept. 25, 1995 2443 15 Gen. 12,301 Morris Levy, Tr. Sept. 28, 1995 2443 17 Gen. 12,302 Bertha R. Taft (Fee) Sept. 14, 1995 2424 159 Gen. 402 Log Cabin Realty Dec. 6, 1995 2477 129 Gen. 12,303 BHL Limited Partnership Dec. 13, 1995 2473 111 Gen. 12,304 Wal-Mart Stores, Inc. Dec. 7, 1995 2467 335 Gen. 12,305 Foster Parents Plan, Inc. Nov. 28, 1995 2460 47 Gen. 12,306 Warwick Credit Union Nov. 1, 1995 2455 117 Gen. 12,307 John J. Cooney Oct. 25, 1995 2455 115 Gen. 12,308 Donna Drew Sherman et al, Trs. Apr. 4, 1996 2523 187 Gen. 12,309 State of Rhode Island and Providence Plantations Feb. 8, 1996 2497 205 Gen. 12,310 Kelly & Picerne, Inc. June 20, 1996 2560 145 Gen. 12,311 AKM, Inc. June 26, 1996 2560 147 Gen. 12,312 E.M. Greco and Son Aug. 2, 1996 2576 269 Gen. 12,313 Centerville Builders, Inc. July 26, 1996 2576 271 Gen. 12,314 Donald C. Mitchell June 27, 1996 2566 170 Gen. 12,315 Rhode Island Economic Development Corporation Oct. 3, 1996 2607 234 Gen. 12,316 Warwick Four LLC Sept. 28, 1996 2605 68 Gen. 12,317 Warren A. Rowlett, Jr. Nov. 6, 1996 2630 38 Gen. 12,318 Warren B. Finn, Jr. Dec. 27, 1996 2641 30 Gen. 12,319 The Summit at Warwick Executive Park Condominium Association Jan. 2, 1997 2645 36 Gen. 12,320 R & M Properties, L.L.C. Mar. 13, 1997 2671 87 Gen. 12,321 G.W. Realty, Inc. Mar. 27, 1997 2679 184 Gen. 12,322 WARWICK Recorded in Warwick Land Records Grantors Date Book Page Prop. No. John A. Wright et al April 11, 1997 2684 173 Gen. 12,323 Russell Investments, Inc. June 3, 1997 2711 137 Gen. 12,324 Paolino/Watson Associates, L.L.C. Mar. 12, 1997 2674 123 Gen. 12,325 Cornell Properties L.L.C. May 14, 1997 2701 37 Gen. 12,326 Pulte Home Corporation of Massachusetts June 18, 1997 2715 193 Gen. 12,327 Municipal Auto Sales, inc. June 14, 1997 2714 196 Gen. 12,328 Boulevard Motel Corp. June 9, 1997 2712 188 Gen. 12,329 Ram Realty L.L.C. June 10, 1997 2712 186 Gen. 12,330 Warren C. Willett et al June 10, 1997 2718 129 Gen. 12,331 Sundown Corporation May 22, 1997 2706 297 Gen. 12,332 Blier & Blier, Inc. July 1, 1997 2723 287 Gen. 12,333 Arvind N. Patel Oct. 18, 1997 2779 199 Gen. 12,334 Val-Jan, Inc. Oct. 16, 1997 2779 197 Gen. 12,335 F. Paolino Homes, Inc. Oct. 23, 1997 2783 102 Gen. 12,336 City of Warwick Oct. 23, 1997 2783 105 Gen. 12,337 John Perri & Sons, Inc. Oct. 27, 1997 2783 100 Gen. 12,338 National Velous Corporation Nov. 4, 1997 2792 93 Gen. 12,339 Harvey Industries, Inc. Nov. 4, 1997 2792 90 Gen. 12,340 Schroff, Inc. Nov. 24, 1997 2800 207 Gen. 12,341 One Seventeen Realty, LLC Dec. 15, 1997 2818 342 Gen. 12,342 The Whitney Group, Inc. Jan. 3, 1998 2821 127 Gen. 12,343 Fermac Realty, Inc. Jan. 9, 1998 2823 314 Gen. 12,344 Pontiac Enterprises Aug. 19, 1997 2754 221 Gen. 12,345 The Providence Mutual Fire Insurance Company Jan. 19, 1998 2826 252 Gen. 12,346 Village at Hillsgrove LP Jan. 21, 1998 2828 292 Gen. 12,347 City of Warwick Jan. 29, 1998 2832 191 Gen. 12,348 Everett I. Rogers III Jan. 28, 1998 2832 189 Gen. 12,349 The Aldrich Estate L.L.C. Jan. 15, 1998 2840 181 Gen. 12,350 John Blackmar et al Jan. 8, 1998 2826 250 Gen. 12,351 Zarrella Development Corp. Feb. 13, 1998 2840 185 Gen. 12,352 City of Warwick Feb. 19, 1998 2842 256 Gen. 12,353 P & W Realty Feb. 25, 1998 2852 99 Gen. 12,354 Johnston Corporation Feb. 25, 1998 2852 101 Gen. 12,355 Centerville Builders, Inc. Mar. 26, 1998 2868 127 Gen. 12,356 Electro-Films, Inc. Mar. 23, 1998 2885 7 Gen. 12,357 Pawtuxet Realty, Inc. Apr. 30, 1998 2893 224 Gen. 12,358 Paul T. Driscoll, Tr. Apr. 24, 1998 2893 226 Gen. 12,359 Paul T. Driscoll, Tr. Apr. 24, 1998 2893 229 Gen. 12,360 Paul T. Driscoll, Tr. Apr. 24, 1998 2893 232 Gen. 12,361 WESTERLY Recorded in Westerly Land Records Grantors Date Book Page Prop. No. Anthony P. Manfredi et al June 20, 1995 561 341 Gen. 11,854 Brian J. Foley May 18, 1995 561 331 Gen. 11,855 Princess Pines Estates, Inc. May 22, 1995 561 335 Gen. 11,856 Red Brook Realty Corporation May 22, 1995 561 337 Gen. 11,857 Grace Panciera May 24, 1995 561 339 Gen. 11,858 Louis R. Zanella et al May 22, 1995 561 333 Gen. 11,859 Park Washington Realty Dec. 5, 1995 580 151 Gen. 11,860 Town of Westerly Sept. 27, 1995 571 245 Gen. 11,861 Town of Westerly Sept. 27, 1995 571 251 Gen. 11,862 Town of Westerly Sept. 27, 1995 571 249 Gen. 11,863 Town of Westerly Sept. 27, 1995 571 247 Gen. 11,864 The Washington Trust Company Nov. 20, 1995 578 56 Gen. 11,865 Town of Westerly, Beach Street Administration Building Nov. 15, 1995 577 184 Gen. 11,866 Town of Westerly Jan. 16, 1996 586 211 Gen. 11,867 Princess Pines Estates, Inc. Mar. 22, 1996 591 304 Gen. 11,868 B. Anne Cardin et al June 22, 1996 607 136 Gen. 11,869 Salvatore J. Saporita et al Sept. 3, 1996 613 163 Gen. 11,870 James Joseph Laudone Sept. 3, 1996 613 174 Gen. 11,871 Sorensen and McCuin Sept. 3, 1996 613 171 Gen. 11,872 George Delicato et al Sept. 3, 1996 613 169 Gen. 11,873 Michael J. Laudone et al Sept. 3, 1996 613 167 Gen. 11,874 James J. Laudone, Jr. Sept. 3, 1996 613 165 Gen. 11,875 RFC Partnership Aug. 26, 1996 613 161 Gen. 11,876 Golden Arch Limited Partnership Sept. 26, 1996 619 272 Gen. 11,877 Daniel S. Schilke et al Sept. 6, 1996 619 270 Gen. 11,878 Andrew R. Schilke et al Sept. 6, 1996 621 75 Gen. 11,879 Champion Physicians, L.L.C. Feb. 27, 1997 637 235 Gen. 11,880 Young Men's Christian Association of Westerly-Pawcatuck Mar. 17, 1997 637 233 Gen. 11,881 James Romanella & Sons, Inc. June 9, 1997 648 176 Gen. 11,882 Nancy S. Taylor et al Aug. 23, 1996 645 284 Gen. 11,883 Robert W. Kapfer et al July 9, 1997 654 37 Gen. 11,884 Linda M. Sacco Oct. 10, 1997 668 97 Gen. 11,885 Mary L. Lucey Nov. 20, 1997 674 40 Gen. 11,886 Westmed Properties, LLC Jan. 8, 1998 681 44 Gen. 11,887 Rhode Island Industrial Facilities Corporation March 6, 1998 691 248 Gen. 11,888 WEST GREENWICH Recorded in West Greenwich Land Records Grantors Date Book Page Prop. No. Waterford Homes, Inc. Oct. 10, 1995 71 646 Gen. 1589 James D. McMahon, Jr. et al Sept. 9, 1995 71 648 Gen. 1590 Bradford H. Kenyon et ali Nov. 6, 1995 72 357 Gen. 1591 Best New England, Inc. Aug. 19, 1996 75 362 Gen. 1592 Robert H. Turner et ux Mar. 22, 1996 73 606 Gen. 1593 Superior Properties, Inc. Aug. 7, 1996 75 161 Gen. 1594 Wickaboxet Hills, Inc. Nov. 12, 1996 76 121 Gen. 1595 Philip B. Spadola et ali Apr. 22, 1997 77 935 Gen. 1596 Smiley Development Apr. 30, 1997 77 937 Gen. 1597 GTECH Corporation July 7, 1997 78 660 Gen. 1598 David P. Andrews, Jr. July 3, 1997 78 826 Gen. 1599 West Greenwich Volunteer Fire Company No. 1 Dec. 15, 1997 85 187 Gen. 1600 Specific Properties, LLC June 17, 1997 78 452 Gen. 1601 Linden Lane Land Company,LLC June 12, 1997 78 450 Gen. 1602 Greenbridge Development Corporation, Inc. June 4, 1997 78 304 Gen. 1603 WEST WARWICK Recorded in West Warwick Land Records Grantors Date Book Page Prop. No. Soluol Chemical Co. Inc. Aug. 1, 1995 610 145 Gen. 8558 Padula Builders, Inc. Sept. 27, 1995 613 260 Gen. 8559 Richard M. Winokur, Tr. Oct. 10, 1995 615 87 Gen. 8560 J & G Realty Corporation June 20, 1995 615 84 Gen. 8561 Sanrose Realty Associates Dec. 11, 1995 624 107A Gen. 8562 Amtrol Inc. Jan. 9, 1996 628 116 Gen. 8563 Gil Realty, LLC Apr. 7, 1997 684 294 Gen. 8564 Town of West Warwick Mar. 5, 1997 679 243 Gen. 8565 Jericho Associates, LLC Mar. 3, 1997 681 37 Gen. 8566 DBH Broadcasting, Inc. Apr. 1, 1997 689 196 Gen. 8567 Kent Hotel Associates, L.P. June 30, 1997 697 255 Gen. 8568 Cox Communications Rhode Island, Inc. Aug. 8, 1997 704 285 Gen. 8569 Town of West Warwick Sept. 9, 1997 708 27 Gen. 8570 MRN Realty, LLC Aug. 22, 1997 707 161 Gen. 8571 Precision Development, Inc. July 25, 1997 701 247 Gen. 8572 Anthony J. Vessella et al Dec. 17, 1997 728 152 Gen. 8573 Eagle Quest Golf & Leisure Dome, Inc. Nov. 18, 1997 721 227 Gen. 8574 WEST WARWICK Recorded in West Warwick Land Records Grantors Date Book Page Prop. No. Original Bradford Soap Works, Inc. Jan. 27, 1998 732 44 Gen. 8575 Cumberland Farms, Inc. Feb. 25, 1998 738 211 Gen. 8576 ALL OF THE LAND AND RIGHTS IN LAND HEREINABOVE REFERRED TO IN THIS SCHEDULE OF PROPERTY ARE CONVEYED SUBJECT TO ALL RESTRICTIONS, RESERVATIONS, EXCEPTIONS, CONDITIONS AND AGREEMENTS SET FORTH OR REFERRED TO IN THE DEEDS HEREINABOVE MENTIONED AND THE DEEDS THEREIN REFERRED TO INSOFAR AS THE SAME ARE NOW IN FORCE AND APPLICABLE; AND THERE IS EXCEPTED FROM CERTAIN OF SAID RIGHTS SO MUCH THEREOF AS HAS BEEN TAKEN BY THE STATE OF RHODE ISLAND OR MUNICIPAL AUTHORITIES FOR HIGHWAY PURPOSES AND CERTAIN OF SAID RIGHTS ARE SUBJECT TO SUCH OTHER RIGHTS AND EASEMENTS AS WERE TAKEN BY GOVERNMENTAL AUTHORITIES; AND CERTAIN OF SAID RIGHTS AND EASEMENTS HEREINABOVE REFERRED TO ARE SUBJECT TO PRIOR LIENS, HOWEVER, SAID PRIOR LIENS WILL NOT INTERFERE WITH THE PROPER OPERATION OF THE COMPANY'S BUSINESS, AND THEIR EFFECT, IF ANY, UPON THE SECURITY OF THE INDENTURE MAY PROPERLY BE IGNORED; AND CERTAIN OF SAID RIGHTS HEREINABOVE REFERRED TO WERE CONVEYED TO THE NARRAGANSETT ELECTRIC COMPANY AND TO THE NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY JOINTLY. CERTAIN OF THE LANDS AND RIGHTS IN LANDS HEREINABOVE REFERRED TO IN THIS SCHEDULE OF PROPERTY AND CERTAIN OF THE LANDS AND RIGHTS IN LANDS INCLUDED AS MORTGAGED PROPERTY IN THE GRANTING CLAUSES OF THE ORIGINAL INDENTURE AND PRIOR SUPPLEMENTAL INDENTURES, INCLUDING SCHEDULES I THERETO, MAY BE SUBJECT TO THE RIGHTS OF THE PUBLIC AND THE STATE OF RHODE ISLAND UNDER THE PUBLIC TRUST DOCTRINE. STATE OF RHODE ISLAND ) ) SC. COUNTY OF PROVIDENCE ) At Providence in said County on this 28th day of July, 1998, before me personally appeared the above named R. Nadeau to me known and known by me to be the party executing in his capacity as Vice President for and on behalf of The Narragansett Electric Company, a corporation, the foregoing instrument and acknowledged said instrument by him so executed to be his free and voluntary act and deed and the free and voluntary act and deed of The Narragansett Electric Company, a corporation, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal this 28th day of July, 1998. [Notarial Seal] By /s/ Michael D. DiNezza _____________________________________ Michael D. DiNezza, Notary Public My commission expires: June 29, 2001 STATE OF RHODE ISLAND ) ) SC. COUNTY OF PROVIDENCE ) At Providence in said County on this 28th day of July, 1998, before me personally appeared the above named Paul M. Lenahan, to me known and known by me to be the party executing in his capacity as Vice President for and on behalf of BankBoston N.A., a national banking association, the foregoing instrument and acknowledged said instrument by him so executed to be his free and voluntary act and deed and the free and voluntary act and deed of BankBoston N.A., a national banking association, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal this 28th day of July, 1998. [Notarial Seal] By /s/ Laurie C. Wilkins ______________________________________ Laurie C. Wilkins, Notary Public My commission expires: June 26, 2001 I, Robert King Wulff, Assistant Secretary of The Narragansett Electric Company, a corporation duly organized under the laws of the State of Rhode Island and having its principal place of business in Providence, Rhode Island, HEREBY CERTIFY that at a special meeting of the stockholders of said corporation, duly called and held at 280 Melrose Street, Providence, Rhode Island, on July 22, 1998, by the affirmative action of the holders of all of the outstanding common stock of said corporation, being the only class of stock outstanding the holders of which were entitled to vote at said meeting, the following vote was duly adopted: VOTED: That the form, terms, and provisions of the Supplemental Indenture to be dated as of June 1, 1998, from the Company, to Rhode Island Hospital Trust National Bank as Trustee, or any successor Trustee (hereinafter in these votes called the Twenty-third Supplemental Indenture), supplementing and amending the Company's First Mortgage Indenture and Deed of Trust dated as of September 1, 1944, as supplemented and amended, and mortgaging, pledging, conveying, assigning, and transferring to said Bank, as Trustee, the property and rights and interests in property therein described for the security of the First Mortgage Bonds of the Company, and making certain amendments to the Indenture, substantially in the form presented to this meeting, are hereby approved; and the President and each Vice President are severally authorized in the name and on behalf of the Company to execute, under the corporate seal attested by the Secretary or Assistant Secretary, to acknowledge and to deliver, in as many counterparts as the officer so acting may deem advisable, an instrument in substantially the form of said supplemental indenture, the execution and delivery of such an instrument by any of said officers to be conclusive evidence that the same is authorized by this vote. I FURTHER CERTIFY that by the affirmative action of all the directors present, upon a motion duly made and recorded, at a regular meeting of the Board of Directors of said Company, duly called and held at 25 Research Drive, Westborough, Massachusetts, on June 17, 1998, at which meeting a quorum was present and acting throughout, the following vote was duly adopted: VOTED: That the form, terms, and provisions of a Supplemental Indenture from this Company to Rhode Island Hospital Trust National Bank, as Trustee (the Supplemental Indenture), supplementing and amending the First Mortgage Indenture and Deed of Trust between The Narragansett Electric Company and Rhode Island Hospital Trust Company dated September 1, 1944, and mortgaging, pledging, conveying, assigning and transferring to said Bank, as Trustee, the property and rights and interests in property therein described for the security of the First Mortgage Bonds of the Company and making certain amendments to the terms of the Indenture, substantially in the form presented to this meeting, are hereby approved; and the President and each Vice President are severally authorized in the name and on behalf of the Company to execute, under the corporate seal attested by the Secretary or any Assistant Secretary, to acknowledge and to deliver, in as many counterparts as the officer so acting may deem advisable, an instrument in substantially said form, the execution and delivery of such an instrument by any of said officers to be conclusive evidence that the same is authorized by this vote. AND I FURTHER CERTIFY that as appears from the records of said corporation R. Nadeau is Vice President of said corporation and duly authorized to execute in its name and on its behalf the foregoing Twenty-third Supplemental Indenture, dated as of June 1, 1998, that the foregoing Twenty- third Supplemental Indenture to which this certificate is attached is substantially in the form presented to and approved at said meetings; that the foregoing is a true and correct copy of the votes passed at said meetings respectively as recorded in the records of said corporation and that said votes remain in full force and effect without alteration. IN WITNESS WHEREOF I have hereunto subscribed my name as Assistant Secretary as aforesaid and have caused the corporate seal of said corporation to be hereto affixed this 28th day of July, 1998. /s/ Robert King Wulff ____________________________________ Robert King Wulff, Assistant Secretary of THE NARRAGANSETT ELECTRIC COMPANY [Corporate Seal] RECORDING NOTE Schedule of cities and towns in Rhode Island in which the Twenty-Third Supplemental Indenture of The Narragansett Electric Company dated as of June 1, 1998 has been recorded as a mortgage of real estate and financing statements have been filed as a security interest in fixtures Barrington, RI Town Clerk's Office Bristol, RI Town Clerk's Office Burrillville, RI Town Clerk's Office Charlestown, RI Town Clerk's Office Coventry, RI Town Clerk's Office Cranston, RI City Clerk's Office East Greenwich, RI Town Clerk's Office East Providence, RI City Clerk's Office Exeter, RI Town Clerk's Office Foster, RI Town Clerk's Office Glocester, RI Town Clerk's Office Hopkinton, RI Town Clerk's Office Johnston, RI Town Clerk's Office Lincoln, RI Town Clerk's Office Little Compton, RI Town Clerk's Office Narragansett, RI Town Clerk's Office North Kingstown, RI Town Clerk's Office North Providence, RI Town Clerk's Office Providence, RI City Clerk's Office Richmond, RI Town Clerk's Office Scituate, RI Town Clerk's Office Smithfield, RI Town Clerk's Office South Kingstown, RI Town Clerk's Office Tiverton, RI Town Clerk's Office Warren, RI Town Clerk's Office Warwick, RI City Clerk's Office Westerly, RI Town Clerk's Office West Greenwich, RI Town Clerk's Office West Warwick, RI Town Clerk's Office A financing statement was filed, as a security interest in personal property and fixtures, in the office of the Secretary of State of Rhode Island on July 28, 1998. EX-10 4 NEES EXHIBIT 10(L) AMENDMENT TO NEW ENGLAND ELECTRIC SYSTEM COMPANIES DEFERRED COMPENSATION PLAN Pursuant to the provisions of Article V of the New England Electric System Companies' Deferred Compensation Plan, said Plan is hereby amended effective as of December 1, 1997, by inserting a new Section 4.04(K) to read as follows: "K. Annuity Payments. Notwithstanding any provision of the Plan to the contrary, any Participant who has a Spouse (as defined in the Qualified Plan) who is receiving payment (or who has the right to receive payment) in the form of a single life annuity, may elect with the consent of the Benefits Committee, and in accordance with the procedures specified in this paragraph, to change his or her form of payment to a contingent annuitant option of actuarial equivalent value, with his or her Spouse as a contingent annuitant with an option of 50%, 66 2/3%, or 100% of the amounts previously payable to the Participant. The amount of benefit payment to the Participant and the Spouse under this option will be determined in accordance with the applicable provisions of the Qualified Plan for converting a single life annuity to such a contingent annuitant option. In the case of such a Participant who is currently receiving payment in the form of a single life annuity, the election and consent described in this paragraph shall be irrevocable and must occur, in accordance with procedures prescribed by the Committee by an established date, to be effective with respect to annuity payments commencing on and after January 1, 1998. In the case of such a Participant who has the right to receive payment in the form of a single life annuity but who has not commenced to receive such payment, such irrevocable election and consent must occur in accordance with such procedures at least 30 days prior to his or her benefit commencement date. The Participant must waive all death benefits provided hereunder." /s/ George M. Sage __________________________________________ Chairman Pursuant to Vote of November 24, 1997, of the Compensation Committee AMENDMENT TO NEW ENGLAND ELECTRIC SYSTEM COMPANIES DEFERRED COMPENSATION PLAN Pursuant to the provisions of Article V of the New England Electric System Companies' Deferred Compensation Plan, said Plan is hereby amended effective as of December 1, 1997, as follows: Section 4.04(A) is amended to read: "4.04 Payment of Balances. (A) Election of Time of Payment. (i) At the time of electing to defer Compensation, in accordance with subsection 4.01(A), the Participant shall also elect whether to receive payment after ten years or upon Termination of Service on or after the date when the Participant could first commence receiving benefits under the Qualified Plan. (ii) Six months or more prior to the scheduled commencement of payment(s) (or later if Termination of Service is unplanned but not after commencement of payments), a Participant, who has previously elected to receive payment on the date when he or she could first commence receiving benefits under the Qualified Plan, may request the Benefits Committee, at its sole discretion, to approve a change in the payout schedule to either a lump sum, or three, five, or ten annual payments commencing with the first payment of benefits under the Qualified Plan." Section 4.04(C) is amended to read: "(C) Payments at Retirement. If the Participant has elected payment on the date when he or she could first commence receiving benefits under the Qualified Plan, the Participant's full Cash and Share Account Balances shall be paid in ten annual payments (or if the Participant has elected at the time of electing the deferral, in a lump sum or in three, five, or ten annual payments) commencing at such date." /s/ George M. Sage ________________________________________ Chairman Pursuant to Vote of November 24, 1997, of the Compensation Committee AMENDMENT TO NEW ENGLAND ELECTRIC SYSTEM COMPANIES' DEFERRED COMPENSATION PLAN Pursuant to the provisions of Article V of the New England Electric System Companies' Deferred Compensation Plan, Section 4.03(H) of said Plan is hereby amended effective as of February 28, 1998, to read as follows: (H) Form of Payments. Except as provided herein, any distribution from a Cash Account will be in cash. Any distribution from a Share Account will be in the form of Shares. Transaction costs associated with the sale of Shares at the time of distribution will be reimbursed by the Company. /s/ George M. Sage _________________________________________ Chairman Pursuant to Vote of February 24, 1998, of the Compensation Committee EX-10 5 NEES EXHIBIT 10(N) NEW ENGLAND ELECTRIC COMPANIES' EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN [REVISED] Executed December 4, 1978 Amended November 5, 1979 October 12, 1982 March 14, 1983 June 21, 1984 July 31, 1984 July 23, 1986 April 1, 1991 January 1, 1995 October 25, 1995 May 20, 1996 December 11, 1998 TABLE OF CONTENTS Page Plan Purposes and Objectives.. . . . . . . . . . . . . . . . . . . . . . . 1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Actuarial Value.. . . . . . . . . . . . . . . . . . . . . . 1 2. Beneficial Owner. . . . . . . . . . . . . . . . . . . . . . 1 3. Benefits Committee. . . . . . . . . . . . . . . . . . . . . 2 4. Board.. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. Change in Control.. . . . . . . . . . . . . . . . . . . . . 2 6. Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7. Committee.. . . . . . . . . . . . . . . . . . . . . . . . . 3 8. Company.. . . . . . . . . . . . . . . . . . . . . . . . . . 3 9. Early Retirement Date.. . . . . . . . . . . . . . . . . . . 3 10. Final Average Total Compensation. . . . . . . . . . . . . . 3 11. Incentive Compensation. . . . . . . . . . . . . . . . . . . 3 12. Incentive Plan. . . . . . . . . . . . . . . . . . . . . . . 4 13. Incentive Share Awards. . . . . . . . . . . . . . . . . . . 4 14 Level A Participant.. . . . . . . . . . . . . . . . . . . . 4 15. Level B Participant.. . . . . . . . . . . . . . . . . . . . 4 16. A Major Transaction.. . . . . . . . . . . . . . . . . . . . 4 17. New England Electric System.. . . . . . . . . . . . . . . . 5 18. Participant.. . . . . . . . . . . . . . . . . . . . . . . . 6 19. Person. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 20. Qualified Compensation. . . . . . . . . . . . . . . . . . . 7 21. Qualified Plan. . . . . . . . . . . . . . . . . . . . . . . 7 22. Qualified Plan Benefit. . . . . . . . . . . . . . . . . . . 7 23. Retirement. . . . . . . . . . . . . . . . . . . . . . . . . 7 24. Retirement Income.. . . . . . . . . . . . . . . . . . . . . 7 25. Spouse. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 26. Termination of Employment.. . . . . . . . . . . . . . . . . 7 27. Total Compensation. . . . . . . . . . . . . . . . . . . . . 7 28. Years of Service. . . . . . . . . . . . . . . . . . . . . . 8 Plan Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1. Retirement Benefit. . . . . . . . . . . . . . . . . . . . . 8 2. Form of Payment.. . . . . . . . . . . . . . . . . . . . . . 9 3. Spouse's Death Benefit. . . . . . . . . . . . . . . . . . . 10 Timing of Payments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Lump Sum Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Vesting and Forfeiture of Benefits.. . . . . . . . . . . . . . . . . . . . 12 Administration and Claims. . . . . . . . . . . . . . . . . . . . . . . . . 13 Effectuation of Interest.. . . . . . . . . . . . . . . . . . . . . . . . . 14 Government Regulations.. . . . . . . . . . . . . . . . . . . . . . . . . . 14 Nonassignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Provisions of Benefits.. . . . . . . . . . . . . . . . . . . . . . . . . . 14 Amendment or Discontinuance. . . . . . . . . . . . . . . . . . . . . . . . 15 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 NEW ENGLAND ELECTRIC COMPANIES' Executive Supplemental Retirement Plan Plan Purposes and Objectives The Supplemental Plan is maintained by the Companies primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Title I of the Employee Retirement Income Security Act. The objectives of the Executive Supplemental Retirement Plan I (the Supplemental Plan) are as follows: 1. to increase the overall effectiveness of the executive compensation program so as to attract, retain, and motivate qualified management personnel; and 2. to provide retirement benefits related to Total Compensation. This revision and restatement is designed to provide benefits for additional executives and to facilitate future corporate restructuring. Definitions When used in the Supplemental Plan, the following words will have the meanings indicated below: 1. Actuarial Value will be established using the most recent assumptions established by the Benefits Committee for the Qualified Plan. 2. Beneficial Owner shall have the meaning defined in Rule 13d-3 under the Securities Exchange Act of 1934. 3. Benefits Committee means the Benefits Committee established in accordance with the New England Electric System Companies Final Average Pay Pension Plan I. 4. Board means the Board of Directors of New England Electric System. 5. Change in Control occurs when the conditions set forth in either of the following paragraphs shall have been satisfied: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of New England Electric System (not including in the securities beneficially owned by such Person any securities acquired directly from New England Electric System or its affiliates) representing 20% or more of the combined voting power of New England Electric System's then outstanding securities; or (b) during any period of not more than two consecutive years after January 1, 1995, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with New England Electric System to effect a transaction described in clause (a) of this paragraph) whose election by the Board or nomination for election by New England Electric System's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority of the Board. 6. Code means the Internal Revenue Code of 1986, as amended from time to time. 7. Committee means the Compensation Committee of the Board. 8. Company means the subsidiary of New England Electric System by which the Participant is employed on the date on which he or she has a Termination of Employment. 9. Early Retirement Date shall have the meaning provided in the Qualified Plan. 10. Final Average Total Compensation means the highest average of the Participant's twelve-month Total Compensation during any consecutive sixty-month period of employment (or during total employment if less than sixty months) within the last 120 months of employment ending with the last day of the month next preceding a given date of determination. 11. Incentive Compensation shall have the meaning provided in the Incentive Plan. 12. Incentive Plan means the New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Compensation Plan I, New England Electric Companies' Incentive Compensation Plan II, and New England Electric Companies' Incentive Compensation Plan III. 13. Incentive Share Awards shall mean annual incentive share awards under the New England Electric Companies' Incentive Share Plan. 14 Level A Participant means a. A Participant in the New England Electric Companies' Senior Incentive Compensation Plan, b. Any person participating in this Supplemental Plan as of October 25, 1995, and c. Any other person participating in the New England Electric Companies' Incentive Compensation Plan I designated by the Committee. 15. Level B Participant means a Participant in the New England Electric Companies' Incentive Compensation Plan I who is not a Level A Participant. 16. A Major Transaction shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) the shareholders of New England Electric System approve a merger or consolidation with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of New England Electric System or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization (or similar transaction) in which no Person acquires more than 20% of the combined voting power of New England Electric System's then outstanding securities; (b) the shareholders of New England Electric System approve a plan of complete liquidation thereof; or (c) the shareholder of New England Electric System approve an agreement for the sale or disposition of all or substantially all of New England Electric System's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. 17. 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. 18. Participant means a Level A Participant or a Level B Participant. 19. Person shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) New England Electric System or any subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of New England Electric System or any subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of New England Electric System in substantially the same proportions as their ownership of shares of New England Electric System. 20. Qualified Compensation means compensation as defined in the Qualified Plan without regard to any reduction required by Section 4.01(a)(17) of the code. 21. Qualified Plan means New England Electric System Companies' Final Average Pay Pension Plan I. 22. Qualified Plan Benefit means the annual benefit payable at Retirement on a straight life annuity basis under the terms of the Qualified Plan without regard to any qualified domestic relations order that would otherwise affect the amount of said benefit. 23. Retirement means the date on which retirement benefits under the Qualified Plan commence. 24. Retirement Income means the monthly benefit for which a Participant is eligible under the Supplemental Plan. 25. Spouse shall have the meaning provided in the Qualified Plan. 26. Termination of Employment shall occur when the Participant is no longer employed by a company participating in the Supplemental Plan. 27. Total Compensation means Qualified Compensation, except that Incentive Compensation and Incentive Share Awards shall be included in the same twelve-month period for which they are awarded, plus any compensation or share awards deferred during the same twelve-month period under the terms of the New England Electric System Companies Revised Deferred Compensation Plan (or its predecessors) during the same twelve-month period to the extent not included in Qualified Compensation. 28. Years of Service shall have the meaning provided in the Qualified Plan. Plan Benefits 1. Retirement Benefit A Participant shall be entitled to receive from the Company for retirements on or after April 1, 1991, an annual retirement benefit equal to (a) plus (b) plus (c) plus (d) plus (e) less (f) less (g) below: (a) 1.5% of Final Average Total Compensation for each Year of Service up to 10 years; (b) 1.3% of Final Average Total Compensation for each Year of Service from 11 to 20 years; (c) 1.25% of Final Average Total Compensation for each Year of Service from 21 to 30 years; (d) .6% of Final Average Total Compensation for each Year of Service over 30 years; (e) .57% of Final Average Total Compensation in excess of the Average Social Security Wage Base for each Year of Service, up to 35 years; (f) any benefit payable on a straight life annuity basis which was accrued, under a plan maintained by an employer other than a New England Electric System company, for service granted pursuant to the additional service credits provision of the Qualified Plan; and (g) the Qualified Plan Benefit. All of the above amounts are to be determined as at the Participant's Termination of Employment. 2. Form of Payment Retirement Income shall be payable in the normal form as follows: (a) If a Participant has a Spouse, the normal form of payment shall be a contingent annuitant option with the Spouse, as contingent annuitant, entitled to receive 50% of the Participant's reduced amount of Retirement Income. (b) If a Participant does not have a Spouse, the normal form of payment shall be a straight life annuity with no amount of Retirement Income payable after the Former Participant's death. If a Participant elects an optional form of payment under the Qualified Plan, the same option and actuarial equivalent factors shall apply to Retirement Income payable under the Supplemental Plan; provided, however, to the extent the form of benefit was dictated by the terms of a qualified domestic relations order, the form may be that which would have applied (or any form that could have been elected) in the absence of said order. In calculating the benefit payable under any option, the same actuarial equivalent factors in the Qualified Plan shall be used in the Supplemental Plan, except that, for Level A Participants, no reduction factors for retirement prior to age 65 shall be applied against the Participant's Retirement Income. 3. Spouse's Death Benefit The Spouse of a Participant vested under the Qualified Plan who has not had a Termination of Employment is entitled to a pre-retirement spouse benefit, if the Participant dies before payment of benefits commence. The Spouse will be entitled to receive an annual benefit determined as follows: (a) as if the Participant had retired and elected Retirement Income payments to begin on the first day of the month next following the later of the date of death or Participant's fifty-fifth birthday, and (b) the Retirement Income was payable in the form of a contingent annuitant option with the Spouse, as contingent annuitant, entitled to receive 50% (100% if the Participant died after his or her 55th birthday and while an active employee) of the Participant's amount of Retirement Income subject to reduction for benefits payable hereunder under a domestic relations order. Timing of Payments A Participant shall be eligible for benefits under the Supplemental Plan when and if he or she is eligible for benefits under the Qualified Plan, except as provided herein. Benefits shall commence on the date on which the Participant or the Spouse first receives benefits under the Qualified Plan. Lump Sum Payments In the event of the dissolution, liquidation, or winding up of the business of the Company or the New England Electric System, whether voluntary or involuntary, the Participant shall receive, at the time of such event, a lump sum payment equal to the full amount of the current Actuarial Value of the Participant's benefits under this Supplemental Plan, unless the New England Electric System, or its successor, has assumed all the rights, duties, and obligations of the Company or New England Electric System hereunder. Any provision of the Supplemental Plan to the contrary notwithstanding, if (i) any company shall fail to make any payment to any Participant when due under the Supplemental Plan or (ii) the employer or company shall fail to make any payment to any participant due under any of the New England Electric Companies' Senior Incentive Compensation Plan, the New England Electric Companies' Incentive Compensation Plan I, the New England Electric Companies Deferred Compensation Plan, or the New England Electric System Companies Retirement Supplement Plan, the full amount of the current Actuarial Value of a Participant's benefits under the Supplemental Plan shall be payable immediately as a lump sum. If any employer or company shall fail to make a payment as provided in (i) or (ii) due to inadvertence or a good faith delay to permit processing and shall immediately upon discovery of such failure or delay make such payment in full, the original failure to make the payment or payments shall not, for the purposes of this paragraph, be a failure to make a payment. If any employer or company shall, in good faith, contest a claim by a participant under this Supplemental Plan or any of the other above-listed plans, the failure to make the contested payment or payments shall not, for the purpose of this paragraph, be a failure to make a payment. At any time following a Change in Control or Major Transaction, any Participant who has had a Termination of Employment, whether before or after the Change in Control or Major Transaction, may elect to receive, in lieu of any future benefits hereunder, a lump sum payment equal to the Actuarial Value of the maximum value of said future benefits, less 10%. If the Company does not make the aforesaid lump sum payments, the New England Electric System will make the payment for the account of the Company. Vesting and Forfeiture of Benefits Except as provided in the following paragraph, a Participant's accrued benefit shall be 100% vested after five Years of Service. A Participant will forfeit his or her benefits under the Supplemental Plan if before the earlier of age 65 or five years following Termination of Employment he or she, without the prior consent of the New England Electric System's Chief Executive Officer (the "CEO") [or prior consent of the Committee in the case of the CEO], enters into or in any manner takes part in, as an employee, agent, officer, owner, or otherwise, any business or authority which in the opinion of the CEO is in competition with, in the same field as, or regulating the business of New England Electric System or any of its subsidiaries, or which in the opinion of the CEO provides services peculiarly essential to utility operation. Violation of this provision will result in termination of payments, and any obligations to make future payments to the Participant and the Participant's Spouse. A Participant may request to have the Committee review any decision made by the CEO under this provision that adversely affects the Participant. The Committee's decision shall be final. Upon the occurrence of a Change in Control or a Major Transaction, the second paragraph of this section shall no longer have any effect. Administration and Claims The Benefits Committee shall have for the Supplemental Plan the same duties as for the Qualified Plan, except as specifically provided herein. The Benefits Appeal Committee for the Qualified Plan shall have for the Supplemental Plan the same duties relative to denied claims as for the Qualified Plan, except as may be specifically provided herein. Effectuation of Interest In the event it should become impossible for the Company, the Benefits Committee, or other committee to perform any act required by the Plan, the Company, the Benefits Committee, or other committee may perform such other act as it in good faith determines will most nearly carry out the intent and purpose of the Plan. Government Regulations It is intended that the Supplemental Plan will comply with all applicable laws and governmental regulations, and the Company shall not be obligated to perform an obligation hereunder in any case where, in the opinion of the Company's counsel, such performance would result in violation of any law or regulation. Nonassignment To the fullest extent permitted by law, no benefit under the Plan, nor any other interest hereunder of any Participant, Spouse, or contingent annuitant, shall be assignable, transferable, or subject to sale, mortgage, pledge, hypothecation, commutation, anticipation, garnishment, attachment, execution, or levy of any kind. Provisions of Benefits The Supplemental Plan will be unfunded. Benefits will be paid from the operating revenues of the Company. A Participant's rights to benefits under the Supplemental Plan shall be those of an unsecured, general creditor of the Company. Amendment or Discontinuance The Committee may amend or discontinue the Supplemental Plan at any time; provided, no modification shall reduce a benefit which a Participant was eligible to receive under the Supplemental Plan at the time of such amendment or discontinuance; and provided further, no amendment or discontinuance in any manner adverse to a Participant with respect to benefit formula or optional form of payment may be made for three years following a Change in Control or a Major Transaction. /s/ George M. Sage _______________________________________________ Chairman of the Compensation Committee EX-10 6 NEES EXHIBIT 10(O) NEW ENGLAND ELECTRIC COMPANIES EXECUTIVE RETIREES HEALTH AND LIFE INSURANCE PLAN Established January 1, 1990 Amended and Restated January 1, 1996 NEW ENGLAND ELECTRIC SYSTEM EXECUTIVE RETIREES HEALTH AND LIFE INSURANCE PLAN TABLE OF CONTENTS ARTICLE PAGE ARTICLE I - INTRODUCTION 1.01. Purpose of Plan. . . . . . . . . . . . . . . . . . . . . . . 1 1.02. Plan Status. . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - DEFINITIONS 2.01. Executive Employee.. . . . . . . . . . . . . . . . . . . . . 2 2.02. Eligible Employee. . . . . . . . . . . . . . . . . . . . . . 2 2.03. NEES Companies Retirees Health and Life Insurance Plan.. . . 2 2.04. Participant. . . . . . . . . . . . . . . . . . . . . . . . . 2 2.05. Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.06. Plan Date. . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III - PARTICIPATION 3.01. Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . 2 3.02. Commencement of Participation. . . . . . . . . . . . . . . . 3 3.03. Cessation of Participation.. . . . . . . . . . . . . . . . . 3 3.04. Reinstatement of Former Participant. . . . . . . . . . . . . 3 ARTICLE IV - HEALTHCARE COVERAGE AND CONTRIBUTION 4.01. Coverage.. . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.02. Description of Benefits. . . . . . . . . . . . . . . . . . . 4 4.03. Participant Contribution.. . . . . . . . . . . . . . . . . . 5 4.04. Employer Contribution. . . . . . . . . . . . . . . . . . . . 5 ARTICLE V - LIFE INSURANCE COVERAGE 5.01. Coverage.. . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE VI - FUNDING 6.01. Funding. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.02 Limitation of Employer Liability.. . . . . . . . . . . . . . 6 ARTICLE VII - AMENDMENT AND TERMINATION OF PLAN 7.01. Amendment and Termination of Plan. . . . . . . . . . . . . . 6 ARTICLE VIII - MISCELLANEOUS 8.01. Incorporation of Provisions by Reference.. . . . . . . . . . 7 8.02. Forfeiture of Benefits.. . . . . . . . . . . . . . . . . . . 7 EXECUTIVE RETIREES HEALTH AND LIFE INSURANCE PLAN ARTICLE I - INTRODUCTION 1.01. Purpose of Plan. The purpose of this amended and restated Plan is to (1) provide postretirement health care benefits under the Medical Contracts and Medigap Contracts maintained by the Employers for certain retired Executive Employees and their Eligible Dependents (2) to provide reimbursement of Medicare Part B premiums to eligible Executive Employees and their Spouses, and (3) to provide life insurance coverage to eligible Executive Employees, as more fully described herein. 1.02. Plan Status. This written Plan document is intended to comply with all relevant provisions of the Code and ERISA and is to be interrupted in a manner consistent with the requirements of such laws including, but not limited to, Sections 601 through 609 of ERISA and Section 4980B of the Code. The Plan shall consist of this document, the Medical Contracts, the Medigap Contracts, the Insurance Contracts, and the plan document for the NEES Companies Retirees Health and Life Insurance Plan. The provisions of the Medical Contracts that are applicable to retired Employees, the provisions of the Medigap Contracts, the provisions of the Life Insurance Contracts, and applicable provision of the NEES Companies Retiree Health and Life Insurance Plan, are incorporated by reference into this Plan document. ARTICLE II - DEFINITIONS The definitions contained in the NEES Companies Retirees Health and Life Insurance Plan I, as amended from time to time, are hereby incorporated by reference into this Plan. In addition, the following terms have the meanings set forth below unless otherwise required by the context. In the event of a conflict between a definition found in the NEES Companies Retirees Health and Life Insurance Plan and one contained in this Plan, the definition found in this Plan shall control. 2.01. Executive Employee means any person, in the employ of an Employer, who qualified for participation in the New England Electric Companies Executive Supplemental Retirement Plan I on December 31, 1995, and who on the date of his or her termination of employment is qualified for participation in the New England Electric Companies Executive Supplemental Retirement Plan I. 2.02. Eligible Employee means an Executive Employee who meets the eligibility criteria set forth under Section 3.01(a) or (b). 2.03. NEES Companies Retirees Health and Life Insurance Plan means the New England Electric System Companies Retirees Health and Life Insurance Plan I, as amended from time to time. 2.04. Participant means any individual who participates in the Plan in accordance with Article III. 2.05. Plan means the New England Electric Companies Executive Retirees Health and Life Insurance Plan as set forth herein, together with any and all amendments hereto. 2.06. Plan Date means January 1, 1994. ARTICLE III - PARTICIPATION 3.01. Eligibility. (a) A retired Executive Employee who, as of the Plan Date, was receiving benefits under the Plan shall continue to participate in the Plan, for purposes of receiving postretirement health care and life insurance benefits, beginning on the Plan Date. (b) An Executive Employee who, on or after the Plan Date, has a termination of employment, and, at the time is at least age 50 shall be eligible to participate in the Plan, for purposes of receiving postretirement health care and life insurance benefits, commencing at Retirement. (c) An Eligible Dependent will be eligible to participate in this Plan, for purposes of receiving health care benefits, upon the Eligible Employee's death. 3.02. Commencement of Participation. An individual will become a Participant on the later of: (a) the Plan Date or (b) the first day of the month following the date he or she becomes an Eligible Employee. 3.03. Cessation of Participation. A Participant will cease to be a Participant as of the earlier of: (a) the date on which the Plan terminates; or (b) the date on which the Participant ceases to be eligible to participate under Section 3.01. 3.04. Reinstatement of Former Participant. A former Participant who is rehired by an Employer will become a Participant again if and when he or she meets the eligibility requirements of Section 3.01 and shall receive postretirement medical benefits in an amount no less than those the Participant was receiving immediately prior to discontinuing participation in the Plan. ARTICLE IV - HEALTHCARE COVERAGE AND CONTRIBUTION 4.01. Coverage. A Participant's postretirement health care coverage under this Plan shall be as follows: (a) If a Participant is under age 65, such Participant will be covered by the Medical Contract coverage he or she was enrolled in immediately before his or her termination of employment (or if the Participant becomes eligible under Section 3.01(c), such Participant will be covered by the Medical Contract coverage the Participant was enrolled in before such Eligible Employee's death) or such other Medical Contract coverage as may be elected by the Participant pursuant to the annual open enrollment procedure for active Employees. (b) If a Participant is age 65 or older, in addition to Medicare coverage to which he or she is entitled, the Participant will also be covered by the Medigap Contract coverage elected by such Participant and will receive such Medicare Part B premium reimbursement as described in Section 4.03 hereof. To the extent permitted under the provisions of the Medical Contracts and the Medigap Contracts, a Participant may also elect coverage under such contracts for Eligible Dependents. Notwithstanding the foregoing, with respect to an Eligible Employee and/or Eligible Dependent, no postretirement medical benefits will be provided under this Plan prior to the earlier of (i) the Eligible Employee's Retirement or (ii) the Eligible Employee's death. 4.02. Description of Benefits. The Medicare Part B premium reimbursement benefit is described in Section 4.03 hereof. The types and amounts of postretirement benefits available under each Medical Contract and Medigap Contract, the requirements for participating in such contracts, and the other terms and conditions of coverage and benefits under such contracts are as set forth in the respective contracts and in any documents that constitute (or are incorporated by reference) in such contracts. The postretirement benefit descriptions in such contracts, as in effect from time to time, are hereby incorporated by reference into this Plan. 4.03. Participant Contribution. The Participant shall not make any monthly contribution and shall receive full reimbursement of the monthly Medicare Part B premiums for such Participant and, if applicable, Spouse. If a Participant became eligible under Section 3.01(c), the Eligible Dependent Participant shall not make any monthly contribution and shall receive full reimbursement of the monthly Medicare Part B premium. 4.04. Employer Contribution. The respective Employers shall pay, on a monthly basis, the full cost of postretirement medical coverage provided under the Medical Contracts and the Medigap Contracts, and (ii) the applicable Medicare Part B premium reimbursement. ARTICLE V - LIFE INSURANCE COVERAGE 5.01. Coverage. If the Participant is not provided life insurance pursuant to an agreement with his or her Employer, the Participant will, upon Retirement, receive basic life insurance coverage in the amount provided by the Employer (exclusive of any individual life insurance program provided under contract with an Employer) immediately prior to his or her termination of employment, which amount shall be reduced 2% a month until it reaches the greater of: (i) $7,500; or (ii) 25% of the amount of coverage provided by the Participant's Employer to the Participant upon the earlier to occur of the Participant attaining age 65 or the Participant's last day of employment prior to Retirement. ARTICLE VI - FUNDING 6.01. Funding. The Employers may, in their sole discretion, establish any form of funding method(s) for the Plan including, but not limited to, the payment of postretirement benefits from an Employer's general assets or purchasing one or more group insurance contracts or HMO contracts to provide for all or a portion of the postretirement benefits provided under the Plan (excluding reimbursement of Medicare Part B premiums). 6.02 Limitation of Employer Liability. With respect to any prepaid or any insured portion of the Plan, liability for providing postretirement benefits under such portion of the Plan and the applicable prepaid or insured Medical Contracts, Medigap Contracts, or Life Insurance Contracts shall be solely that of the insurance company, Blue Cross - Blue Shield organization, or health maintenance organization issuing the applicable prepaid or insured Medical Contracts, Medigap Contracts, or Life Insurance Contracts. The respective Employers shall have no liability for any postretirement benefits due, or alleged to be due, under any such applicable prepaid or insured Medical Contract, Medigap Contract, or Life Insurance Contract. ARTICLE VII - AMENDMENT AND TERMINATION OF PLAN 7.01. Amendment and Termination of Plan. The power to amend the terms of this Plan document, in whole or in part, or to terminate the Plan shall be vested in the Compensation Committee of the Board, which shall have the sole discretion to make all amendments to the terms of this Plan document (including, but not limited to, the time for and amounts of Participant contributions), or to terminate the Plan; provided, however, no amendment or discontinuance in any manner adverse to a Participant or an Executive Employee with respect to benefits offered under the Plan may be made for three years following a Change in Control or a Major Transaction. ARTICLE VIII - MISCELLANEOUS 8.01. Incorporation of Provisions by Reference. All of the provisions contained in Article VI, Administration of Plan, and Article IX, Miscellaneous Provisions, of the NEES Companies Retirees Health and Life Insurance Plan, as amended from time to time, are hereby incorporated into this Plan by reference. 8.02. Forfeiture of Benefits. A Participant will forfeit his or her future benefits under the Plan at the time that a forfeiture of benefits under the New England Electric Companies Executive Supplemental Retirement Plan I occurs. /s/ George M. Sage ______________________________________ Chairman of the Compensation Committee EX-10 7 NEES EXHIBIT 10(P) NEW ENGLAND ELECTRIC COMPANIES' INCENTIVE COMPENSATION PLAN I Adopted - August 24, 1977 Amended - December 5, 1978 Amended - May 17, 1982 Amended - July 31, 1984 Amended - July 30, 1985 Amended - February 9, 1987 Amended - May 23, 1990 Amended - December 1, 1991 Amended - January 1, 1992 Amended - January 1, 1994 Amended - February 21, 1994 Amended - January 1, 1995 Amended - October 24, 1995 Amended - January 1, 1998 TABLE OF CONTENTS Page I. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.01 Base Compensation. . . . . . . . . . . . . . . . . . . . . . . .1 2.02 Beneficial Owner. . . . . . . . . . . . . . . . . . . . . . . . 1 2.03 Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2.04 Bonus Award. . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.05 Category A Participant. . . . . . . . . . . . . . . . . . . . . 2 2.06 Category B Participant. . . . . . . . . . . . . . . . . . . . . 2 2.07 Category C Participants. . . . . . . . . . . . . . . . . . . . .2 2.08 Change in Control. . . . . . . . . . . . . . . . . . . . . . . .2 2.09 Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.10 Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.11 Financial Objective. . . . . . . . . . . . . . . . . . . . . . .3 2.12 A Major Transaction. . . . . . . . . . . . . . . . . . . . . . .3 2.13 Management Committee. . . . . . . . . . . . . . . . . . . . . . 4 2.14 New England Electric System. . . . . . . . . . . . . . . . . . .4 2.15 Participant. . . . . . . . . . . . . . . . . . . . . . . . . . .5 2.16 Performance Benchmarks. . . . . . . . . . . . . . . . . . . . . 5 2.17 Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.18 Plan Year. . . . . . . . . . . . . . . . . . . . . . . . . . . .5 2.19 Senior Incentive Compensation Plan. . . . . . . . . . . . . . . 5 2.20 Strategic Objectives. . . . . . . . . . . . . . . . . . . . . . 6 2.21 System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3.01 Administration and Interpretation. . . . . . . . . . . . . . . .6 3.02 Amendment and Termination. . . . . . . . . . . . . . . . . . . .6 3.03 Salary Approvals. . . . . . . . . . . . . . . . . . . . . . . . 6 3.04 No Segregation of Assets; No Assignment. . . . . . . . . . . . .7 3.05 Effectuation of Interest. . . . . . . . . . . . . . . . . . . . 7 3.06 Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.01 Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . .7 4.02 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.03 Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 V. PARTICIPANTS' COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 8 5.01 Base Compensation and Incentive Compensation. . . . . . . . . . 8 VI. BASE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.01 Determination. . . . . . . . . . . . . . . . . . . . . . . . . .8 VII. INCENTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . .8 7.01 Incentive Compensation Amounts. . . . . . . . . . . . . . . . . 8 7.02 Use of Benchmarks. . . . . . . . . . . . . . . . . . . . . . . .9 7.03 Components. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.04 Financial Objective Award. . . . . . . . . . . . . . . . . . . .9 7.05 Strategic Objectives Award. . . . . . . . . . . . . . . . . . . 9 7.06 Exercise of Discretion. . . . . . . . . . . . . . . . . . . . .10 7.07 Notification of Award. . . . . . . . . . . . . . . . . . . . . 10 VIII. PAYMENT UPON CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . 10 8.01 Change in Control. . . . . . . . . . . . . . . . . . . . . . . 10 IX. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 11 9.01 Other Benefit Plans. . . . . . . . . . . . . . . . . . . . . . 11 9.02 Termination of Participation; Interplan Transfer. . . . . . . .11 9.03 Future Employment. . . . . . . . . . . . . . . . . . . . . . . 11 9.04 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . .12 9.05 Gender and Number. . . . . . . . . . . . . . . . . . . . . . . 12 9.06 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 12 9.07 Effective Date. . . . . . . . . . . . . . . . . . . . . . . . .12 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 ii NEW ENGLAND ELECTRIC COMPANIES' INCENTIVE COMPENSATION PLAN I I. PURPOSE The purpose of the Incentive Compensation Plan I (the Plan) is to achieve and maintain a high level of corporate performance by making it possible for those selected executives whose efforts and responsibilities have direct and major influence on corporate earnings to earn significant compensation rewards in proportion to (i) corporate achievement of financial and strategic objectives and (ii) the executive's contribution thereto. This amendment, effective January 1, 1998, is designed to focus on the post- divestiture growth and profitability of the System. II. DEFINITIONS 2.01 Base Compensation means the compensation referred to in Section 6.01 and includes all salary, whether received or deferred. 2.02 Beneficial Owner shall have the meaning defined in Rule 13d-3 under the Exchange Act. 2.03 Board means the Board of Directors of New England Electric System. 2.04 Bonus Award means the compensation referred to in Article VII. 2.05 Category A Participant means those Participants so designated by the Committee. 2.06 Category B Participant means those Participants so designated by the Committee. 2.07 Category C Participants means all Participants not designated either Category A or Category B Participants. 2.08 Change in Control occurs when the conditions set forth in either of the following paragraphs shall have been satisfied: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of New England Electric System (not including in the securities beneficially owned by such Person any securities acquired directly from New England Electric System or its affiliates) representing 20% or more of the combined voting power of New England Electric System's then outstanding securities; or (b) during any period of not more than two consecutive years individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with New England Electric System to effect a transaction described in clause (a) of this paragraph) whose election by the Board or nomination for election by New England Electric System's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority of the Board. 2.09 Committee means the Compensation Committee of the Board. 2.10 Exchange Act means the Securities Exchange Act of 1934. 2.11 Financial Objective means the same annual financial target established under Article IV of the Senior Incentive Compensation Plan for the Plan Year. 2.12 A Major Transaction shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) the shareholders of New England Electric System approve a merger or consolidation with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of New England Electric System or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization (or similar transaction) in which no Person acquires more than 20% of the combined voting power of New England Electric System's then outstanding securities; (b) the shareholders of New England Electric System approve a plan of complete liquidation thereof; or (c) the shareholders of New England Electric System approve an agreement for the sale or disposition of all or substantially all of New England Electric System's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. 2.13 Management Committee means the Chief Executive Officer of New England Electric System and the Chairman of New England Electric System. 2.14 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. 2.15 Participant means an individual who has been selected, in accordance with Section 4.01, or an equivalent prior provision, to be a participant in the Plan. 2.16 Performance Benchmarks means those standards established by the Management Committee and the Committee to judge progress toward achievement of the Financial Objective and each Strategic Objective. Individual objective or subjective performance measures may also be developed for each Participant to assist in the evaluation of his or her contribution toward the corporate achievement of the Strategic Objectives assigned to the individual. 2.17 Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) New England Electric System or any subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of New England Electric System or any subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of New England Electric System in substantially the same proportions as their ownership of shares of New England Electric System. 2.18 Plan Year means a calendar year. 2.19 Senior Incentive Compensation Plan means New England Electric Companies' Senior Incentive Compensation Plan, as amended from time to time. 2.20 Strategic Objectives means the same Strategic Objectives established under Article IV of the Senior Incentive Compensation Plan for the Plan Year. 2.21 System means the New England Electric System holding company system. III. ADMINISTRATION 3.01 Administration and Interpretation. The Plan shall be administered by the Committee, and interpretations of the Plan by the Committee shall be final and binding on all parties. 3.02 Amendment and Termination. The Committee may amend or terminate the Plan at any time, provided that: (a) no such action shall affect any right or obligation with respect to any Bonus Award previously granted; (b) provisions of Article VIII and Sections 2.08 and 2.12 may not be amended without the written consent of any Participant affected; and (c) no amendment or termination of the Plan may be made after a Major Transaction unless the shareholders have rescinded their approval. 3.03 Salary Approvals. The Committee will approve all salary changes for individual Participants. 3.04 No Segregation of Assets; No Assignment. The New England Electric System is not required to set aside or segregate any assets of any kind to meet obligations under this Plan. A Participant has no rights under this Plan to any specific assets of the System. A Participant may not commute, sell, assign, transfer, or otherwise convey the right to receive any payments under this Plan, which payments and the right thereto shall be, to the fullest extent permitted by law, nonassignable and nontransferable, whether voluntarily or involuntarily. 3.05 Effectuation of Interest. In the event it should become impossible for the System, the Committee, or the Management Committee to perform any act required by the Plan, the System, the Committee, or the Management Committee may perform such other act as it in good faith determines will most nearly carry out the intent and purpose of the Plan. 3.06 Accounting. The Manager of Internal Audits and the Controller will be responsible to the Committee for accounting matters directly affecting the Plan. IV. PARTICIPATION 4.01 Selection. It is anticipated (but not binding) that the Committee shall select, by December 1 of each year, the Participants for the following year. 4.02 Notification. The Management Committee shall notify those Participants who have been included in the Plan for the following year and those who have been dropped from the Plan. 4.03 Objectives. All Participants will have the Financial Objective. Individual Participants may participate in different Strategic Objectives. Further, their Strategic Objectives may be differently weighted. The Management Committee shall determine such objectives and weighting. V. PARTICIPANTS' COMPENSATION 5.01 Base Compensation and Incentive Compensation. The compensation for each Participant will consist of two parts: Base Compensation and Incentive Compensation. VI. BASE COMPENSATION 6.01 Determination. A Participant's performance will be evaluated and his or her compensation, including any merit or promotional increase, will be set in accordance with the New England Electric Salary Management Program. VII. INCENTIVE COMPENSATION 7.01 Incentive Compensation Amounts. When the books are closed at the end of a Plan Year, the Management Committee will make recommendations to the Committee for Bonus Awards to each Participant. The Committee will act on the recommendations and the money will be distributed to the Participants based upon the Committee's determination by the March 15 following the Plan Year. 7.02 Use of Benchmarks. The Management Committee and the Committee will use the Performance Benchmarks and individual performance measures as guides to evaluate each Participant's achievement in each area. 7.03 Components. The Bonus Award has two components: a Financial Objective Award and a Strategic Objectives Award. The targeted Strategic Objectives Award is 22.5% of Base Compensation. The targeted Financial Objective Award is 13.5% of Base Compensation and the maximum Financial Objective Award is 22.5%. 7.04 Financial Objective Award. The calculation of the Financial Objective Award will parallel the calculation under the New England Electric Companies' Senior Incentive Compensation Plan. If the Financial Objective Benchmark is achieved, full target credit will be given for this target. The Financial Objective Bonus Award will be adjusted up or down to reflect income greater than, or less than, the Benchmark. 7.05 Strategic Objectives Award. Each Participant's award shall be governed by the contribution of the Participant toward meeting his or her Strategic Objectives. The Strategic Objectives Bonus Award will be adjusted downward to reflect shortfalls in Performance Benchmark achievement. 7.06 Exercise of Discretion. The Committee is expected to use its judgment in evaluating performance, with the Objectives and Benchmarks as standards, not cliffs. The Committee may reduce bonuses from those calculated by the formula if circumstances warrant. The Committee may also award bonuses outside those calculated by the formula. Further, the Committee retains the discretion, from time to time, to add or delete Strategic Objectives and to adjust Benchmarks as it deems appropriate. 7.07 Notification of Award. The Management Committee shall be responsible for seeing that each Participant is told the basis for the amount of his or her Bonus Award. VIII. PAYMENT UPON CHANGE OF CONTROL 8.01 Change in Control. In the event of a Change in Control or Major Transaction, each Participant will receive, within 30 days of the consummation of the Change in Control or of the transaction approved by the Major Transaction, a cash payment equal to the average of the bonus percentages for this Plan for the last three years prior to the Change in Control or Major Transaction times the Participant's annualized Base Compensation. Further, if the consummation of the Change in Control or of the transaction approved by the Major Transaction occurs prior to the determination and payment of the Bonus Award for the prior Plan Year, the Participant will also receive within 30 days a cash payment equal to said percentage times the Participant's Base Compensation received in the prior Plan Year. No further benefits will be payable from this Plan. IX. GENERAL PROVISIONS 9.01 Other Benefit Plans. Bonus Awards will not be used in determining the Participant's benefits under any group insurance plan or any incentive program other than New England Electric Companies' Incentive Share Plan. Bonus Awards will be included in pension plan calculations to the extent otherwise provided in these plans. 9.02 Termination of Participation; Interplan Transfer. If, for any reason, a Participant should cease to be actively employed by a subsidiary of the New England Electric System prior to July 1 of a Plan Year, that person will not be deemed a Participant for that year, unless the Committee determines there are extraordinary circumstances which justify inclusion. A Participant who ceases to be so actively employed during the last six months of a Plan Year will be deemed a Participant for that year on a proportional basis. The Committee will also determine the extent, if any, of participation by the person replacing a Participant. If a Participant becomes a participant in another incentive compensation plan during the Plan Year, the Participant will be deemed to be a Participant for that year on a proportional basis in each of the Plans, respectively. 9.03 Future Employment. Neither the Plan nor the making of awards hereunder shall be construed to create any obligation to continue the Plan or to give any present or future employee any right to continued employment. 9.04 Headings. The headings of articles and sections of the Plan are for convenience of reference only. 9.05 Gender and Number. Unless the context requires otherwise, the singular shall include the plural; the masculine gender shall include the feminine; and such words as "herein", "hereinafter", "hereof", and "hereunder" shall refer to this instrument as a whole and not merely to the subdivisions in which such words appear. 9.06 Governing Law. Except as otherwise required by law, the Plan and all matters arising thereunder shall be governed by the laws of The Commonwealth of Massachusetts. 9.07 Effective Date. This Amendment shall be effective January 1, 1998. /s/ George M. Sage __________________________________________ Chairman, Compensation Committee Pursuant to Votes dated November 24, 1997 and August 25, 1998 of the Compensation Committee EX-10 8 NEES EXHIBIT 10(Q) NEW ENGLAND ELECTRIC COMPANIES' INCENTIVE COMPENSATION PLAN II Adopted - July 12, 1982 Amended - December 18, 1984 Amended - November 20, 1985 Amended - December 1, 1986 Amended - May 23, 1990 Amended - December 1, 1991 Amended - September 1, 1992 Amended - January 1, 1994 Amended - March 1, 1994 Amended - January 1, 1995 Amended - January 1, 1998 TABLE OF CONTENTS Page I. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.01 Base Compensation. . . . . . . . . . . . . . . . . . . . . . . . 1 2.02 Beneficial Owner. . . . . . . . . . . . . . . . . . . . . . . . 1 2.03 Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.04 Bonus Award. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.05 Change in Control. . . . . . . . . . . . . . . . . . . . . . . . 2 2.06 Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.07 Financial Objective. . . . . . . . . . . . . . . . . . . . . . . 3 2.08 A Major Transaction. . . . . . . . . . . . . . . . . . . . . . . 3 2.09 Management Committee. . . . . . . . . . . . . . . . . . . . . . 4 2.10 New England Electric System. . . . . . . . . . . . . . . . . . . 4 2.11 Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.12 Performance Benchmark. . . . . . . . . . . . . . . . . . . . . . 4 2.13 Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.14 Plan Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.15 Senior Incentive Compensation Plan. . . . . . . . . . . . . . . 5 2.16 Strategic Objectives. . . . . . . . . . . . . . . . . . . . . . 5 2.17 System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 III. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.01 Administration and Interpretation. . . . . . . . . . . . . . . . 6 3.02 Amendment and Termination. . . . . . . . . . . . . . . . . . . . 6 3.03 No Segregation of Assets; No Assignment. . . . . . . . . . . . . 6 3.04 Participant List. . . . . . . . . . . . . . . . . . . . . . . . 7 3.05 Effectuation of Interest. . . . . . . . . . . . . . . . . . . . 7 3.06 Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.01 Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.02 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.03 Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. PARTICIPANTS' COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 8 5.01 Base Compensation and Incentive Compensation. . . . . . . . . . 8 VI. BASE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.01 Determination. . . . . . . . . . . . . . . . . . . . . . . . . . 8 VII. INCENTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . .8 7.01 Incentive Compensation Amounts. . . . . . . . . . . . . . . . . .8 7.02 Use of Benchmarks. . . . . . . . . . . . . . . . . . . . . . . . 9 7.03 Components. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.04 Financial Objective Award. . . . . . . . . . . . . . . . . . . . 9 7.05 Strategic Objective Award. . . . . . . . . . . . . . . . . . . . 9 7.06 Exercise of Discretion. . . . . . . . . . . . . . . . . . . . . .9 7.07 Notification of Award. . . . . . . . . . . . . . . . . . . . . .10 VIII. PAYMENT UPON CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . 10 8.01 Change of Control. . . . . . . . . . . . . . . . . . . . . . .10 IX. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . 11 9.01 Other Benefit Plans. . . . . . . . . . . . . . . . . . . . . .11 9.02 Termination of Participation; Interplan Transfer. . . . . . . 11 9.03 Future Employment. . . . . . . . . . . . . . . . . . . . . . .11 9.04 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.05 Gender and Number. . . . . . . . . . . . . . . . . . . . . . .12 9.06 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . .12 9.07 Effective Date. . . . . . . . . . . . . . . . . . . . . . . . 12 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 ii NEW ENGLAND ELECTRIC COMPANIES' INCENTIVE COMPENSATION PLAN II I. PURPOSE The purpose of this Incentive Compensation Plan II (the Plan) is to achieve and maintain a high level of corporate performance by making it possible for those selected executives whose efforts and responsibilities have direct influence on corporate earnings to earn significant compensation rewards in proportion to (i) corporate achievement of financial and strategic objectives and (ii) the executive's contribution thereto. This amendment, effective January 1, 1998, is designed to focus on the post-divestiture growth and profitability of the System. II. DEFINITIONS 2.01 Base Compensation means the compensation referred to in Section 6.01. 2.02 Beneficial Owner shall have the meaning defined in Rule 13d-3 under the Exchange Act. 2.03 Board means the Board of Directors of New England Electric System. 2.04 Bonus Award means the compensation referred to in Article VII. 2.05 Change in Control occurs when the conditions set forth in either of the following paragraphs shall have been satisfied: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of New England Electric System (not including in the securities beneficially owned by such Person any securities acquired directly from New England Electric System or its affiliates) representing 20% or more of the combined voting power of New England Electric System's then outstanding securities; or (b) during any period of not more than two consecutive years individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with New England Electric System to effect a transaction described in clause (a) of this paragraph) whose election by the Board or nomination for election by New England Electric System's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority of the Board. 2.06 Exchange Act means the Securities Exchange Act of 1934. 2.07 Financial Objective means the same annual financial target established under Article IV of the New England Electric Companies' Senior Incentive Compensation Plan for the Plan Year. 2.08 A Major Transaction shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) the shareholders of New England Electric System approve a merger or consolidation with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of New England Electric System or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization (or similar transaction) in which no Person acquires more than 20% of the combined voting power of New England Electric System's then outstanding securities; (b) the shareholders of New England Electric System approve a plan of complete liquidation thereof; or (c) the shareholder of New England Electric System approve an agreement for the sale or disposition of all or substantially all of New England Electric System's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. 2.09 Management Committee means the Chief Executive Officer of New England Electric System and the Chairman of New England Electric System. 2.10 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. 2.11 Participant means an individual who has been selected, in accordance with Section 4.01, or an equivalent prior provision, to be a participant in the Plan. 2.12 Performance Benchmark means those standards established by the Management Committee to judge progress toward achievement of the Financial Objective and each specific Strategic Objective. Individual objective or subjective performance measures may also be developed for each Participant to assist in the evaluation of his or her contribution toward the corporate achievement of the Strategic Objectives assigned to the individual. 2.13 Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) New England Electric System or any subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of New England Electric System or any subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of New England Electric System in substantially the same proportions as their ownership of shares of New England Electric System. 2.14 Plan Year means a calendar year. 2.15 Senior Incentive Compensation Plan means New England Electric Companies' Senior Incentive Compensation Plan, as amended from time to time. 2.16 Strategic Objectives means the same Strategic Objectives established under Article IV of the Senior Incentive Compensation Plan for the Plan Year. 2.17 System means the New England Electric System holding company system. III. ADMINISTRATION 3.01 Administration and Interpretation. The Plan shall be administered by the Management Committee, and interpretations of the Plan by the Management Committee shall be final and binding by all parties. 3.02 Amendment and Termination. The Management Committee may amend or terminate the Plan at any time, provided that: (a) no such action shall affect any right or obligation with respect to any Bonus Award previously granted; (b) the provisions of Article VII and Sections 2.05 and 2.08 may not be amended without the written consent of any Participant affected; and (c) no amendment or termination of the Plan may be made after a Major Transaction unless the shareholders have rescinded their approval. 3.03 No Segregation of Assets; No Assignment. The New England Electric System is not required to set aside or segregate any assets of any kind to meet obligations under this Plan. A Participant has no rights under this Plan to any specific assets of the System. A Participant may not commute, sell, assign, transfer, or otherwise convey the right to receive any payments under this Plan, which payments and the right thereto shall be, to the fullest extent permitted by law, nonassignable and nontransferable, whether voluntarily or involuntarily. 3.04 Participant List. The Management Committee shall be responsible for maintaining an up-to-date list of the Participants in the Plan. 3.05 Effectuation of Interest. In the event it should become impossible for the System, the Committee, or the Management Committee to perform any act required by the Plan, the System, the Committee, or the Management Committee may perform such other act as it in good faith determines will most nearly carry out the intent and purpose of the Plan. 3.06 Accounting. The Manager of Internal Audits and the Controller will be responsible to the Management Committee for accounting matters directly affecting the Plan. IV. PARTICIPATION 4.01 Selection. The Participants in the Plan will be selected by the Senior Management. 4.02 Notification. The Management Committee shall notify those Participants who have been included in the Plan for the following year and those who have been dropped from the Plan. 4.03 Objectives. All Participants will have the Financial Objective. Individual Participants may participate in different Strategic Objectives. Further, their Strategic Objectives may be differently weighted. The Management Committee shall determine such objectives and weighting. Participants will be advised of their Strategic Objectives prior to the Plan Year for which they apply. V. PARTICIPANTS' COMPENSATION 5.01 Base Compensation and Incentive Compensation. The compensation for each Participant will consist of two parts: Base Compensation and Incentive Compensation. VI. BASE COMPENSATION 6.01 Determination. A Participant's performance will be evaluated and his or her compensation, including any merit or promotional increase, will be set in accordance with the New England Electric Salary Management Program. VII. INCENTIVE COMPENSATION 7.01 Incentive Compensation Amounts. When the books are closed at the end of a Plan Year, the Management Committee will determine the appropriate amount to be awarded each Participant, and this money will be distributed to the Participants by the March 15 following the Plan Year. 7.02 Use of Benchmarks. The Management Committee will use the Performance Benchmarks and individual performance measures as guides to evaluate each Participant's achievement in each area. 7.03 Components. The Bonus Award has two components: a Financial Objective Award and a Strategic Objectives Award. The targeted Strategic Objective Award is 16.5% of Base Compensation. The targeted Financial Objective Award is 9.9% of Base Compensation and the maximum Financial Objective Award is 16.5%. 7.04 Financial Objective Award. The calculation of the Financial Objective Award will parallel the calculation under the New England Electric Companies' Senior Incentive Compensation Plan. If the Financial Objective Benchmark is achieved, full target credit will be given for this target. The Financial Objective Bonus Award will be adjusted up or down to reflect income greater than, or less than, the Benchmark. 7.05 Strategic Objective Award. Each Participant's award shall be governed by the contribution of the Participant toward meeting his or her Strategic Objectives. The Strategic Objective Bonus Award will be adjusted downward to reflect shortfalls in Performance Benchmark achievement. 7.06 Exercise of Discretion. The Management Committee is expected to use its judgment in evaluating performance with the Objectives and Benchmarks as standards, not cliffs. The Management Committee may reduce bonuses from those calculated by the formula if circumstances warrant. The Management Committee may also award bonuses outside those calculated by the formula. Further, the Management Committee retains the discretion, from time to time, to add or delete Strategic Objectives and adjust Benchmarks as it deems appropriate. 7.07 Notification of Award. The Management Committee shall be responsible for seeing that each Participant is told the basis for the size of his or her Bonus Award. VIII. PAYMENT UPON CHANGE OF CONTROL 8.01 Change of Control. In the event of a Change in Control or Major Transaction, each Participant will receive, within 30 days of the consummation of the Change in Control or of the transaction approved by the Major Transaction, a cash payment equal to the average of the bonus percentages for this Plan for the last three years prior to the Change in Control or Major Transaction times the Participant's annualized Base Compensation. Further, if the consummation of the Change in Control or of the transaction approved by the Major Transaction occurs prior to the determination and payment of the Bonus Award for the prior Plan Year, the Participant will also receive within 30 days a cash payment equal to said percentage times the Participant's Base Compensation received in the prior Plan Year. No further benefits will be payable from this Plan. IX. GENERAL PROVISIONS 9.01 Other Benefit Plans. Bonus Awards will not be used in determining benefits under any group insurance plan or any other incentive program other than New England Electric Companies' Incentive Share Plan. Bonus Awards will be included in pension plan calculations to the extent otherwise provided in these plans. 9.02 Termination of Participation; Interplan Transfer. If, for any reason, a Participant should cease to be actively employed by a subsidiary of the New England Electric System prior to July 1 of a Plan Year, that person will not be deemed a Participant for that year, unless the Management Committee determines there are extraordinary circumstances which justify inclusion. A Participant who ceases to be so actively employed during the last six months of a Plan Year will be deemed a Participant for that year on a proportional basis. The Management Committee will also determine the extent, if any, of participation by the person replacing a Participant. If a Participant becomes a participant in another incentive compensation plan during the Plan Year, the Participant will be deemed to be a Participant for that year on a proportional basis in each of the Plans, respectively. 9.03 Future Employment. Neither the Plan nor the making of awards hereunder shall be construed to create any obligation to continue the Plan or to give any present or future employee any right to continued employment. 9.04 Headings. The headings of articles and sections of the Plan are for convenience of reference only. 9.05 Gender and Number. Unless the context requires otherwise, the singular shall include the plural; the masculine gender shall include the feminine; and such words as "herein," "hereinafter," "hereof," and "hereunder" shall refer to this instrument as a whole and not merely to the subdivisions in which such words appear. 9.06 Governing Law. Except as otherwise required by law, the Plan and all matters arising thereunder shall be governed by the laws of The Commonwealth of Massachusetts. 9.07 Effective Date. This Amendment shall be effective January 1, 1998. /s/ Alfred D. Houston /s/ Richard P. Sergel The Management Committee In accordance with Votes dated November 24, 1997 and August 25, 1998 of the New England Electric System Compensation Committee EX-10 9 NEES EXHIBIT 10(R) NEW ENGLAND ELECTRIC COMPANIES' INCENTIVE COMPENSATION PLAN III Adopted - November 29, 1988 Amended - May 23, 1990 Amended - December 1, 1991 Amended - January 1, 1994 Amended - March 1, 1994 Amended - January 1, 1995 Amended - January 1, 1996 Amended - January 1, 1998 TABLE OF CONTENTS Page I. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.01 Base Compensation. . . . . . . . . . . . . . . . . . 1 2.02 Beneficial Owner. . . . . . . . . . . . . . . . . . 1 2.03 Board. . . . . . . . . . . . . . . . . . . . . . . . 1 2.04 Bonus Award. . . . . . . . . . . . . . . . . . . . . 1 2.05 Change in Control. . . . . . . . . . . . . . . . . . 2 2.06 Exchange Act. . . . . . . . . . . . . . . . . . . . 2 2.07 Financial Objective. . . . . . . . . . . . . . . . . 3 2.08 A Major Transaction. . . . . . . . . . . . . . . . . 3 2.09 Management Committee.. . . . . . . . . . . . . . . . 4 2.10 New England Electric System. . . . . . . . . . . . . 4 2.11 Participant. . . . . . . . . . . . . . . . . . . . . 4 2.12 Performance Benchmarks.. . . . . . . . . . . . . . . 4 2.13 Person.. . . . . . . . . . . . . . . . . . . . . . . 5 2.14 Plan Year. . . . . . . . . . . . . . . . . . . . . . 5 2.15 Senior Incentive Compensation Plan.. . . . . . . . . 5 2.16 Strategic Objectives.. . . . . . . . . . . . . . . . 5 2.17 System.. . . . . . . . . . . . . . . . . . . . . . . 5 III. ADMINISTRATION.. . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.01 Administration and Interpretation. . . . . . . . . . 6 3.02 Amendment or Termination.. . . . . . . . . . . . . . 6 3.03 No Segregation of Assets; No Assignment. . . . . . . 6 3.04 Participant List.. . . . . . . . . . . . . . . . . . 7 3.05 Effectuation of Interest.. . . . . . . . . . . . . . 7 3.06 Accounting.. . . . . . . . . . . . . . . . . . . . . 7 IV. PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.01 Selection. . . . . . . . . . . . . . . . . . . . . . 7 4.02 Notification.. . . . . . . . . . . . . . . . . . . . 7 4.03 Objectives.. . . . . . . . . . . . . . . . . . . . . 7 V. PARTICIPANTS' COMPENSATION.. . . . . . . . . . . . . . . . . . . . 8 5.01 Base Compensation and Incentive Compensation.. . . . 8 VI. BASE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . 8 6.01 Performance Evaluation.. . . . . . . . . . . . . . . 8 VII. INCENTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 8 7.01 Incentive Compensation Amounts. . . . . . . . . . . . 8 7.02 Use of Benchmarks.. . . . . . . . . . . . . . . . . . 9 7.03 Components. . . . . . . . . . . . . . . . . . . . . . 9 7.04 Financial Objective Award.. . . . . . . . . . . . . . 9 7.05 Strategic Objective Award.. . . . . . . . . . . . . . 9 7.06 Exercise of Discretion. . . . . . . . . . . . . . . . 9 7.07 Notification of Award.. . . . . . . . . . . . . . . . 10 VIII. PAYMENT UPON CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . 10 8.01 Change of Control.. . . . . . . . . . . . . . . . . . 10 IX. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . 11 9.01 Other Benefit Plans.. . . . . . . . . . . . . . . . . 11 9.02 Termination of Participation; Interplan Transfer. . . 11 9.03 Future Employment.. . . . . . . . . . . . . . . . . . 11 9.04 Headings. . . . . . . . . . . . . . . . . . . . . . . 12 9.05 Gender and Number.. . . . . . . . . . . . . . . . . . 12 9.06 Governing Law.. . . . . . . . . . . . . . . . . . . . 12 9.07 Effective Date. . . . . . . . . . . . . . . . . . . . 12 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 II NEW ENGLAND ELECTRIC COMPANIES' INCENTIVE COMPENSATION PLAN III I. PURPOSE The purpose of this Incentive Compensation Plan III (the Plan) is to achieve and maintain a high level of corporate performance by making it possible for executives whose efforts and responsibilities have an influence on corporate earnings to earn compensation rewards in proportion to (i) corporate achievement of financial and strategic objectives and (ii) the executive's contribution thereto. This amendment, effective January 1, 1998, is designed to focus on the post-divestiture growth and profitability of the System. II. DEFINITIONS 2.01 Base Compensation means the compensation referred to in Section 6.01. 2.02 Beneficial Owner shall have the meaning defined in Rule 13d-3 under the Exchange Act. 2.03 Board means the Board of Directors of New England Electric System. 2.04 Bonus Award means the compensation referred to in Article VII. 2.05 Change in Control occurs when the conditions set forth in either of the following paragraphs shall have been satisfied: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of New England Electric System (not including in the securities beneficially owned by such Person any securities acquired directly from New England Electric System or its affiliates) representing 20% or more of the combined voting power of New England Electric System's then outstanding securities; or (b) during any period of not more than two consecutive years individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with New England Electric System to effect a transaction described in clause (a) of this paragraph) whose election by the Board or nomination for election by New England Electric System's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended cease for any reason to constitute a majority of the Board. 2.06 Exchange Act means the Securities Exchange Act of 1934. 2.07 Financial Objective means the same annual financial target established under Article IV of the Senior Incentive Compensation Plan for the Plan Year. 2.08 A Major Transaction shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) the shareholders of New England Electric System approve a merger or consolidation with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of New England Electric System or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization (or similar transaction) in which no Person acquires more than 20% of the combined voting power of New England Electric System's then outstanding securities; (b) the shareholders of New England Electric System approve a plan of complete liquidation thereof; or (c) the shareholder of New England Electric System approve an agreement for the sale or disposition of all or substantially all of New England Electric System's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. 2.09 Management Committee means the Chief Executive Officer of New England Electric System and the Chairman of New England Electric System. 2.10 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. 2.11 Participant means an individual who has been selected, in accordance with Section 4.01, or an equivalent prior provision, to be a participant in the Plan. 2.12 Performance Benchmarks means those standards established by the Management Committee to judge progress toward achievement of the Financial Objective and each Strategic Objective. Individual objective or subjective performance measures may also be developed for each Participant to assist in the evaluation of his or her contribution toward the corporate achievement of the Strategic Objectives assigned to the individual. 2.13 Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) New England Electric System or any subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of New England Electric System or any subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of New England Electric System in substantially the same proportions as their ownership of shares of New England Electric System. 2.14 Plan Year means a calendar year. 2.15 Senior Incentive Compensation Plan means New England Electric Companies' Senior Incentive Compensation Plan, as amended from time to time. 2.16 Strategic Objectives means the same Strategic Objectives established under Article IV of the Senior Incentive Compensation Plan for the Plan Year. 2.17 System means the New England Electric System holding company system. III. ADMINISTRATION 3.01 Administration and Interpretation. The Plan shall be administered by the Management Committee, and interpretations of the Plan by the Management Committee shall be final and binding by all parties. 3.02 Amendment or Termination. The Management Committee may amend or terminate the Plan at any time, provided that: (a) no such action shall affect any right or obligation with respect to any Bonus Award previously granted; (b) the provisions of Article VII and Sections 2.05 and 2.08 may not be amended without the written consent of any Participant affected; and (c) no amendment or termination of the Plan may be made after a Major Transaction unless the shareholders have rescinded their approval. 3.03 No Segregation of Assets; No Assignment. The New England Electric System is not required to set aside or segregate any assets of any kind to meet obligations under this Plan. A Participant has no rights under this Plan to any specific assets of the New England Electric System. A Participant may not commute, sell, assign, transfer, or otherwise convey the right to receive any payments under this Plan, which payments and the right thereto shall be, to the fullest extent permited by law, nonassignable and nontransferable, whether voluntarily or involuntarily. 3.04 Participant List. The Management Committee shall be responsible for maintaining an up-to-date list of the Participants in the Plan. 3.05 Effectuation of Interest. In the event it should become impossible for the System or the Management Committee to perform any act required by the Plan, the System or the Management Committee may perform such other act as it in good faith determines will most nearly carry out the intent and purpose of the Plan. 3.06 Accounting. The Manager of Internal Audits and the Controller will be responsible to the Management Committee for accounting matters directly affecting the Plan. IV. PARTICIPATION 4.01 Selection. The Participants in the Plan will be selected by the Senior Management. 4.02 Notification. The member of senior management to whom the Participant reports shall notify him or her of their inclusion in the Plan for the following year. 4.03 Objectives. All Participants will have the Financial Objective. Individual Participants may participate in different Strategic Objectives. Further, their Strategic Objectives may be differently weighted. The member of senior management to whom the Participant reports shall determine such objectives and weighting. Participants will be advised of their Strategic Objectives prior to the Plan Year for which they apply. V. PARTICIPANTS' COMPENSATION 5.01 Base Compensation and Incentive Compensation. The compensation for each Participant will consist of two parts: Base Compensation and Incentive Compensation. VI. BASE COMPENSATION 6.01 Performance Evaluation. A Participant's performance will be evaluated and his or her compensation, including any merit or promotional increase, will be set in accordance with the New England Electric Salary Management Program VII. INCENTIVE COMPENSATION 7.01 Incentive Compensation Amounts. When the books are closed at the end of a Plan Year, the member of senior management to whom the Participant reports will recommend to the Management Committee and the Management Committee will determine the appropriate amount to be awarded each Participant, and this money will be distributed to the Participants by the March 15 following the Plan Year. 7.02 Use of Benchmarks. Senior management and the Management Committee will use the Performance Benchmarks and individual performance measures as guides to evaluate each Participant's achievement in each area. 7.03 Components. The Bonus Award has two components: a Financial Objective Award and a Strategic Objectives Award. The targeted Strategic Objective Award is 7.5% of Base Compensation. The targeted Financial Objective Award is 4.5% of Base Compensation and the maximum Financial Objective Award is 7.5%. 7.04 Financial Objective Award. The calculation of the Financial Objective Award will parallel the calculation under the New England Electric Companies' Senior Incentive Compensation Plan. If the Financial Objective Benchmark is achieved, full targeted credit will be given for this target. The Financial Objective Bonus Award will be adjusted up or down to reflect income greater than, or less than, the Benchmark. 7.05 Strategic Objective Award. Each Participant's award shall be governed by the contribution of the Participant toward meeting his or her Strategic Objectives. The Strategic Objective Bonus Award will be adjusted downward to reflect shortfalls in Performance Benchmark achievement. 7.06 Exercise of Discretion. Senior management and the Management Committee are expected to use their judgment in evaluating performance with the Objectives and Benchmarks as standards, not cliffs. The Management Committee may reduce bonuses from those calculated by the formula if circumstances warrant. The Management Committee may also award bonuses outside those calculated by the formula. Further, the Management Committee retains the discretion, from time to time, to add or delete Strategic Objectives and adjust Benchmarks as it deems appropriate. 7.07 Notification of Award. The member of Senior Management to whom the Participant reports shall be responsible for seeing that he or she is told the basis for the size of his or her Bonus Award. VIII. PAYMENT UPON CHANGE OF CONTROL 8.01 Change of Control. In the event of a Change in Control or Major Transaction, each Participant will receive, within 30 days of the consummation of the Change in Control or of the transaction approved by the Major Transaction, a cash payment equal to the average of the bonus percentages for this Plan for the last three years for this Plan prior to the Change in Control or Major Transaction times the Participant's annualized Base Compensation. Further, if the consummation of the Change in Control or of the transaction approved by the Major Transaction occurs prior to the determination and payment of the Bonus Award for the prior Plan Year, the Participant will also receive within 30 days a cash payment equal to said percentage times the Participant's Base Compensation received in the prior Plan Year. No further benefits will be payable from this Plan. IX. GENERAL PROVISIONS 9.01 Other Benefit Plans. Bonus Awards will not be used in determining a Participant's benefits under any group insurance plan or any incentive program other than New England Electric Companies' Incentive Share Plan. Bonus Awards will be included in pension plan calculations to the extent otherwise provided in these plans. 9.02 Termination of Participation; Interplan Transfer. If, for any reason, a Participant should cease to be actively employed by a subsidiary of the New England Electric System prior to July 1 of a Plan Year, that person will not be deemed a Participant for that year, unless the member of the Management Committee determines there are extraordinary circumstances which justify inclusion. A Participant who ceases to be so actively employed during the last six months of a Plan year will be deemed a Participant for that year on a proportional basis. The Management Committee will also determine the extent, if any, of participation by the person replacing a Participant. If a Participant becomes a participant in another incentive compensation plan during the Plan Year, the Participant will be deemed to be a Participant for that year on a proportional basis in each of the Plans, respectively. 9.03 Future Employment. Neither the Plan nor the making of awards hereunder shall be construed to create any obligation to continue the Plan or to give any present or future employee any right to continued employment. 9.04 Headings. The headings of articles and sections of the Plan are for convenience of reference only. 9.05 Gender and Number. Unless the context requires otherwise, the singular shall include the plural; the masculine gender shall include the feminine; and such words as "herein," "hereinafter," "hereof," and "hereunder" shall refer to this instrument as a whole and not merely to the subdivisions in which such words appear. 9.06 Governing Law. Except as otherwise required by law, the Plan and all matters arising thereunder shall be governed by the laws of The Commonwealth of Massachusetts. 9.07 Effective Date. This Amendment shall be effective January 1, 1998. /s/ Alfred D. Houston ___________________________________ /s/ Richard P. Sergel ___________________________________ The Management Committee In accordance with votes dated November 24, 1997 and August 25, 1998 of the New England Electric System Compensation Committee EX-10 10 NEES EXHIBIT 10(S) NEW ENGLAND ELECTRIC COMPANIES' SENIOR INCENTIVE COMPENSATION PLAN Adopted - March 14, 1988 Amended - May 23, 1990 Amended - November 26, 1991 Amended - January 1, 1993 Amended - January 1, 1994 Amended - January 1, 1995 Amended - January 1, 1998 TABLE OF CONTENTS Page I. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.01 Base Compensation. . . . . . . . . . . . . . . . . . . 1 2.02 Beneficial Owner.. . . . . . . . . . . . . . . . . . . 1 2.03 Board. . . . . . . . . . . . . . . . . . . . . . . . . 1 2.04 Bonus Award. . . . . . . . . . . . . . . . . . . . . . 1 2.05 Change in Control. . . . . . . . . . . . . . . . . . . 2 2.06 Committee. . . . . . . . . . . . . . . . . . . . . . . 2 2.07 Exchange Act.. . . . . . . . . . . . . . . . . . . . . 2 2.08 Financial Objective. . . . . . . . . . . . . . . . . . 3 2.09 A Major Transaction. . . . . . . . . . . . . . . . . . 3 2.10 New England Electric System. . . . . . . . . . . . . . 4 2.11 Participant. . . . . . . . . . . . . . . . . . . . . . 4 2.12 Performance Benchmarks.. . . . . . . . . . . . . . . . 4 2.13 Person.. . . . . . . . . . . . . . . . . . . . . . . . 4 2.14 Plan Year. . . . . . . . . . . . . . . . . . . . . . . 5 2.15 Strategic Objectives.. . . . . . . . . . . . . . . . . 5 2.16 System.. . . . . . . . . . . . . . . . . . . . . . . . 5 III. ADMINISTRATION.. . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.01 Administration and Interpretation. . . . . . . . . . . 5 3.02 Amendment or Termination.. . . . . . . . . . . . . . . 5 3.03 No Segregation of Assets; No Assignment. . . . . . . . 6 3.04 Effectuation of Interes. . . . . . . . . . . . . . . . 6 IV. CORPORATE TARGETS. . . . . . . . . . . . . . . . . . . . . . . . . 6 4.01 Financial Target.. . . . . . . . . . . . . . . . . . . 6 4.02 Strategic Objectives.. . . . . . . . . . . . . . . . . 7 4.03 Use of Benchmarks. . . . . . . . . . . . . . . . . . . 7 V. BONUS AWARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.01 Components.. . . . . . . . . . . . . . . . . . . . . . 7 5.02 Financial Objective Award. . . . . . . . . . . . . . . 7 5.03 Strategic Objective Award. . . . . . . . . . . . . . . 7 5.04 Exercise of Discretion.. . . . . . . . . . . . . . . . 8 5.05 Distribution Date. . . . . . . . . . . . . . . . . . . 8 VI. BASE COMPENSATION.. . . . . . . . . . . . . . . . . . . . . . . . 8 6.01 Performance Evaluation. . . . . . . . . . . . . . . . 8 VII. PAYMENT UPON CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . 8 7.01 Change in Control.. . . . . . . . . . . . . . . . . . 8 VIII. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . 9 8.01 Other Benefit Plans.. . . . . . . . . . . . . . . . . 9 8.02 Rate Making.. . . . . . . . . . . . . . . . . . . . . 9 8.03 Future Employment. . . . . . . . . . . . . . . .. . . 9 8.04 Headings. . . . . . . . . . . . . . . . . . . . . . . 9 8.05 Gender and Number.. . . . . . . . . . . . . . . . . . 10 8.06 Governing Law.. . . . . . . . . . . . . . . . . . . . 10 8.07 Effective Date. . . . . . . . . . . . . . . . . . . . 10 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ii NEW ENGLAND ELECTRIC COMPANIES' SENIOR INCENTIVE COMPENSATION PLAN I. PURPOSE The Senior Incentive Compensation Plan (the Plan) is intended to achieve and maintain a high level of corporate performance by linking a significant component of compensation to meeting financial and strategic objectives. This amendment, effective January 1, 1998, is designed to focus efforts on the post-divestiture growth and profitability of the New England Electric System. II. DEFINITIONS 2.01 Base Compensation means the compensation referred to in Section 6.01 and includes all base salary, whether received or deferred. 2.02 Beneficial Owner shall have the meaning defined in Rule 13d-3 under the Exchange Act. 2.03 Board means the Board of Directors of New England Electric System. 2.04 Bonus Award means the compensation referred to in Article V. 2.05 Change in Control occurs when the conditions set forth in either of the following paragraphs shall have been satisfied: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of New England Electric System (not including in the securities beneficially owned by such Person any securities acquired directly from New England Electric System or its affiliates) representing 20% or more of the combined voting power of New England Electric System's then outstanding securities; or (b) during any period of not more than two consecutive years individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with New England Electric System to effect a transaction described in clause (a) of this paragraph) whose election by the Board or nomination for election by New England Electric System's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended cease for any reason to constitute a majority of the Board. 2.06 Committee means the Compensation Committee of the Board. 2.07 Exchange Act means the Securities Exchange Act of 1934. 2.08 Financial Objective means the annual financial target set by the Board in accordance with Section 4.01. 2.09 A Major Transaction shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) the shareholders of New England Electric System approve a merger or consolidation with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of New England Electric System or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization (or similar transaction) in which no Person acquires more than 20% of the combined voting power of New England Electric System's then outstanding securities; (b) the shareholders of New England Electric System approve a plan of complete liquidation thereof; or (c) the shareholder of New England Electric System approve an agreement for the sale or disposition of all or substantially all of New England Electric System's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. 2.10 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. 2.11 Participant means the Chairman and the President of New England Electric System, if they are employees of a System company, and such other individuals as the Board may select. 2.12 Performance Benchmarks means those standards established by the Committee in accordance with Sections 4.01 and 4.02 to judge progress toward achievement of the Financial Objective and each specific Strategic Objective. 2.13 Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) New England Electric System or any subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of New England Electric System or any subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of New England Electric System in substantially the same proportions as their ownership of shares of New England Electric System. 2.14 Plan Year means a calendar year. 2.15 Strategic Objectives means the goals established by the Committee in accordance with Section 4.02 to reflect the long-term goals for the continued viability and financial health of the Company. 2.16 System means the New England Electric System holding company system. III. ADMINISTRATION 3.01 Administration and Interpretation. The Plan shall be administered by the Committee, and interpretations of the Plan by the Committee shall be final and binding on all parties. 3.02 Amendment or Termination. The Board may amend or terminate the Plan at any time, provided that: (a) no such action shall affect any right or obligation with respect to any Bonus Award previously granted; (b) the provisions of Article VII and Sections 2.05 and 2.08 may not be amended without the written consent of any Participant affected; and (c) no amendment or termination of the Plan may be made after a Major Transaction unless the shareholders have rescinded their approval. 3.03 No Segregation of Assets; No Assignment. The New England Electric System is not required to set aside or segregate any assets of any kind to meet obligations under this Plan. A Participant has no rights under this Plan to any specific assets of the System. A Participant may not commute, sell, assign, transfer, or otherwise convey the right to receive any payments under this Plan, which payments and the right thereto shall be, to the fullest extent permitted by law, nonassignable and nontransferable, whether voluntarily or involuntarily. 3.04 Effectuation of Interest. In the event it should become impossible for the System, the Board, or the Compensation Committee to perform any act required by the Plan, the System, the Board, or the Compensation Committee may perform such other act as it in good faith determines will most nearly carry out the intent and purpose of the Plan. IV. CORPORATE TARGETS 4.01 Financial Target. The Board will establish a financial target for each Plan Year. This will serve as the Benchmark for the Financial Objective. 4.02 Strategic Objectives. The Compensation Committee will establish Strategic Objectives for each Plan Year and the Performance Benchmarks for each of these objectives. For Participants in this Plan, each Strategic Objective will be equally weighted. 4.03 Use of Benchmarks. The Board will use these Performance Benchmarks as guides to measure the achievement in each area. V. BONUS AWARD 5.01 Components. The Bonus Award has two components: a Financial Objective Award and a Strategic Objective Award. The targeted Strategic Objective Award is 25% of Base Compensation. The targeted Financial Objective Award is 15% of Base Compensation, and the maximum Financial Objective Award is 25%. 5.02 Financial Objective Award. If the Financial Objective Benchmark is achieved, the target credit will be given. The Financial Objective Bonus Award will be adjusted up or down to reflect results greater than, or less than, the Benchmark. 5.03 Strategic Objective Award. If each Benchmark is fully met, the maximum Strategic Objective Bonus Award will be granted. The Strategic Objective Bonus Award will be adjusted downward to reflect shortfalls in Performance Benchmark achievement. 5.04 Exercise of Discretion. The Board is expected to use its judgment in evaluating performance, with the Objectives and Benchmarks as standards, not cliffs. The Board may reduce bonuses from those calculated by the formula if circumstances warrant. The Board may also award bonuses outside those calculated by the formula. Further, the Committee retains the discretion, from time to time, to add or delete Strategic Objectives and to adjust Benchmarks as it deems appropriate. 5.05 Distribution Date. The Bonus Award shall be distributed to the Participants by the March 15 following the Plan Year. VI. BASE COMPENSATION 6.01 Performance Evaluation. A Participant's performance will be evaluated and his or her compensation, including any merit or promotional increase, will be set by the Board in accordance with the New England Electric Salary Management Program. VII. PAYMENT UPON CHANGE OF CONTROL 7.01 Change in Control. In the event of a Change in Control or a Major Transaction, each Participant will receive, within 30 days of the consummation of the Change in Control or of the transaction approved by the Major Transaction, a cash payment equal to the average of the bonus percentages for this Plan for the last three years for this Plan prior to the Change in Control or Major Transaction times the Participant's annualized Base Compensation. Further, if the consummation of the Change in Control or of the transaction approved by the Major Transaction occurs prior to the determination and payment of the Bonus Award for the prior Plan Year, the Participant will also receive within 30 days a cash payment equal to said percentage times the Participant's Base Compensation received in the prior Plan Year. No further benefits will be payable from this Plan. VIII. GENERAL PROVISIONS 8.01 Other Benefit Plans. Bonus Awards will not be used in determining a Participant's benefit under any group insurance plan or any other incentive program, other than New England Electric Companies' Incentive Share Plan. Bonus Awards will be included in pension plan calculations to the extent otherwise provided in those plans. 8.02 Rate Making. Bonus Awards shall not be included for rate-making purposes. 8.03 Future Employment. Neither the Plan nor the making of awards hereunder shall be construed to create any obligation to continue the Plan or to give any present or future employee any right to continued employment. 8.04 Headings. The headings of articles and sections of the Plan are for convenience of reference only. 8.05 Gender and Number. Unless the context requires otherwise, the singular shall include the plural; the masculine gender shall include the feminine; and such words as "herein," "hereinafter," "hereof," and "hereunder" shall refer to this instrument as a whole and not merely to the subdivisions in which such words appear. 8.06 Governing Law. Except as otherwise required by law, the Plan and all matters arising thereunder shall be governed by the laws of The Commonwealth of Massachusetts. 8.07 Effective Date. This Amendment shall be effective January 1, 1998. /s/ George M. Sage ________________________________________ Chairman, Compensation Committee Pursuant to Votes of November 25, 1997 AND September 22, 1998 of the Board of Directors EX-10 11 NEES EXHIBIT 10(T) AMENDMENT TO NEW ENGLAND ELECTRIC SYSTEM DIRECTORS DEFERRED COMPENSATION PLAN Pursuant to the provisions of Article V of the New England Electric System Directors Deferred Compensation Plan, said Plan is hereby amended effective as of December 1, 1997, as follows: Section 4.04(A) is amended to read: "4.04 Payment of Balances. (A) Election of Time of Payment. (i) At the time of electing to defer Compensation, in accordance with subsection 4.01, the Participant shall also elect whether to receive payment after ten years or upon Retirement. (ii) Six months or more prior to the scheduled commencement of payment(s) (or later if Retirement is unplanned but not after commencement of payments), a Participant, who has previously elected to receive payment upon Retirement, may request the Compensation Committee, at its sole discretion, to approve a change in the payout schedule to either a lump sum, or three, five, or ten annual payments commencing upon Retirement." Section 4.04(C) is amended to read: "(C) Payments at Retirement. If the Participant has elected payment at Retirement, the Participant's full Cash and Share Account Balances shall be paid in ten annual payments (or if the Participant has elected at the time of electing the deferral, in a lump sum or in three, five, or ten annual payments) commencing at such date." /s/ George M. Sage ________________________________________ Chairman Pursuant to Vote of November 24, 1997, of the Compensation Committee AMENDMENT TO NEW ENGLAND ELECTRIC SYSTEM DIRECTORS DEFERRED COMPENSATION PLAN Pursuant to the provisions of Article V of the New England Electric System Directors Deferred Compensation Plan, Section 4.04(G) of said Plan is hereby amended effective as of February 28, 1998, to read as follows: (G) Form of Payments. Except as provided herein, any distribution from a Cash Account will be in cash. Any distribution from a Share Account will be in the form of Shares. Transaction costs associated with the sale of Shares at the time of distribution will be reimbursed by the Company. /s/ George M. Sage __________________________________________ Chairman Pursuant to Vote of February 24, 1998, of the Compensation Committee EX-10 12 NEES EXHIBIT 10(W) Amendment to New England Electric Companies' Long-Term Performance Share Award Plan Section 3.02 is amended to read: 3.02 Amendment and Termination. The Committee may amend or terminate the Plan at any time, provided that: (a) no such action shall affect any right or obligation with respect to any Performance Shares allocated to a Participant's account; (b) the provisions of Sections 2.05, 2.10, and 5.01 may not be amended without the written consent of any Participant affected; and (c) no amendment or termination of the Plan may be made after a Major Transaction unless the shareholders have rescinded their approval. The second paragraph of Section 4.05 is amended to read: Any award will be distributed in the form of Shares. Transaction costs associated with the sale of Shares at the time of such award will be reimbursed by the Employer. Section 5.01 is amended to read: 5.01 Change in Control. In the event of a Change in Control or a Major Transaction, each Participant will receive, within 30 days of the consummation of the Change in Control or of the transaction approved by the Major Transaction, shares equal to the product of "a" times "b", where: "a" is the number of Performance Shares in the Participant's account, and "b" is (i) for performance cycles through December 31, 2000: the average of the target achievement percentages for the Incentive Compensation Plan I for the last three years prior to the consummation of the Change in Control or of the transaction approved by the Major Transaction and (ii) for performance cycles ending after December 31, 2000: the average of the goal achievements for this Plan for the last three years prior to the consummation of the Change in Control or of the transaction approved by the Major Transaction. /s/ George M. Sage ___________________________________ Chairman Pursuant to Vote of February 24, 1998 and August 25, 1998 of the Compensation Committee EX-10 13 NEES EXHIBIT 10(X) NEW ENGLAND ELECTRIC SYSTEM DIRECTORS RETIREMENT PLAN May 1, 1994 Amended December 11, 1998 New England Electric System Directors Retirement Plan TABLE OF CONTENTS Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Beneficial Owner. . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Change in Control. . . . . . . . . . . . . . . . . . . . . . . . . . 1 4. Committee.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. New England Electric System. . . . . . . . . . . . . . . . . . . . . 2 6. A Major Transaction. . . . . . . . . . . . . . . . . . . . . . . . . 2 7. Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8. Person.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9. Retainer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 10. Qualified Plan.. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 11. Quarter of Service.. . . . . . . . . . . . . . . . . . . . . . . . . 4 Plan Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. Retirement Benefit. . . . . . . . . . . . . . . . . . . . . . . . . 5 2. Form of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. Termination of Benefits. . . . . . . . . . . . . . . . . . . . . . . 5 4. No Death Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Administration and Claims. . . . . . . . . . . . . . . . . . . . . . . . . 5 Government Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Nonassignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Provisions of Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Vesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Change in Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Amendment or Discontinuance. . . . . . . . . . . . . . . . . . . . . . . . 7 Effective Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 NEW ENGLAND ELECTRIC SYSTEM DIRECTORS RETIREMENT PLAN Definitions When used in this Plan, the following words will have the meaning given below: 1. Beneficial Owner shall have the meaning defined in Rule 13d-3 under the Exchange Act. 2. Board means the Board of Directors of New England Electric System. 3. Change in Control occurs when the conditions set forth in either of the following paragraphs shall have been satisfied: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of New England Electric System (not including in the securities beneficially owned by such Person any securities acquired directly from New England Electric System or its affiliates) representing 20% or more of the combined voting power of New England Electric System's then outstanding securities; or (b) during any period of not more than two consecutive years after January 1, 1995, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with New England Electric System to effect a transaction described in clause (a) of this paragraph) whose election by the Board or nomination for election by New England Electric System's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority of the Board. 4. Committee means the Compensation Committee of the Board. 5. 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. 6. A Major Transaction shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) the shareholders of New England Electric System approve a merger or consolidation with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of New England Electric System or the surviving or succeeding entity or any parent thereof immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 20% of the combined voting power of New England Electric System's then outstanding securities; (b) the shareholders of New England Electric System approve a plan of complete liquidation thereof; or (c) the shareholder of New England Electric System approve an agreement for the sale or disposition of all or substantially all of New England Electric System's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. 7. Participant means any non-employee director of the New England Electric System. 8. Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) New England Electric System or any subsidiary thereof, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of New England Electric System or any subsidiary thereof, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of New England Electric System in substantially the same proportions as their ownership of shares of New England Electric System. 9. Retainer means the annualized cash retainer paid for service on the Board (excluding retainers for service on committees, retainers for service as an officer of a Committee or the Board, any meeting fees or expenses, and the value of shares granted under the New England Electric System Director Share Plan) determined as of the quarter immediately preceding the Participant's termination of service. 10. Qualified Plan means the New England Electric System Companies' Final Average Pay Pension Plan I. 11. Quarter of Service means a calendar quarter for all or any portion of which the Participant served as a member of the Board, excluding any quarter during which the Participant was an employee of the New England Electric System or any of its subsidiaries. Plan Benefits 1. Retirement Benefit A Participant shall be entitled to receive under this plan an annual retirement benefit (payable on a quarterly basis) equal to (a) times (b), where: (a) is the Retainer and (b) is: (i) 100%, if the Participant has 40 or more Quarters of Service, or (ii) 75%, if the Participant has 20 or more but less than 40 Quarters of Service. No retirement benefit shall be payable if the Participant has less than 20 Quarters of Service. 2. Form of Payment Retirement benefits shall be paid in cash on the first business day of each calendar quarter following the later of the Participant's termination of service or age 60. 3. Termination of Benefits Benefits shall cease at the Participant's death. 4. No Death Benefits There are no death benefits hereunder nor any retirement benefits payable to anyone other than the Participant. Administration and Claims The Committee shall have for this Plan the same powers, indemnities, and duties, including, but not limited to, the procedures for denied claims, as the benefits committee and the benefits appeal committee have for the Qualified Plan. Government Regulations It is intended that this Plan will comply with all applicable laws and governmental regulations, and the Company shall not be obligated to perform an obligation hereunder in any case where, in the opinion of the Company's counsel, such performance would result in violation of any law or regulation. Nonassignment To the fullest extent permitted by law, no benefit under the Plan, nor any other interest hereunder of any Participant, may be assigned or alienated. Provisions of Benefits This Plan will be unfunded. Benefits will be paid from the operating revenues of the Company. A Participant's rights to benefits under this Plan shall be those of an unsecured, general creditor of the Company. Vesting A Participant's accrued benefits shall be 100% vested after twenty Quarters of Service. Change in Control If a Participant's service on the Board is terminated following a Change in Control or a Major Transaction, if he or she has less than 40 quarters, he or she will receive enough additional quarters to equal 40. Amendment or Discontinuance The Committee may amend or discontinue the Plan at any time; provided that no modification shall reduce a benefit which a Participant was eligible to receive under the Plan if he or she had terminated service at the time of such amendment or discontinuance. Effective Date This Amendment shall be effective December 11, 1998. /s/ George M. Sage _________________________________________ Chairman of the Compensation Committee EX-10 14 NEES EXHIBIT 10(Y) AGREEMENT BETWEEN NEW ENGLAND ELECTRIC SYSTEM AND ___________________________ Dated November 1, 1998 TABLE OF CONTENTS Page 1. Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Term of Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Company's Covenants Summarized.. . . . . . . . . . . . . . . . . . 2 4. The Executive's Covenants. . . . . . . . . . . . . . . . . . . . . 2 5. Compensation Other Than Severance Payments.. . . . . . . . . . . . 3 6. Severance Payments.. . . . . . . . . . . . . . . . . . . . . . . . 4 7. Termination Procedures and Compensation During Dispute.. . . . . . 10 8. No Mitigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9. Successors; Binding Agreement. . . . . . . . . . . . . . . . . . . 12 10. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12. Validity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 13. Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14. Settlement of Disputes; Arbitration. . . . . . . . . . . . . . . . 15 15. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 AGREEMENT THIS AGREEMENT dated November 1, 1998, is made by and between New England Electric System, a Massachusetts business trust (the Company), and _________________ (the Executive). WHEREAS the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel; and WHEREAS the Board of Directors of the Company (the Board) recognizes that, as is the case with many publicly-held companies, the possibility of a Change in Control or a Major Transaction (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries (collectively, the System), including the Executive, to their assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a Change in Control or a Major Transaction; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 2000; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control or a Major Transaction shall have occurred prior to such January 1; provided, however, if a Change in Control or a Major Transaction shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six months beyond the month in which such Change in Control or Major Transaction occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the NEES Companies and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the NEES Companies is terminated following a Change in Control or a Major Transaction and during the term of this Agreement. The obligations of the Company hereunder shall be deemed satisfied to the extent payments are made by any NEES Company. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the NEES Companies following a Change in Control or a Major Transaction. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the NEES Companies. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control or a Potential Major Transaction during the term of this Agreement, the Executive will remain in the employ of the NEES Companies until the earliest of (i) a date which is twelve months from the date of such Potential Change of Control or Potential Major Transaction, (ii) the date of a Change in Control or a Major Transaction, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control or Potential Major Transaction as a Change in Control or a Major Transaction, as applicable, in applying the definition of Good Reason), by reason of death or Disability or Retirement, or (iv) the termination by the NEES Companies of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control or a Major Transaction and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the NEES Companies as a result of incapacity due to physical or mental illness, the Company shall provide the Executive with disability benefits equivalent to those under the Disability Insurance Plan (without regard to any amendment to such plan made subsequent to the Change in Control or Major Transaction which amendment adversely affect the Executive's rights thereunder) until the Executive's employment is terminated by the Employer for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control or a Major Transaction and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Employer during such period; except to the extent that the Executive is receiving payments with respect to such period, or a portion thereof, in accordance with Section 5.1. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control or a Major Transaction and during the term of this Agreement, the Company shall pay to the Executive the normal post-termination compensation and benefits due the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the System's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. Provided that the benefits payable to the Executive pursuant to the Standard Severance Plan for Non-Union Employees (the Severance Plan) or its successor do not exceed benefits payable to the Executive under this Agreement, the Executive hereby waives all rights to benefits pursuant to the Severance Plan. 6. Severance Payments. 6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the Severance Payments) upon the termination of the Executive's employment following a Change in Control or a Major Transaction and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Employer for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control or a Major Transaction by the Employer without cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change in Control or a Major Transaction without cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or a Major Transaction, or if the Executive terminates his employment with Good Reason prior to a Change in Control or a Major Transaction (determined by treating a Potential Change in Control or Potential Major Transaction as a Change in Control or a Major Transaction, as applicable, in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two times the sum of (i) the higher of the Executive's annual base salary in effect as of the Date of Termination or in effect immediately prior to the Change in Control or Major Transaction, and (ii) the higher of the average amount paid to the Executive pursuant to the New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Compensation Plan I, II, or III, and the New England Electric Companies' Incentive Share Plan or successors of any such plans, with respect to the three years preceding the year in which the Date of Termination occurs or the average amount paid with respect to the three years preceding the year in which the Change in Control or Major Transaction occurs. (B) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (x) the actuarial equivalent of the retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the later of age 55 or the second anniversary of the Date of Termination) which the Executive would have accrued under the terms of each such Pension Plan (without regard to any amendment to such Pension Plan made subsequent to a Change in Control or a Major Transaction, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) twenty- four additional months of service credit thereunder and had been credited under each such Pension Plan during such period with compensation at the higher of (a) Executive's compensation (as defined in such Pension Plan) during the twelve months immediately preceding the Date of Termination or (b) Executive's compensation (as defined in such Pension Plan) during the twelve months immediately preceding the Change in Control or Major Transaction, over (y) the actuarial equivalent of the retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the later of age 55 or the Date of Termination) which the Executive had accrued pursuant to the provisions of each such Pension Plan as of the Date of Termination. For purposes of this Section 6.1(B), "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the New England Electric Companies' Final Average Pay Plan I (or a successor thereto) immediately prior to the Date of Termination (without regard to any amendment of such methods and assumptions made subsequent to a Change in Control or a Major Transaction, which amendment results in a lower actuarial equivalent value). The discount rate used for the calculation of benefits hereunder shall be that used by the System for valuing the liabilities of the New England Electric Companies' Final Average Pay Plan I (or a successor thereto) immediately prior to the Date of Termination. (C) If the Executive would have become entitled to benefits under the System's post-retirement health care or life insurance plans had his employment terminated at any time during the period of twenty- four months after the Date of Termination, the Company shall arrange to provide such benefits to the Executive commencing on the later of (a) the date that such coverage would have first become available and (b) the date the benefits described in (D) below terminate. (D) For the twenty-four month period immediately following the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control or a Major Transaction which reduction constitutes Good Reason). Benefits otherwise receivable by the Executive pursuant to this Section 6.1(D) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during the twenty-four month period following the Executive's termination of employment (and any such benefits actually received by the Executive shall be reported to the Company by the Executive). If the benefits provided to the Executive under this Section 6.1(D) shall result in a decrease, pursuant to Section 6.2, in the Severance Payments and these Section 6.1(D) benefits are thereafter reduced pursuant to the immediately preceding sentence because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2, or (b) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code. 6.2 Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or a Major Transaction, or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the System, any Person whose actions result in a Change in Control or a Major Transaction or any Person affiliated with the System or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called Total Payments) would be subject (in whole or part), to the Excise Tax, then the Severance Payments shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax (after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement) if (A) the net amount of such Total Payments, as so reduced, (and after deduction of the net amount of federal, state and local income tax on such reduced Total Payments) is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments), over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the Executive receiving the greater of clauses (A) and (B) of this Section. 6.3 The payments provided for in Section 6.1 (other than Section 6.1(D)) hereof shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any termination of his employment hereunder or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control or a Major Transaction and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Change in Control or a Major Transaction and during the term of this Agreement, shall mean (i) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty-day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Employer, shall not be less than thirty days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen days nor more than sixty days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control or a Major Transaction and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the NEES Companies terminates during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement (other than in Section 6.1(D) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the System, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control or a Major Transaction, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: New England Power Service Company 25 Research Drive Westborough, MA 01582-0099 Attention: Director of Human Resources To the Executive: ______________________ ______________________ ______________________ 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty days after notification by the Board that the Executive's claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (B) "Board" shall mean the Board of Directors of the Company. (C) "Cause" for termination by the Employer of the Executive's employment, after any Change in Control or Major Transaction, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the System (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the System, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the System. (D) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (II) during any period of not more than two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (I) of this paragraph) whose election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority thereof. (E) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (F) "Company" shall mean New England Electric System and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise (except in determining, under Section 15(E) hereof, whether or not any Change in Control or Major Transaction has occurred in connection with such succession). (G) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (H) "Disability" shall be deemed the reason for the termination by the Employer of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the System for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (I) "Disability Insurance Plan" shall mean the Company Disability Insurance Plan or any successor thereto. (J) "Employer" shall mean the NEES Company by which the Executive is employed at the time of determination. (K) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (L) "Executive" shall mean the individual named in the first paragraph of this Agreement. (M) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the System, or failures by the System to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII), or (VIII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of duties substantially inconsistent with the Executive's status as an executive officer of the System; (II) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) requiring the Executive to be based at a location more than 100 miles from the town of Westborough, Massachusetts, except for required travel on the System's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Employer, to pay to the Executive any portion of the Executive's compensation within seven days of the date such compensation is due; (V) the failure by the System to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control or the Major Transaction which is material to the Executive's total compensation, including but not limited to the New England Electric Companies' Incentive Compensation Plan I, New England Electric Companies' Incentive Compensation Plan II, New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Share Plan, New England Electric Systems Companies' Deferred Compensation Plan and the New England Electric Companies' Executive Supplemental Retirement Plan or any substitute plans adopted prior to the Change in Control or Major Transaction, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the System to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not substantially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control or Major Transaction; (VI) the failure by the System to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the System's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control or the Major Transaction, the taking of any action by the System which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control or Major Transaction, or the failure by the Employer to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the NEES Companies in accordance with the Employer's normal vacation policy in effect at the time of the Change in Control or Major Transaction; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (N) A "Major Transaction" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the shareholders of the Company approve a merger or consolidation of the Company with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds (2/3) of the board of directors of the Company or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Company's then outstanding securities; or (II) the shareholders of the Company approve a plan of complete liquidation of the Company; or (III) the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. (O) "NEES Companies" shall mean all NEES Companies, collectively. (P) "NEES Company" shall mean a subsidiary of the Company. (Q) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (R) "Pension Plan" shall mean each of the plans and agreements listed in Attachment A. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any NEES Company, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any NEES Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company. (T) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities, increases such Person's beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof unless such Person has reported or is required to report such ownership (but less than 25%) on Schedule 13G under the Exchange Act (or any comparable or successor report) or on Schedule 13D under the Exchange Act (or any comparable or successor report) which Schedule 13D does not state any intention to or reserve the right to control or influence the management or policies of the Company or engage in any of the actions specified in Item 4 of such Schedule (other than the disposition of the common shares) and, within 10 business days of being requested by the Company to advise it regarding the same, certifies to the Company that such Person acquired such securities of the Company in excess of 14.9% inadvertently and who, together with its affiliates, thereafter does not acquire additional securities while the Beneficial Owner of 15% or more of the securities then outstanding; provided, however, that if the Person requested to so certify fails to do so within 10 business days, then such occurrence shall become a Potential Change in Control immediately after such 10 business day period; or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (U) "Potential Major Transaction" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Major Transaction; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Major Transaction; or (III) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Major Transaction has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Employer or the Executive of the Executive's employment if such employment is terminated in accordance with the Employer's written mandatory retirement policy, if any, as in effect immediately prior to the Change in Control or Major Transaction, or in accordance with any retirement arrangement established with the Executive's written consent with respect to the Executive. (W) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (X) "System" shall mean the Company and the NEES Companies, collectively. (Y) "Total Payments" shall mean those payments described in Section 6.2 hereof. New England Electric System By /s/ George M. Sage ______________________________________ Chairman of the Compensation Committee /s/ ______________________________________ ATTACHMENT A New England Electric System Companies' Final Average Pay Pension Plan I New England Electric Companies' Executive Supplemental Retirement Plan I AGREEMENT BETWEEN NEW ENGLAND ELECTRIC SYSTEM AND ______________________ Dated March 1, 1998 TABLE OF CONTENTS Page 1. Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Term of Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Company's Covenants Summarized . . . . . . . . . . . . . . . . . . 2 4. The Executive's Covenants; Previous Agreement. . . . . . . . . . . 2 5. Compensation Other Than Severance Payments . . . . . . . . . . . . 3 6. Severance Payments . . . . . . . . . . . . . . . . . . . . . . . . 4 7. Termination Procedures and Compensation During Dispute . . . . . . 9 8. No Mitigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9. Successors; Binding Agreement. . . . . . . . . . . . . . . . . . . 12 10. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12. Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 13. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14. Settlement of Disputes; Arbitration. . . . . . . . . . . . . . . . 14 15. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 AGREEMENT THIS AGREEMENT dated March 1, 1998, is made by and between New England Electric System, a Massachusetts business trust (the Company), and ____________________________ (the Executive). WHEREAS the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel; and WHEREAS the Board of Directors of the Company (the Board) recognizes that, as is the case with many publicly-held companies, the possibility of a Change in Control or a Major Transaction (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries (collectively, the System), including the Executive, to their assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a Change in Control or a Major Transaction; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 2000; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control or a Major Transaction shall have occurred prior to such January 1; provided, however, if a Change in Control or a Major Transaction shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six months beyond the month in which such Change in Control or Major Transaction occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the NEES Companies and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the NEES Companies is terminated following a Change in Control or a Major Transaction and during the term of this Agreement. The obligations of the Company hereunder shall be deemed satisfied to the extent payments are made by any NEES Company. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the NEES Companies following a Change in Control or a Major Transaction. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the NEES Companies. 4. The Executive's Covenants; Previous Agreement. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control or a Potential Major Transaction during the term of this Agreement, the Executive will remain in the employ of the NEES Companies until the earliest of (i) a date which is twelve months from the date of such Potential Change of Control or Potential Major Transaction, (ii) the date of a Change in Control or a Major Transaction, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control or Potential Major Transaction as a Change in Control or a Major Transaction, as applicable, in applying the definition of Good Reason), by reason of death or Disability or Retirement, or (iv) the termination by the NEES Companies of the Executive's employment for any reason. The Executive and the Company agree that their prior agreement dated February 28, 1995, is terminated effective as of the date hereof. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control or a Major Transaction and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the NEES Companies as a result of incapacity due to physical or mental illness, the Company shall provide the Executive with disability benefits equivalent to those under the Disability Insurance Plan (without regard to any amendment to such plan made subsequent to the Change in Control or Major Transaction which amendment adversely affect the Executive's rights thereunder) until the Executive's employment is terminated by the Employer for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control or a Major Transaction and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Employer during such period; except to the extent that the Executive is receiving payments with respect to such period, or a portion thereof, in accordance with Section 5.1. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control or a Major Transaction and during the term of this Agreement, the Company shall pay to the Executive the normal post-termination compensation and benefits due the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the System's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. Provided that the benefits payable to the Executive pursuant to the Standard Severance Plan for Non-Union Employees (the Severance Plan) or its successor do not exceed benefits payable to the Executive under this Agreement, the Executive hereby waives all rights to benefits pursuant to the Severance Plan. 6. Severance Payments. 6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the Severance Payments) upon the termination of the Executive's employment following a Change in Control or a Major Transaction and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Employer for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control or a Major Transaction by the Employer without cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change in Control or a Major Transaction without cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or a Major Transaction, or if the Executive terminates his employment with Good Reason prior to a Change in Control or a Major Transaction (determined by treating a Potential Change in Control or Potential Major Transaction as a Change in Control or a Major Transaction, as applicable, in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the higher of the Executive's annual base salary in effect as of the Date of Termination or in effect immediately prior to the Change in Control or Major Transaction, and (ii) the higher of the average amount paid to the Executive pursuant to the New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Compensation Plan I, II, or III, and New England Electric Companies' Incentive Share Plan or successors of any such plans, with respect to the three years preceding the year in which the Date of Termination occurs or the average amount paid with respect to the three years preceding the year in which the Change in Control or Major Transaction occurs. (B) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (x) the actuarial equivalent of the retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the later of age 55 or the third anniversary of the Date of Termination) which the Executive would have accrued under the terms of each such Pension Plan (without regard to any amendment to such Pension Plan made subsequent to a Change in Control or a Major Transaction, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty- six additional months of service credit thereunder and had been credited under each such Pension Plan during such period with compensation at the higher of (a) Executive's compensation (as defined in such Pension Plan) during the twelve months immediately preceding the Date of Termination or (b) Executive's compensation (as defined in such Pension Plan) during the twelve months immediately preceding the Change in Control or Major Transaction, over (y) the actuarial equivalent of the retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the later of age 55 or the Date of Termination) which the Executive had accrued pursuant to the provisions of each such Pension Plan as of the Date of Termination. For purposes of this Section 6.1(B), "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the New England Electric Companies' Final Average Pay Plan I (or a successor thereto) immediately prior to the Date of Termination (without regard to any amendment of such methods and assumptions made subsequent to a Change in Control or a Major Transaction, which amendment results in a lower actuarial equivalent value). The discount rate used for the calculation of benefits hereunder shall be that used by the System for valuing the liabilities of the New England Electric Companies' Final Average Pay Plan I (or a successor thereto) immediately prior to the Date of Termination. (C) If the Executive would have become entitled to benefits under the System's post-retirement health care or life insurance plans had his employment terminated at any time during the period of thirty- six months after the Date of Termination, the Company shall arrange to provide such benefits to the Executive commencing on the later of (a) the date that such coverage would have first become available and (b) the date the benefits described in (D) below terminate. (D) For the thirty-six month period immediately following the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control or a Major Transaction which reduction constitutes Good Reason). Benefits otherwise receivable by the Executive pursuant to this Section 6.1(D) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during the thirty-six month period following the Executive's termination of employment (and any such benefits actually received by the Executive shall be reported to the Company by the Executive). If the benefits provided to the Executive under this Section 6.1(D) shall result in a decrease, pursuant to Section 6.2, in the Severance Payments and these Section 6.1(D) benefits are thereafter reduced pursuant to the immediately preceding sentence because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2, or (b) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code. 6.2 Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or a Major Transaction, or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the System, any Person whose actions result in a Change in Control or a Major Transaction or any Person affiliated with the System or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called Total Payments) would be subject (in whole or part), to the Excise Tax, then the Severance Payments shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax (after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement) if (A) the net amount of such Total Payments, as so reduced, (and after deduction of the net amount of federal, state and local income tax on such reduced Total Payments) is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments), over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the Executive receiving the greater of clauses (A) and (B) of this Section. 6.3 The payments provided for in Section 6.1 (other than Section 6.1(D)) hereof shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any termination of his employment hereunder or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control or a Major Transaction and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Change in Control or a Major Transaction and during the term of this Agreement, shall mean (i) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty-day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Employer, shall not be less than thirty days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen days nor more than sixty days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control or a Major Transaction and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the NEES Companies terminates during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement (other than in Section 6.1(D) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the System, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control or a Major Transaction, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: New England Power Service Company 25 Research Drive Westborough, MA 01582-0099 Attention: Director of Human Resources To the Executive: ___________________________ ___________________________ ___________________________ 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty days after notification by the Board that the Executive's claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Base Amount" shall have the meaning defined in section 280G(b)(3) of the Code. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Cause" for termination by the Employer of the Executive's employment, after any Change in Control or Major Transaction, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the System (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the System, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the System. (E) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (II) during any period of not more than two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (I) of this paragraph) whose election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority thereof. (F) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (G) "Company" shall mean New England Electric System and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise (except in determining, under Section 15(E) hereof, whether or not any Change in Control or Major Transaction has occurred in connection with such succession). (H) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (I) "Disability" shall be deemed the reason for the termination by the Employer of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the System for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (J) "Disability Insurance Plan" shall mean the Company Disability Insurance Plan or any successor thereto. (K) "Employer" shall mean the NEES Company by which the Executive is employed at the time of determination. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the System, or failures by the System to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII), or (VIII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of duties substantially inconsistent with the Executive's status as an executive officer of the System; (II) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) requiring the Executive to be based at a location more than 100 miles from the town of Westborough, Massachusetts, except for required travel on the System's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Employer, to pay to the Executive any portion of the Executive's compensation within seven days of the date such compensation is due; (V) the failure by the System to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control or the Major Transaction which is material to the Executive's total compensation, including but not limited to the New England Electric Companies' Incentive Compensation Plan I, New England Electric Companies' Incentive Compensation Plan II, New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Share Plan, New England Electric Systems Companies' Deferred Compensation Plan and the New England Electric Companies' Executive Supplemental Retirement Plan or any substitute plans adopted prior to the Change in Control or Major Transaction, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the System to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not substantially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control or Major Transaction; (VI) the failure by the System to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the System's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control or the Major Transaction, the taking of any action by the System which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control or Major Transaction, or the failure by the Employer to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the NEES Companies in accordance with the Employer's normal vacation policy in effect at the time of the Change in Control or Major Transaction; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (P) A "Major Transaction" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the shareholders of the Company approve a merger or consolidation of the Company with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds (2/3) of the board of directors of the Company or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Company's then outstanding securities; or (II) the shareholders of the Company approve a plan of complete liquidation of the Company; or (III) the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. (Q) "NEES Companies" shall mean all NEES Companies, collectively. (R) "NEES Company" shall mean a subsidiary of the Company. (S) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (T) "Pension Plan" shall mean each of the plans and agreements listed in Attachment A. (U) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any NEES Company, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any NEES Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company. (V) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities, increases such Person's beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof unless such Person has reported or is required to report such ownership (but less than 25%) on Schedule 13G under the Exchange Act (or any comparable or successor report) or on Schedule 13D under the Exchange Act (or any comparable or successor report) which Schedule 13D does not state any intention to or reserve the right to control or influence the management or policies of the Company or engage in any of the actions specified in Item 4 of such Schedule (other than the disposition of the common shares) and, within 10 business days of being requested by the Company to advise it regarding the same, certifies to the Company that such Person acquired such securities of the Company in excess of 14.9% inadvertently and who, together with its affiliates, thereafter does not acquire additional securities while the Beneficial Owner of 15% or more of the securities then outstanding; provided, however, that if the Person requested to so certify fails to do so within 10 business days, then such occurrence shall become a Potential Change in Control immediately after such 10 business day period; or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (W) "Potential Major Transaction" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Major Transaction; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Major Transaction; or (III) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Major Transaction has occurred. (X) "Retirement" shall be deemed the reason for the termination by the Employer or the Executive of the Executive's employment if such employment is terminated in accordance with the Employer's written mandatory retirement policy, if any, as in effect immediately prior to the Change in Control or Major Transaction, or in accordance with any retirement arrangement established with the Executive's written consent with respect to the Executive. (Y) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (Z) "System" shall mean the Company and the NEES Companies, collectively. (AA) "Total Payments" shall mean those payments described in Section 6.2 hereof. New England Electric System By Chairman of the Compensation Committee /s/ _____________________________________ ATTACHMENT A New England Electric System Companies' Final Average Pay Pension Plan I New England Electric Companies' Executive Supplemental Retirement Plan I EX-10 15 NEES EXHIBIT 10(BB) AGREEMENT BETWEEN NEW ENGLAND ELECTRIC SYSTEM AND RICHARD P. SERGEL Dated March 1, 1998 TABLE OF CONTENTS Page 1. Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Term of Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Company's Covenants Summarized . . . . . . . . . . . . . . . . . . 2 4. The Executive's Covenants; Previous Agreement. . . . . . . . . . . 2 5. Compensation Other Than Severance Payments . . . . . . . . . . . . 3 6. Severance Payments . . . . . . . . . . . . . . . . . . . . . . . . 4 7. Termination Procedures and Compensation During Dispute . . . . . . 11 8. No Mitigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9. Successors; Binding Agreement. . . . . . . . . . . . . . . . . . . 14 10. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 12. Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 14. Settlement of Disputes; Arbitration. . . . . . . . . . . . . . . . 16 15. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 AGREEMENT THIS AGREEMENT dated March 1, 1998, is made by and between New England Electric System, a Massachusetts business trust (the Company), and Richard P. Sergel (the Executive). WHEREAS the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel; and WHEREAS the Board of Directors of the Company (the Board) recognizes that, as is the case with many publicly-held companies, the possibility of a Change in Control or a Major Transaction (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries (collectively, the System), including the Executive, to their assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a Change in Control or a Major Transaction; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 2000; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control or a Major Transaction shall have occurred prior to such January 1; provided, however, if a Change in Control or a Major Transaction shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of thirty-six months beyond the month in which such Change in Control or Major Transaction occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the NEES Companies and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the NEES Companies is terminated following a Change in Control or a Major Transaction and during the term of this Agreement. The obligations of the Company hereunder shall be deemed satisfied to the extent payments are made by any NEES Company. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the NEES Companies following a Change in Control or a Major Transaction. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the NEES Companies. 4. The Executive's Covenants; Previous Agreement. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control or a Potential Major Transaction during the term of this Agreement, the Executive will remain in the employ of the NEES Companies until the earliest of (i) a date which is twelve months from the date of such Potential Change of Control or Potential Major Transaction, (ii) the date of a Change in Control or a Major Transaction, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control or Potential Major Transaction as a Change in Control or a Major Transaction, as applicable, in applying the definition of Good Reason), by reason of death or Disability or Retirement, or (iv) the termination by NEES Companies of the Executive's employment for any reason. The Executive and the Company agree that their prior agreement dated February 28, 1995, is terminated effective as of the date hereof. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control or a Major Transaction and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the NEES Companies as a result of incapacity due to physical or mental illness, the Company shall provide the Executive with disability benefits equivalent to those under the Disability Insurance Plan (without regard to any amendment to such plan made subsequent to the Change in Control or Major Transaction which amendment adversely affect the Executive's rights thereunder) until the Executive's employment is terminated by the Employer for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control or a Major Transaction and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Employer during such period; except to the extent that the Executive is receiving payments with respect to such period, or a portion thereof, in accordance with Section 5.1. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control or a Major Transaction and during the term of this Agreement, the Company shall pay to the Executive the normal post-termination compensation and benefits due the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the System's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. Provided that the benefits payable to the Executive pursuant to the Standard Severance Plan for Non-Union Employees (the Severance Plan) or its successor do not exceed benefits payable to the Executive under this Agreement, the Executive hereby waives all rights to benefits pursuant to the Severance Plan. 6. Severance Payments. 6.1 Subject to Section 6.2(b), the Company shall pay the Executive the payments described in this Section 6.1 (the Severance Payments) upon the termination of the Executive's employment following a Change in Control or a Major Transaction and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Employer for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control or a Major Transaction by the Employer without cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change in Control or a Major Transaction without cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or a Major Transaction, or if the Executive terminates his employment with Good Reason prior to a Change in Control or a Major Transaction (determined by treating a Potential Change in Control or Potential Major Transaction as a Change in Control or a Major Transaction, as applicable, in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the higher of the Executive's annual base salary in effect as of the Date of Termination or in effect immediately prior to the Change in Control or Major Transaction, and (ii) the higher of the average amount paid to the Executive pursuant to the New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Compensation Plan I, II, or III, and New England Electric Companies Incentive Share Plan or successors of any such plans, with respect to the three years preceding the year in which the Date of Termination occurs or the average amount paid with respect to the three years preceding the year in which the Change in Control or Major Transaction occurs. (B) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (x) the actuarial equivalent of the retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the later of age 55 or the third anniversary of the Date of Termination) which the Executive would have accrued under the terms of each such Pension Plan (without regard to any amendment to such Pension Plan made subsequent to a Change in Control or a Major Transaction, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty- six additional months of service credit thereunder and had been credited under each such Pension Plan during such period with compensation at the higher of (a) Executive's compensation (as defined in such Pension Plan) during the twelve months immediately preceding the Date of Termination or (b) Executive's compensation (as defined in such Pension Plan) during the twelve months immediately preceding the Change in Control or Major Transaction, over (y) the actuarial equivalent of the retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the later of age 55 or the Date of Termination) which the Executive had accrued pursuant to the provisions of each such Pension Plan as of the Date of Termination. For purposes of this Section 6.1(B), "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the New England Electric Companies' Final Average Pay Plan I (or a successor thereto) immediately prior to the Date of Termination (without regard to any amendment of such methods and assumptions made subsequent to a Change in Control or a Major Transaction, which amendment results in a lower actuarial equivalent value). The discount rate used for the calculation of benefits hereunder shall be that used by the System for valuing the liabilities of the New England Electric Companies' Final Average Pay Plan I (or a successor thereto) immediately prior to the Date of Termination. (C) If the Executive would have become entitled to benefits under the System's post-retirement health care or life insurance plans had his employment terminated at any time during the period of thirty-six months after the Date of Termination, the Company shall pay such benefits to the Executive commencing on the later of (a) the date that such coverage would have first become available and (b) the date the benefits described in (D) below terminate. (D) For the thirty-six month period immediately following the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control or a Major Transaction which reduction constitutes Good Reason). Benefits otherwise receivable by the Executive pursuant to this Section 6.1(D) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during the thirty-six month period following the Executive's termination of employment (and any such benefits actually received by the Executive shall be reported to the Company by the Executive). If the benefits provided to the Executive under this Section 6.1(D) shall result in a decrease, pursuant to Section 6.2(b), in the Severance Payments and these Section 6.1(D) benefits are thereafter reduced pursuant to the immediately preceding sentence because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2, or (b) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code. 6.2 (a) In the event that the Executive becomes entitled to the Severance Payments prior to February 1, 2001, if any of the Severance Payments will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the Gross-Up Payment) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Severance Payments and any Federal, state and local income tax and Excise Tax upon the payment provided for by this Section 6.2(a), shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by the Executive in connection with a Change in Control or a Major Transaction, or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the System, any Person whose actions result in a Change in Control or a Major Transaction or any Person affiliated with the System or such Person) shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, (ii) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Severance Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(l) of the Code (after applying clause (i), above), and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Executive's employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a Federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (b) In the event the Executive becomes entitled to the Severance Payments on February 1, 2001, or thereafter, and in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or a Major Transaction, or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the System, any Person whose actions result in a Change in Control or a Major Transaction or any Person affiliated with the System or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called Total Payments) would be subject (in whole or part), to the Excise Tax, then the Severance Payments shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax (after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement) if (A) the net amount of such Total Payments, as so reduced, (and after deduction of the net amount of Federal, state and local income tax on such reduced Total Payments) is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of Federal, state and local income tax on such Total Payments), over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the Executive receiving the greater of clauses (A) and (B) of this Section. 6.3 The payments provided for in Section 6.1 (other than Sections 6.1(D) and 6.2(a)) hereof shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments, or any limitation on such payments set forth in Section 6.2(b) hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any termination of his employment hereunder or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control or a Major Transaction and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Change in Control or a Major Transaction and during the term of this Agreement, shall mean (i) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty-day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Employer, shall not be less than thirty days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen days nor more than sixty days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control or a Major Transaction and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the NEES Companies terminates during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement (other than in Section 6.1(D) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the System, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control or a Major Transaction, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: New England Power Service Company 25 Research Drive Westborough, MA 01582-0099 Attention: Director of Human Resources To the Executive: Richard P. Sergel 34 Brook Street Wellesley, MA 02181 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under Federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty days after notification by the Board that the Executive's claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Base Amount" shall have the meaning defined in section 280G(b)(3) of the Code. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Cause" for termination by the Employer of the Executive's employment, after any Change in Control or Major Transaction, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the System (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the System, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the System. (E) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (II) during any period of not more than two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (I) of this paragraph) whose election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute a majority thereof. (F) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (G) "Company" shall mean New England Electric System and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise (except in determining, under Section 15(E) hereof, whether or not any Change in Control or Major Transaction has occurred in connection with such succession). (H) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (I) "Disability" shall be deemed the reason for the termination by the Employer of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the System for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (J) "Disability Insurance Plan" shall mean the Company Disability Insurance Plan or any successor thereto. (K) "Employer" shall mean the NEES Company by which the Executive is employed at the time of determination. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the System, or failures by the System to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII), or (VIII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of duties substantially inconsistent with the Executive's status as an executive officer of the System; (II) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) requiring the Executive to be based at a location more than 100 miles from the town of Westborough, Massachusetts, except for required travel on the System's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Employer, to pay to the Executive any portion of the Executive's compensation within seven days of the date such compensation is due; (V) the failure by the System to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control or the Major Transaction which is material to the Executive's total compensation, including but not limited to the New England Electric Companies' Incentive Compensation Plan I, New England Electric Companies' Incentive Compensation Plan II, New England Electric Companies' Senior Incentive Compensation Plan, New England Electric Companies' Incentive Share Plan, New England Electric Systems Companies' Deferred Compensation Plan and the New England Electric Companies' Executive Supplemental Retirement Plan or any substitute plans adopted prior to the Change in Control or Major Transaction, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the System to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not substantially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control or Major Transaction; (VI) the failure by the System to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the System's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control or the Major Transaction, the taking of any action by the System which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control or Major Transaction, or the failure by the Employer to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the NEES Companies in accordance with the Employer's normal vacation policy in effect at the time of the Change in Control or Major Transaction; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (P) "Gross-Up Payment" shall have the meaning given in Section 6.2(a) hereof. (Q) A "Major Transaction" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the shareholders of the Company approve a merger or consolidation of the Company with any corporation or business trust, other than (i) a merger or consolidation which would result in the individuals who prior to such merger or consolidation constitute the Board constituting at least two-thirds of the board of directors of the Company or the surviving or succeeding entity immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Company's then outstanding securities; or (II) the shareholders of the Company approve a plan of complete liquidation of the Company; or (III) the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, other than a sale or disposition which would result in the individuals who prior to such sale or disposition constitute the Board constituting at least two-thirds of the board of directors of the Person purchasing such assets immediately after such sale or disposition. (R) "NEES Companies" shall mean all NEES Companies, collectively. (S) "NEES Company" shall mean a subsidiary of the Company. (T) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (U) "Pension Plan" shall mean each of the plans and agreements listed in Attachment A. (V) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any NEES Company, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any NEES Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company. (W) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities, increases such Person's beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof unless such Person has reported or is required to report such ownership (but less than 25%) on Schedule 13G under the Exchange Act (or any comparable or successor report) or on Schedule 13D under the Exchange Act (or any comparable or successor report) which Schedule 13D does not state any intention to or reserve the right to control or influence the management or policies of the Company or engage in any of the actions specified in Item 4 of such Schedule (other than the disposition of the common shares) and, within 10 business days of being requested by the Company to advise it regarding the same, certifies to the Company that such Person acquired such securities of the Company in excess of 14.9% inadvertently and who, together with its affiliates, thereafter does not acquire additional securities while the Beneficial Owner of 15% or more of the securities then outstanding; provided, however, that if the Person requested to so certify fails to do so within 10 business days, then such occurrence shall become a Potential Change in Control immediately after such 10 business day period; or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (X) "Potential Major Transaction" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Major Transaction; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Major Transaction; or (III) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Major Transaction has occurred. (Y) "Retirement" shall be deemed the reason for the termination by the Employer or the Executive of the Executive's employment if such employment is terminated in accordance with the Employer's written mandatory retirement policy, if any, as in effect immediately prior to the Change in Control or Major Transaction, or in accordance with any retirement arrangement established with the Executive's written consent with respect to the Executive. (Z) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (AA) "System" shall mean the Company and the NEES Companies, collectively. (BB) "Total Payments" shall mean those payments described in Section 6.2 hereof. New England Electric System By /s/ George M. Sage _______________________________________ Chairman of the Compensation Committee /s/ Richard P. Sergel _________________________________________ ATTACHMENT A New England Electric System Companies' Final Average Pay Pension Plan I New England Electric Companies' Executive Supplemental Retirement Plan EX-10 16 NEES EXHIBIT 10(II) AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated this 31st day of December, 1998, pursuant to Section 18-209 of the Delaware Limited Liability Company Act and Section 59 of the Massachusetts Limited Liability Company Act, between AllEnergy Marketing Company, L.L.C., a Massachusetts limited liability company having its principal place of business at 3 University Office Park, 95 Sawyer Road, Waltham, Massachusetts 02154 (the "Company"), and AllEnergy Marketing Company, L.L.C., a Delaware limited liability company having its principal place of business at 3 University Office Park, 95 Sawyer Road, Waltham, Massachusetts 02154 (the "Surviving Company"). WITNESSETH: WHEREAS, the Company is a limited liability company duly organized and existing under the laws of the Commonwealth of Massachusetts; WHEREAS, the Surviving Company is a limited liability company duly organized and existing under the laws of the State of Delaware; WHEREAS, the Company desires to merge itself into the Surviving Company; WHEREAS, the Surviving Company desires that the Company be merged into the Surviving Company; and WHEREAS, the Members of the Company and the Surviving Company have adopted a resolution approving this Agreement and Plan of Merger; NOW THEREFORE, in consideration of the foregoing premises and the undertakings herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Merger. The Company shall be merged into the Surviving Company pursuant to Section 18-209 of the Delaware Limited Liability Company Act and Section 59 of the Massachusetts Limited Liability Company Act. The Surviving Company shall survive the merger herein contemplated and shall continue to be governed by the laws of the State of Delaware. The separate existence of the Company shall cease forthwith upon the Effective Date (as defined below). The merger of the Company into the Surviving Company shall herein be referred to as the "Merger." 2. Member Approval. Concurrently with the execution of this Agreement and Plan of Merger, this Agreement and Plan of Merger has been approved (i) by the members of the Company in accordance with the Limited Liability Company Agreement of the Company and Section 60 of the Massachusetts Limited Liability Company Act, and (ii) by the members of the Surviving Company in accordance with Section 18-209(b) of the Delaware Limited Liability Company Act. 3. Effective Date. The Merger shall be effective at 11:59 p.m. on the date specified in a Certificate of Merger to be filed with the Secretary of State of the State of Delaware and a Certificate of Merger to be filed with the Secretary of State of Massachusetts, which filings shall be made as soon as practicable after all required stockholder approvals and other consents and approvals have been obtained. The time of such effectiveness shall herein be referred to as the "Effective Date." 4. Membership Interests in the Company. On the Effective Date, by virtue of the Merger and without any action on the part of the holders thereof, (i) all of the membership interests in the Company held by NEES Energy, Inc. shall be exchanged for 100% of the outstanding membership interest in the Surviving Company, and (ii) all of the membership interests in the Company held by NEES Global, Inc. shall be converted into the right to receive $160,016 in cash, to be paid by the Surviving Company promptly following the Effective Date. NEES Energy, Inc. and NEES Global, Inc. together constitute the holders of all of the membership interests in the Company. 5. Membership Interests in the Surviving Company. On the Effective Date, by virtue of the Merger and without any action on the part of the holder thereof, each membership interest in the Surviving Company existing immediately prior thereto shall be cancelled. 6. Succession. On the Effective Date, the Surviving Company shall succeed to all of the rights, privileges, debts, liabilities, powers and property of the Company in the manner of and as more fully set forth in Section 18-209 of the Delaware Limited Liability Company Act and Section 62 of the Massachusetts Limited Liability Company Act. Without limiting the foregoing, upon the Effective Date, all property, rights, privileges, franchises, patents, trademarks, licenses, registrations, and other assets of every kind and description of the Company shall be transferred to, vested in and devolved upon the Surviving Company without further act or deed and all property, rights, and every other interest of the Company and the Surviving Company shall be as effectively the property of the Surviving Company as they were of the Company and the Surviving Company, respectively. All rights of creditors of the Company and all liens upon any property of the Company shall be preserved unimpaired, and all debts, liabilities and duties of the Company shall attach to the Surviving Company and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. 7. Limited Liability Company Agreement. On the Effective Date, (i) the Limited Liability Company Agreement of the Company, dated as of December 3, 1997 and as amended to date, shall be terminated and shall be of no further force or effect and (ii) the Limited Liability Company Agreement attached hereto as Exhibit A shall become the Limited Liability Company Agreement of the Surviving Company, and such Limited Liability Company Agreement is hereby adopted effective as of the Effective Date. 8. Officers. The officers of the Company on the Effective Date shall become the officers of the Surviving Company on the Effective Date and shall continue in office until the expiration of their respective terms of office and until their successors have been elected and qualified. 9. Further Assurances. From time to time, as and when required by the Surviving Company or by its successors and assigns, there shall be executed and delivered on behalf of the Company such deeds and other instruments, and there shall be taken or caused to be taken by it such further and other action, as shall be appropriate or necessary in order to vest or perfect in or to confirm of record or otherwise in the Surviving Company the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of the Company, and otherwise to carry out the purposes of this Agreement and Plan of Merger, and the officers and directors of the Company are fully authorized in the name and on behalf of the Company or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 10. Abandonment. At any time prior to the Effective Date, this Agreement and Plan of Merger may be terminated and the Merger may be abandoned by the Members of either the Company or the Surviving Company or both, notwithstanding their prior approval of this Agreement and Plan of Merger. 11. Amendment. This Agreement and Plan of Merger may be amended by the members of the Company and the Surviving Company at any time prior to the Effective Date. 12. Governing Law. This Agreement and Plan of Merger and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of Delaware. 13. Counterparts. In order to facilitate the filing and recording of this Agreement and Plan of Merger, the same may be executed in any number of counterparts, each of which shall be deemed to be an original. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement and Plan of Merger to be executed and attested on its behalf by its officers thereunto duly authorized, as of the date first above written. THE COMPANY: ALLENERGY MARKETING COMPANY, L.L.C. (a Massachusetts limited liability company) By:_________________________________ Marcy L. Reed Vice President and Treasurer THE SURVIVING COMPANY: ALLENERGY MARKETING COMPANY, L.L.C. (a Delaware limited liability company) By:________________________________ Marcy L. Reed Vice President and Treasurer EXHIBIT A LIMITED LIABILITY COMPANY AGREEMENT ALLENERGY MARKETING COMPANY, L.L.C. LIMITED LIABILITY COMPANY AGREEMENT Dated as of ____________ __, 1998 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 FORMATION AND PURPOSE. . . . . . . . . . . . . . . . . . . . 1 2.1 Rights, Duties, etc.. . . . . . . . . . . . . . . . . 1 2.2 Name. . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Registered Office/Agent . . . . . . . . . . . . . . . 2 2.4 Term. . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Purpose . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 Powers. . . . . . . . . . . . . . . . . . . . . . . . 2 2.7 Filing of Certificate . . . . . . . . . . . . . . . . 4 2.8 Foreign Qualification . . . . . . . . . . . . . . . . 4 ARTICLE 3 MEMBERSHIP AND CAPITAL4 3.1 Members Initial Capital Contributions . . . . . . . . 4 3.2 Maintenance of Capital Accounts . . . . . . . . . . . 5 3.3 Percentage Interests. . . . . . . . . . . . . . . . . 5 3.4 Additional Capital Contributions. . . . . . . . . . . 5 3.5 Return of Capital Contributions . . . . . . . . . . . 6 3.6 Additional Members; New Issuances; Classes of Members 6 ARTICLE 4 STATUS AND RIGHTS OF MEMBERS . . . . . . . . . . . . . . . . 6 4.1 Limited Liability . . . . . . . . . . . . . . . . . . 6 4.2 No Make Up. . . . . . . . . . . . . . . . . . . . . . 7 4.3 Return of Distributions . . . . . . . . . . . . . . . 7 4.4 Specific Limitations. . . . . . . . . . . . . . . . . 7 4.5 Hiring of Company Employees . . . . . . . . . . . . . 8 4.6 Confidential Information. . . . . . . . . . . . . . . 8 4.7 Remedies. . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 5 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.1 Management by the Members . . . . . . . . . . . . . . 10 5.2 Meetings of Members; Consents . . . . . . . . . . . . 11 5.3 Place of Meetings . . . . . . . . . . . . . . . . . . 11 5.4 Notice of Meetings. . . . . . . . . . . . . . . . . . 11 5.5 Meeting of All Members. . . . . . . . . . . . . . . . 11 5.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . 11 5.7 Voting by Percentage Interests; Voting Thresholds . . 11 5.8 Representatives and Proxies . . . . . . . . . . . . . 11 5.9 Conference Telephone. . . . . . . . . . . . . . . . . 12 5.10 Action by Members Without a Meeting . . . . . . . . . 12 5.11 Waiver of Notice. . . . . . . . . . . . . . . . . . . 12 5.12 Advisory Board. . . . . . . . . . . . . . . . . . . . 12 5.13 Duties and Authority of the Members . . . . . . . . . 12 5.14 Officers: Authority . . . . . . . . . . . . . . . . . 13 5.15 Transactions with Affiliates; Exclusive Supply Arrangements . . . . . . . . . . . . 14 ARTICLE 6 BUSINESS PLAN: BUDGET. . . . . . . . . . . . . . . . . . . . 14 6.1 Business Plan . . . . . . . . . . . . . . . . . . . . 14 6.2 Annual Budget . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 7 DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS . . . . . . 15 7.1 Distributions . . . . . . . . . . . . . . . . . . . . 15 7.2 Allocations of Net Profits. . . . . . . . . . . . . . 16 7.3 Allocation of Net Losses. . . . . . . . . . . . . . . 16 7.4 Other Allocation Provisions . . . . . . . . . . . . . 16 7.5 Changes in Members' Interests . . . . . . . . . . . . 17 7.6 Tax Allocations . . . . . . . . . . . . . . . . . . . 17 7.7 Tax Credits . . . . . . . . . . . . . . . . . . . . . 18 7.8 Adjustment of Capital Accounts. . . . . . . . . . . . 18 7.9 Interpretation. . . . . . . . . . . . . . . . . . . . 18 7.10 Loans to Company. . . . . . . . . . . . . . . . . . . 19 ARTICLE 8 TAX MATTERS MEMBER . . . . . . . . . . . . . . . . . . . . . 19 8.1 Tax Matters Member. . . . . . . . . . . . . . . . . . 19 8.2 Indemnity of Tax Matters Member . . . . . . . . . . . 19 8.3 Information Furnished . . . . . . . . . . . . . . . . 19 8.4 Notice of Proceedings. etc. . . . . . . . . . . . . . 19 8.5 Notices to Tax Matters Member . . . . . . . . . . . . 20 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING, AND REPORTS. . . . . . . . . . . 20 9.1 Books and Records . . . . . . . . . . . . . . . . . . 20 9.2 Delivery to Members; Inspection . . . . . . . . . . . 20 9.3 Financial Statements. . . . . . . . . . . . . . . . . 21 9.4 Filings . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 10 AMENDMENTS TO AGREEMENT . . . . . . . . . . . . . . . . . . 21 10.1 Amendments. . . . . . . . . . . . . . . . . . . . . . 21 10.2 Filings . . . . . . . . . . . . . . . . . . . . . . . 22 10.3 Binding Effect. . . . . . . . . . . . . . . . . . . . 22 ARTICLE 11 DISSOLUTION OF COMPANY. . . . . . . . . . . . . . . . . . . 22 11.1 Termination of Membership . . . . . . . . . . . . . . 22 11.2 Events of Dissolution or Liquidation. . . . . . . . . 22 11.3 Liquidation . . . . . . . . . . . . . . . . . . . . . 23 11.4 Distributions to Members. . . . . . . . . . . . . . . 23 11.5 No Action for Dissolution . . . . . . . . . . . . . . 23 11.6 No Further Claim. . . . . . . . . . . . . . . . . . . 23 ARTICLE 12 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . 24 12.1 General . . . . . . . . . . . . . . . . . . . . . . . 24 12.2 Persons Entitled to Indemnity . . . . . . . . . . . . 24 12.3 Procedure Agreements. . . . . . . . . . . . . . . . . 25 12.4 Extent of Duties. . . . . . . . . . . . . . . . . . . 25 12.5 Fiduciary and Other Duties. . . . . . . . . . . . . . 25 ARTICLE 13 REPRESENTATIONS AND COVENANTS BY THE MEMBERS. . . . . . . . 26 13.1 Organization; Corporate Authority . . . . . . . . . . 26 13.2 Legal, Valid and Binding Obligation . . . . . . . . . 26 13.3 Investment Intent . . . . . . . . . . . . . . . . . . 27 13.4 Securities Regulation . . . . . . . . . . . . . . . . 27 13.5 Information . . . . . . . . . . . . . . . . . . . . . 27 13.6 Tax Position. . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 14 COMPANY REPRESENTATIONS . . . . . . . . . . . . . . . . . . 27 14.1 Legal Existence . . . . . . . . . . . . . . . . . . . 27 14.2 Valid Issuance. . . . . . . . . . . . . . . . . . . . 28 14.3 Options. etc. . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 15 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 28 15.1 Additional Documents. . . . . . . . . . . . . . . . . 28 15.2 Execution of Papers . . . . . . . . . . . . . . . . . 28 15.3 General . . . . . . . . . . . . . . . . . . . . . . . 28 15.4 Notices. Etc. . . . . . . . . . . . . . . . . . . . . 28 15.5 Expenses in Event of Breach . . . . . . . . . . . . . 29 15.6 Gender and Number . . . . . . . . . . . . . . . . . . 29 15.7 Severability. . . . . . . . . . . . . . . . . . . . . 29 15.8 Headings. . . . . . . . . . . . . . . . . . . . . . . 29 15.9 No Third Party Rights . . . . . . . . . . . . . . . . 29 ALLENERGY MARKETING COMPANY, L.L.C. LIMITED LIABILITY COMPANY AGREEMENT THIS LIMITED LIABILITY COMPANY AGREEMENT of ALLENERGY MARKETING COMPANY, L.L.C. is dated as of ________ __, 1998, by and between AllEnergy Marketing Company, L.L.C., a Delaware limited liability company (the "Company") and NEES Energy, Inc., a Massachusetts corporation ("NEI" and, together with such future parties as may be added as members of the Company, the "Members"). WHEREAS, the Members have formed a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (the "Act") in order to conduct the business described herein; and WHEREAS, the Company and the Members wish to enter into this Agreement to provide for, among other things, the management of the business and affairs of the Company, the allocation of profits and losses among the Members, the respective rights and obligations of the Members to each other and to the Company, and certain other matters. NOW, THEREFORE, the Company and the Members hereby agree as follows: ARTICLE 1 DEFINITIONS Certain capitalized terms used in this Agreement have specifically defined meanings which are either set forth or referred to in Exhibit 1, which is attached hereto and incorporated herein by reference. ARTICLE 2 FORMATION AND PURPOSE 2.1 Rights, Duties, etc. The rights, duties and liabilities of the Members shall be determined pursuant to the Act and this Agreement. To the extent that such rights, duties or obligations are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement shall, to the extent permitted by the Act, control. 2.2 Name. The name of the Company shall be AllEnergy Marketing Company, L.L.C. The business of the Company may be conducted under that name or, upon compliance with applicable laws, any other name that the Required Members deem appropriate or advisable. The Members shall file any fictitious name certificates and similar filings, and any amendments thereto, that shall be necessary to permit the Company to carry on its business under the desired name. 2.3 Registered Office/Agent. The registered office required to be maintained by the Company in The Commonwealth of Massachusetts pursuant to the Act shall initially be 3 University Office Park, 95 Sawyer Road, Waltham, Massachusetts, 02154. The registered agent of the Company pursuant to the Act shall initially be William H. Heil, whose address shall be that of the registered office of the Company. The Company may, upon compliance with the applicable provisions of the Act, change its registered office or registered agent from time to time in the discretion of the Required Members. 2.4 Term. The term of the Company (the "Term") shall continue in perpetuity unless sooner terminated as provided in Article 12. 2.5 Purpose. The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, engaging in any lawful act or activity for which limited liability companies may be formed under the Act and engaging in any and all activities necessary, advisable, convenient or incidental thereto. Such object and purpose shall include, without limitation, purchasing, marketing, selling and distributing energy commodities (including but not limited to natural gas, electricity and other energy sources) and related products, providing related services, and engaging in any and all other activities necessary, advisable, convenient or incidental to such activities. 2.6 Powers. Without limiting the generality of Section 2.5, the Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose set forth in Section 2.5, including, but not limited to, the power: 2.6.1 to conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Act in any state, territory, district or possession of the United States or in any foreign country as may be necessary, convenient or incidental to the accomplishment of the purposes of the Company; 2.6.2 to enter into, perform and carry out contracts of any kind necessary to, in connection with, in furtherance of, convenient to, or incidental to the accomplishment of the purpose of the Company, including without limitation, contracts to purchase, market, sell or distribute gas, electricity or any other energy commodity or related products or to provide related services, which contracts may be with a third party, a Member or an Affiliate of a Member, subject to Section 5.15; 2.6.3 to purchase or otherwise acquire, enter into, establish, own, invest in, trade, close out, use, employ, market, sell, mortgage, lend or otherwise dispose of positions under options, future contracts, forward contracts, spot contracts, swap contracts and other financial products, whether for hedging purposes or otherwise; 2.6.4 to purchase, take, receive, subscribe for or otherwise acquire, own, hold, enter into, invest in, trade, vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares and other equity interests in, obligations of, and other financial instruments with or in respect of, domestic and foreign corporations, associations, general, limited and limited liability partnerships, trusts, limited liability companies and other entities (including without limitation corporations, associations, partnerships, trusts, limited liability companies and other entities that engage or propose to engage in one or more businesses similar or related to the business of the Company, including specifically but not by way of limitation energy services companies), individuals, international agencies, and the United States government and any other national, state, regional, territorial, local or municipal government and any agency or instrumentality of any such government; 2.6.5 to acquire by purchase, exchange, lease, contribution of property or otherwise, own, hold, operate, maintain, finance, improve, market, lease, sell, distribute, convey, mortgage, encumber, transfer, demolish or dispose of any real or personal property, including but not limited to natural gas, electricity or any other energy commodity that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company; 2.6.6 to lend money, to invest and reinvest its funds and to take and hold real and personal property for the payment of funds so loaned or invested; 2.6.7 to negotiate, enter into, renegotiate, extend, renew, terminate, modify, amend, waive, execute, acknowledge or take any other action with respect to any lease, contract or security agreement in respect of any assets of or the business of the Company; 2.6.8 to borrow and issue evidences of indebtedness and to secure the same by a mortgage, pledge or other lien on the assets of the Company; provided, however, that without the prior written consent of the Member in question, the Company shall not incur any indebtedness that provides for the liability of any Member; 2.6.9 to open, close, and to make deposits to and withdrawals from bank and other deposit accounts; 2.6.10 to give or terminate guarantees and indemnities; 2.6.11 to hire, employ and dismiss employees, agents and representatives, attorneys, accountants, brokers, investment bankers, appraisers and any other advisors or consultants of the Company or service providers to the Company, and define their duties and fix their compensation and benefits; 2.6.12 to indemnify any Person in accordance with this Agreement; 2.6.13 to cease its activities and cancel its Certificate; 2.6.14 to sue and be sued, complain and defend, and participate in administrative or other proceedings, in its name; 2.6.15 to pay, collect, compromise, litigate, arbitrate or otherwise adjust or settle any and all other claims or demands of or against the Company or to hold such proceeds against the payment of contingent liabilities; and 2.6.16 to make, execute, acknowledge and file any and all documents or instruments necessary, convenient or incidental to the accomplishment of the purpose of the Company. 2.7 Filing of Certificate. Each of the officers set forth in Section 5.14 is designated as an authorized person within the meaning of the Act to execute, deliver and file any certificates under the Act and any other certificates necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business. 2.8 Foreign Qualification. The Members shall take all necessary actions to cause the Company to be authorized to conduct business legally in Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, Connecticut, New York and any other jurisdictions which the Required Members shall determine. ARTICLE 3 MEMBERSHIP AND CAPITAL 3.1 Members Initial Capital Contributions. The sole initial Member of the Company is NEI, which is admitted to the Company as a Member effective upon its execution of this Agreement. The Capital Contribution of NEI has been made by virtue of the conversion of its membership interest in AllEnergy Marketing Company, L.L.C., a Massachusetts limited liability company merged with and into the Company on the date hereof. 3.2 Maintenance of Capital Accounts. A separate account (each a "Capital Account") shall be established and maintained for each Member which shall be increased by (a) such Member's Capital Contributions and (b) such Member's share of the Net Profit of the Company, and shall be charged with (c) Distributions to such Member and (d) such Member's share of the Net Losses of the Company. It is the intention of the Members that the Capital Accounts be maintained in accordance with the provisions of Section 704(b) of the Code and the Regulations thereunder, that any liabilities be taken into account in accordance with the provisions of Section 752 of the Code and the Regulations thereunder, and that this Agreement be interpreted consistently therewith. 3.3 Percentage Interests. The percentage interest of each Member in the profits of the Company (each a "Percentage Interest") shall initially be as follows: NEI 100% The Percentage Interests of the Members shall be subject to adjustment as provided in Sections 3.6 and 3.7.4. 3.4 Additional Capital Contributions. 3.4.1 Required Contributions. The Required Members may from time to time determine that additional Capital Contributions are required by the Company. In such a case, each Member agrees that within not more than ten Business Days (or such longer period of time as the Required Members may determine) following the determination by the Required Members that additional Capital Contributions are necessary, which period may be extended by agreement of the Required Members, such Member will contribute to the Company (in cash unless otherwise determined (and agreed as to the nature and valuation) by the Required Members) as an additional Capital Contribution that percentage of the aggregate additional Capital Contributions required of all Members that is equal to its Percentage Interest. 3.4.2 Funds Transfers. Capital Contributions required by this Section 3.4 shall be made by wire transfer of immediately available funds to the Company' s account at such bank as the Company may from time to time designate in writing (or if property other than cash is to be contributed, in the manner specified by the Required Members). 3.4.3 Voluntary Contributions. Following the Effective Date, no Member shall be required or permitted to make any Capital Contributions to the Company except pursuant to this Section 3.4. 3.5 Return of Capital Contributions. No Member shall have the right to demand a return of all or any part of its Capital Contributions, and any return of the Capital Contributions of any Member shall be made solely from the assets of the Company and only in accordance with the terms of this Agreement. No interest shall be paid to any Member with respect to its Capital Contributions. 3.6 Additional Members; New Issuances; Classes of Members. Except as contemplated by Article 9, no new Members shall be admitted to the Company without the consent of the Required Members. Upon the written consent of the Required Members, the Company may issue Interests, which may represent interests in both the capital and the profits of the Company or which may be interests in only the future profits of the Company ("Profits Interests") to Persons who are not yet Members, or may increase the Interest of an existing Member, for such consideration (including but not limited to cash, other property or the provision of services, whether future, current or past) and on such terms as the Required Members shall determine. Upon the issuance of a new Interest, or an increase in the Percentage Interest represented by an existing Interest, the Percentage Interests of all existing Members shall be diluted ratably. Each Person that is to be issued an Interest shall deliver to the Company, as a condition of its admission to the Company as a Member, such documents of the type specified in Section 9.5.1(i) and (ii) as the Required Members shall request. The Members shall constitute a single class of Members for all purposes under the Act and this Agreement unless and to the extent that this Agreement specifically provides for different classes or groups of Members of the Company. ARTICLE 4 STATUS AND RIGHTS OF MEMBERS 4.1 Limited Liability. Except as otherwise provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member nor any other Indemnified Person shall be obligated personally for any such debt, obligation or liability of the Company. All Persons dealing with the Company shall look solely to the assets of the Company for the payment of the debts, obligations or liabilities of the Company. 4.2 No Make Up. In no event shall any Member be required to pay to the Company, to any other Member or its Affiliate or to any third party, any deficit balance that may exist from time to time in such Member's Capital Account. 4.3 Return of Distributions. Except as otherwise expressly required by law, a Member, in its capacity as such, shall have no liability either to the Company or any of its creditors in excess of (a) the amount of its Capital Contributions actually made, (b) its share of any assets and undistributed profits of the Company, (c) its obligation to make Capital Contributions and any other payments expressly provided for in this Agreement, and (d) to the extent required by law, the amount of any Distributions wrongfully distributed to it; provided, however, that, to the maximum extent permitted by applicable law, the obligations of the Members under Section 3.4 shall be solely for the benefit of the Company and not the creditors of the Company. Except as required by law or a court of competent jurisdiction, no Member shall be obligated by this Agreement to return any Distribution to the Company or pay the amount of any Distribution for the account of the Company or to any creditor of the Company. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Member is obligated to return or pay any part of any Distribution, the obligation shall be that of such Member alone, and not of any other Member unless the court so provides. The amount of any Distribution returned to the Company by or on behalf of a Member or paid by or on behalf of a Member for the account of the Company or to a creditor of the Company shall be added to the account or accounts from which it was subtracted when it was distributed to the Member. 4.4 Specific Limitations. No Member shall have the right or power to: (a) withdraw or reduce its Capital Contribution except as a result of the dissolution of the Company or as otherwise provided by law or in this Agreement, (b) other than upon the Effective Date or with the approval of the Required Members, make voluntary Capital Contributions or to contribute any property to the Company other than cash, (c) bring an action for partition against the Company or any Company assets, (d) cause the termination and dissolution of the Company, except as set forth in this Agreement, or (e) upon the distribution of its Capital Contribution require that property other than cash be distributed in return for its Capital Contribution. Each Member hereby irrevocably waives any and all rights that it may have to maintain an action for partition of any of the Company's property. Except as otherwise set forth in this Agreement, no Member shall have priority over any other Member either as to the return of its Capital Contribution or as to Net Profit, Net Loss, or Distributions; provided, that this provision shall not apply to the repayment by the Company of loans (as distinguished from Capital Contributions) which a Member has made to the Company. Other than upon the termination and dissolution of the Company as provided by this Agreement, there has been no time agreed upon when the Capital Contribution of any Member will be returned. 4.5 Hiring of Company Employees. 4.5.1 Hiring of Company Employees. During the Term, no Member nor any Affiliate of a Member shall hire, employ or otherwise retain the services of, including as an independent contractor, any person who is then serving, or who within the last year served, as either the chief executive officer or the chief operating officer of the Company, without the prior written consent of the other Members, which consent will not unreasonably be withheld. In the event that any employee or former employee of the Company (including, with the consent of the other Members, the chief executive officer or chief operating officer of the Company, but not including any secretarial or clerical employee) is at any time hired, employed or otherwise retained to provide services by a Member or an Affiliate of a Member, such employee shall not (and the hiring Member or Affiliate shall not permit such employee to) for the one-year period commencing on the date on which he or she begins providing services to such Member or Affiliate of a Member, perform, engage in, participate in, direct, or otherwise consult or provide advice or information with respect to, any business activity that competes directly with any business activity engaged in by the Company. 4.5.2 Severability. If any of the restrictions set forth in this Section 4.5 should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforcement of the remainder of such restrictions and covenants shall not thereby be adversely affected. Each Member agrees that, if any provision of this Section 4.5 should be adjudicated to be invalid or unenforceable, such provision shall be deemed deleted therefrom with respect, and only with respect, to the operation of such provision in the particular jurisdiction in which such adjudication was made; provided, however, that to the extent any such provision may be made valid and enforceable in such jurisdiction by limitations on the scope of the activities, geographical area or time period covered, the Members agree that such provision instead shall be deemed limited to the extent, and only to the extent, necessary to make such provision enforceable to the fullest extent permissible under the laws and public policies applied in such jurisdiction. 4.6 Confidential Information. 4.6.1 Non-Disclosure: Non-Utilization. Each Member agrees that, from the commencement of the Term until the end of the period specified in Section 4.6.4 and regardless of whether the Member is still a Member or has ceased to be a Member, except as otherwise consented to by the Required Members, all non-public confidential or proprietary information furnished to it pursuant to this Agreement or otherwise in connection with the Company's operation of its business, including without limitation, any and all information concerning the Company's suppliers and customers and the Company's business dealings with such Persons ("Confidential Information), will be kept confidential and will not be disclosed or utilized by such Member, or by any of its agents, representatives, employees or Affiliates (or any employee, agent or representative thereof), in any manner or for any purpose whatsoever, in whole or in part, except that (a) each Member shall be permitted to disclose such Confidential Information to those of its agents, attorneys, accountants, financial and business consultants, other representatives, and employees who need to be familiar with such Confidential Information in connection with such Member's investment in the Company and who are charged with an obligation of confidentiality, (b) each Member shall be permitted to disclose such Confidential Information to financial institutions and bona fide prospective purchasers and capital investors when such Persons are charged with an obligation of confidentiality, (c) each Member shall be permitted to disclose such Confidential Information to its members, partners and stockholders so long as they agree not to utilize such Confidential Information in their own business or that of any Affiliate in any way and to keep such Confidential Information confidential (including from any Affiliate) on the terms set forth herein, (d) each Member shall be permitted to disclose Confidential Information to the extent required by law, so long as such Member shall have first afforded the Company with a reasonable opportunity to contest the necessity of disclosing such Confidential Information, (e) each Member shall be permitted to disclose Confidential Information to the extent necessary for the enforcement of any right of such Member arising under this Agreement and (f) each Member shall be permitted to disclose that Confidential Information expressly permitted by the Required Members to be disclosed. No Member, nor any officer, agent, representative or Affiliate of a Member, nor any officer, agent or representative of the Company shall disclose the terms of this Agreement to any Person except (i) to the extent required by law or (ii) for legitimate business purposes approved by the Required Members. For purposes of this Agreement, Confidential Information shall not include any information (other than proprietary compilations of information that is non-confidential or is in the public domain) which (a) is within the public domain prior to the time it is furnished or thereafter comes within the public domain other than as a result of any disclosure by a Member in violation of the terms of this Agreement, (b) was in the possession of a Member on a non-confidential basis prior t the execution of this Agreement or (c) is obtained by a Member from a third party not known by the Member to be under any confidentiality obligation to the Member, whether by contractual, legal or fiduciary obligation or otherwise. 4.6.2 Precautionary Measures. Each Member shall take such precautionary measures as may be required to ensure (and such Member shall be responsible for) compliance with this Section 4.6 by any of its Affiliates, and its and their directors, officers, employees, agents, representatives and other Persons to which it may disclose Confidential Information in accordance with this Section 4.6. 4.6.3 Destruction or Return of Confidential Information. In the event a Member shall cease to be a Member, it shall promptly destroy (and provide a certificate of destruction to the Company with respect to), or return to the Company, all Confidential Information of the Company in its possession. Notwithstanding the immediately preceding sentence, a Member that ceases to be a Member may retain for a stated period, but not disclose to any other Person, Confidential Information for the exclusive purposes of (A) explaining such Member's corporate decisions with respect to the Company or (B) preparing such Member's tax returns and defending audits, investigations and proceedings relating thereto; provided, however, that the Member must notify the Company in advance of such retention and specify in such notice the stated period of such retention. 4.6.4 Survival of Provision Beyond Term. The obligations of each Member under this Section 4.6 shall survive both the termination of such Member's membership in the Company and the dissolution and termination of the Company until, unless extended pursuant to Section 9.9, the earlier of the fifth anniversary of the termination of such Member's membership or the third anniversary of the end of the Term. 4.7 Remedies. The Members agree that no adequate remedy at law exists for a breach or threatened breach of any of the provisions of Section 4.5 or Section 4.6 hereof, the continuation of which unremedied will cause the Company and the other Members to suffer irreparable harm. Accordingly, notwithstanding Section 16.5, the Members agree that the Company and the other Members shall be entitled, in addition to other remedies that may be available to them, to immediate injunctive relief from any breach of any of the provisions of Section 4.5 or 4.6 and to specific performance of their rights hereunder, as well as to any other remedies available at law or in equity. ARTICLE 5 MANAGEMENT 5.1 Management by the Members. The management of the Company is fully vested in the Members, acting exclusively in their membership capacities. Each Member may designate by written notice to the Company and the other Member, one or more representatives of such Member (each, a "Representative") who shall be authorized to speak on behalf of and take actions on behalf of such Member and, if such authorization is subject to any limits, conditions or qualifications, shall specify the precise nature of such limits, conditions or qualifications. A Member's designation may be changed at any time by notice to the Company. In the absence of a designated Representative, the chief executive officer of such Member shall be such Member's Representative. The Members expressly intend that the Company will not have "managers," as that term is used in the Act or in Rev. Proc. 95-10, 1995-3 I.R.B. 20, it being understood that the Representatives do not constitute "managers," but that each Representative acts solely as the agent of the Member that appointed it. 5.2 Meetings of Members; Consents. Deliberations and actions of the Members (including deliberations and actions by the Required Members) shall occur at meetings of the Members or by written consents executed by the Members in accordance with Section 5.10. Meetings of the Members, for any purpose or purposes, may be called by any Member or Members holding Interests representing, in the aggregate, at least a 50% Percentage Interest. 5.3 Place of Meetings. The Required Members may designate any place, either within or outside The Commonwealth of Massachusetts, as the place of meeting for any meeting of the Members. If no designation is made, the place of meeting shall be the principal place of business of the Company. 5.4 Notice of Meetings. Except as provided in Section 5.5, notice stating the place, day and hour of a meeting of Members shall be delivered in accordance with Section 16.4 not less than forty-eight (48) hours before the time of the meeting, by or at the direction of the Member or Members calling the meeting, to each other Member. The purpose or purposes of such meeting shall be specified in such notice. 5.5 Meeting of All Members. If the Required Members consent to the holding of a meeting of Members at any time and place and attend such meeting, such meeting shall be valid without call or notice, and at such meeting any lawful action may be taken. 5.6 Quorum. The Required Members, represented in person or by proxy, shall constitute a quorum at any meeting of Members. 5.7 Voting by Percentage Interests; Voting Thresholds. Except as provided otherwise in this Agreement, voting shall be according to the Members' respective Percentage Interests; provided, however, that unless otherwise expressly provided in this Agreement, all decisions by the Members shall require the affirmative vote of each of the Required Members. 5.8 Representatives and Proxies. At any meeting of Members, a Member shall be deemed in attendance if at least one of its Representatives is in attendance. The vote of a Member at a meeting of Members shall be determined by the Representatives in attendance after such consultation with the Member's other executive officers and directors as may be required. At any meeting of Members, a Member may instead vote by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 5.9 Conference Telephone. Any Member may participate in a meeting of the Members by means of conference telephone or similar communications equipment which permits all persons participating in the meeting to hear each other, and participation in the meeting by means of such equipment shall constitute presence in person at such meeting. 5.10 Action by Members Without a Meeting. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by the Required Members and delivered to the Company for inclusion in the minutes or for filing with the Company records. Action taken under this Section 5.10 is effective when the Required Members have signed the consent, unless the consent specifies a different effective date. 5.11 Waiver of Notice. When any notice is required to be given to any Member, a waiver thereof in writing signed by or on behalf of the Member entitled to such notice, whether before, at or after the time stated therein, shall be equivalent to the giving of such notice. 5.12 Advisory Board. The Members hereby establish, for the purposes of providing advice and counsel and making recommendations to the Members in respect of their management of the Company, an advisory board (the "Advisory Board"). Each Member shall designate three Persons to serve on the Advisory Board. In addition, each of the chief executive officer and chief operating officer of the Company will serve on such board. The Advisory Board shall have no authority to bind or otherwise act on behalf of the Company, nor may the Members delegate any portion of their authority as Members to the Advisory Board; however, the Members may take into account the advice of such Board in exercising their rights and fulfilling their obligations as Members. The Advisory Board may adopt such procedures and rules as to its conduct and proceedings as its members may from time to time determine. 5.13 Duties and Authority of the Members. Each Member shall have the full power and authority to take any and all actions on behalf of or with respect to the Company that are permitted under Massachusetts law to be taken by members of a limited liability company; provided, however, that each Member agrees not to take any action in the name of or on behalf of the Company unless such action, and the taking thereof by such Member, shall have been authorized by the Required Members or is expressly authorized by this Agreement. The Required Members may ratify previously unauthorized actions taken by a Member in the name of and on behalf of the Company, which ratification shall cure any breach by such Member of the prior sentence arising from such actions. Subject to the two immediately preceding sentences, the powers and authority granted to the Members hereunder shall include all those necessary or convenient for the furtherance of the purpose and powers of the Company and shall include the power and authority to make all decisions and take all actions with regard to the management, operations, assets, financing and capitalization of the Company, including without limitation, the power and authority to make decisions concerning, and take all actions in respect of, all those matters specified in Section 2.6. 5.14 Officers: Authority. The Required Members may designate one or more Persons to be officers of the Company and may remove any such Person as an officer of the Company. Any officers so designated shall have such titles and, subject to the other provisions of this Agreement, have such authority and perform such duties as the Required Members may delegate to them, including the power to execute documents, and shall serve at the pleasure of the Required Members. Unless the authority of the Person designated as the officer in question is limited or expanded in the document appointing such officer or is otherwise specified by the Required Members, any officer so appointed shall have the same authority to act for the Company as a corresponding officer of a Delaware corporation would have to act for a Delaware corporation in the absence of a specific delegation of authority; provided, however, that unless such power is specifically delegated to the officer in question either for a specific transaction or generally, no such officer shall have the power to act in a manner that is not consistent with the Business Plan and Annual Budget then in effect, to lease or acquire real property, to borrow an amount of money in excess of $1,000,000, to issue notes, debentures, securities, equity or other interests of or in the Company, to make investments in (other than the temporary investment of surplus cash), or to acquire securities of any Person, to give guarantees or indemnities, to merge, consolidate, liquidate or dissolve the Company or to sell or lease all or any substantial portion of the assets of the Company, and; provided, however, that no such officer shall have the power to enter into, purchase, acquire or otherwise invest in options, futures contracts, forward contracts, collars, spot contracts or swap contracts related to the choice, purchase or consumption of any Energy Commodity or any other financial products marketed or used in connection therewith, unless such transaction is consistent with a code of standards and controls for such transactions which has been approved by the Required Members, or has otherwise specifically been approved by the Required Members. The Required Members, in their discretion, may by written instrument signed by such Members ratify any act previously taken by an officer acting on behalf of the Company. By their signatures to this Agreement, the Required Members hereby designate the following Persons as the initial officers of the Company: Chairman and Chief Executive Officer: William H. Heil President and Chief Operating Officer: John H. Dickson Vice President and Treasurer (Chief Financial Officer): Marcy L. Reed Vice Presidents: Christopher G. Gulick Frank L. Peraino, Sr. Frank X. Beirne William R. Connallon David L. Williamson Secretary: Kirk Ramsauer 5.15 Transactions with Affiliates; Exclusive Supply Arrangements. The Company will comply with all legal requirements applicable with respect to transactions between it and any Member or Affiliate of a Member and will not engage in any transaction with a Member or an Affiliate of any Member without the prior written consent of the other Members, other than any transaction entered into in the ordinary course of the Company s business on terms, including price, at least as favorable to the Company as the Company might obtain in an arm s-length transaction with an unaffiliated counterparty. In the event of such a transaction, the Company will give notice immediately to both Members of the occurrence of such transaction and the terms on which it was effected, unless the transaction and the terms on which it was effected were previously approved by the Required Members. The Company shall not enter into any exclusive supply contract or other similar arrangement with any supplier of Energy Commodities or Energy Related Products and Services without the prior written approval of the Required Members. ARTICLE 6 BUSINESS PLAN: BUDGET 6.1 Business Plan. At least 45 days prior to the-beginning of the second and each subsequent Fiscal Year, the Required Members shall discuss and revise the business plan of the Company then in effect (the "Business Plan") of the Company so that the Business Plan at all times reflects the strategic plan for the Company for the then current Fiscal Year and the subsequent four Fiscal Years. 6.2 Annual Budget. The Required Members shall, at least 45 days before the beginning of each subsequent Fiscal Year, determine a budget for the Company for the next Fiscal Year (the budget for the Company's first Fiscal Year and each subsequent budget, each an "Annual Budget"); provided that if an Annual Budget is not agreed upon for any Fiscal Year, the Annual Budget for the preceding Fiscal Year shall remain in effect. Notwithstanding the proviso to the immediately preceding sentence, the Members agree that if they cannot agree on an Annual Budget, they will implement the dispute resolution provisions of Section 16.5, provided, however, that, no arbitration shall be required. Each Annual Budget shall include a projected profit and loss statement, cash flow statement and balance sheet for the next Fiscal Year, and shall specify and quantify capital expenditures. ARTICLE 7 DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS 7.1 Distributions. 7.1.1 In General. Subject to Section 3.7.2, the Company shall make Distributions at such times and in such amounts as the Required Members shall determine; provided, that, all Distributions (other than Distributions in liquidation of the Company) shall be made ratably in accordance with the Members' Percentage Interests and all Distributions in liquidation of the Company shall be made in proportion to the Members' Capital Account balances so as to reduce each Member' 5 Capital Account balance to zero. 7.1.2 Statutory Bar on Distributions. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a Distribution to any Member on account of its interest in the Company if such Distribution would violate Section 18-607 of the Act or other applicable law. 7.1.3 Withholding. All amounts withheld pursuant to the Code or any provision of any federal, state, local or foreign tax law with respect to any payment, distribution, or allocation to the Company or the Members shall be treated as amounts distributed to the Members pursuant to Section 7.1 for all purposes under this Agreement. The Company shall withhold from Distributions to, and with respect to allocations to, the Members and to pay over to the appropriate federal, state, local or foreign government any amounts required to be so withheld, and shall allocate any such amounts to the Members in respect of whose Distribution or allocation the tax was withheld. 7.1.4 Property Distributions and Installment Sales. The Required Members may from time to time determine to distribute property other than cash to the Members. In such a case, such in-kind Distribution shall be made to the Members entitled thereto in the same proportions as the Members would have been entitled to cash distributions. The amount by which the fair market value of any property to be distributed in kind to the Members exceeds or is less than the Book Value of such property shall, to the extent not otherwise recognized by the Company, be taken into account in determining Net Profit and Net Loss and determining the Capital Accounts of the Members as if such property had been sold at its fair market value immediately prior to its distribution. If any assets are sold in transactions in which, by reason of the provisions of section 453 of the Code or any successor thereto, gain is realized but not recognized, such gain shall be taken into account when realized in computing gain or loss of the Company for purposes of allocation of Net Profit or Net Loss under this Article 7, and, if such sales shall involve substantially all the assets of the Company, the Company shall be deemed to have been dissolved and terminated notwithstanding any election by the Members to continue the Company for purposes of collecting the proceeds of such sales. 7.2 Allocations of Net Profits. Subject to Section 7.4, the Net Profit of the Company shall be allocated among the Members ratably in accordance with their Percentage Interests. 7.3 Allocation of Net Losses. Subject to Section 7.4, the Net Loss of the Company shall be allocated among the Members ratably in accordance with their Percentage Interests. 7.4 Other Allocation Provisions. Prior to making the allocations of Net Profit or Net Loss for the Fiscal Year in accordance with Sections 7.2 and 7.3, income, gain, loss, deduction and credit (and items thereof) shall be allocated in accordance with the provisions of this Section 7.4 to the extent required by the Code and applicable Regulations. Any amounts allocated pursuant to this Section 7.4 shall not again be allocated under Section 7.2 or 7.3. 7.4.1 Qualified Income Offset: Nonrecourse and Member Nonrecourse Deductions. There is hereby included in the Agreement such provisions governing the allocation of income, gain, loss, deduction and credit (and items thereof) as may be necessary to provide that the Company's allocation provisions contain a so-called "Qualified Income Offset provision and comply with all provisions relating to the allocation of so-called Nonrecourse Deductions" and "Member Nonrecourse Deductions" and the chargeback thereof as set forth in the Regulations under Section 704(b) of the Code. Allocations of Nonrecourse Deductions shall be made ratably among the Members in accordance with their Percentage Interests. In allocating Net Profits pursuant to Section 7.2 hereof, the Required Members shall take into account (and, if necessary, modify the allocations to reflect) anticipated future allocations under the minimum gain chargeback rules of Regulation sec. 1.704-2. 7.4.2 Special Adjustments. To the extent that an adjustment to the adjusted tax of any Company asset is required pursuant to Section 734(b) or Section 743(b) of the Code and is required, pursuant to Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. 7.4.3 Recourse Indebtedness. In the event that indebtedness of the Company is recourse to one or more, but not all, of the Members, the Required Members, with the advice of independent accountants, shall make such modifications to the allocation provisions of Sections 7.2 and 7.3 as it shall determine to be appropriate. 7.4.4 Limitation on Net Losses. Notwithstanding any other provision of this Agreement to the contrary, Net Loss shall not be allocated to any Member if such allocation would cause such Member to have an Adjusted Capital Account Deficit or increase such Member's Adjusted Capital Account Deficit. To the extent an allocation of Net Loss would cause or increase an Adjusted Capital Account Deficit as to any Member, the limitation set forth in this Section 7.4.4 shall be applied on a Member by Member basis in accordance with the Members' respective Percentage Interests so as to allocate the maximum permissible Net Loss to each Member without causing any Member to have an Adjusted Capital Account Deficit. 7.5 Changes in Members' Interests. If during any Fiscal Year of the Company there is a change in any Member's Interest in the Company, the Required Members shall confer with the tax advisors to the Company and, in conformity with such advice allocate the Net Profit or Net Loss to the Members so as to take into account the varying Interests of the Members in the Company in a manner that complies with the provisions of Section 706 of the Code and the Regulations thereunder. 7.6 Tax Allocations. 7.6.1 In General. Subject to Section 7.6.2, each item of income, gain, loss and deduction, as determined for federal income tax purposes, shall be allocated among the Members in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Sections 7.2 through 7.5. 7.6.2 Section 704(c) Allocations. In the event there is a difference between the Book Value at which any property is accepted as a contribution to the capital of the Company (or deemed accepted pursuant to Regulation Section 1 .704-1(b)(2)(iv)(g)) and the adjusted tax basis of such property to the Company, the Company shall, solely for federal income tax purposes, specially allocate the income, gain, loss and deduction attributable to such property as and to the extent required by Section 704(c) of the Code and any applicable Regulations under Section 704(b) or Section 704(c) of the Code. 7.7 Tax Credits. All foreign tax credits of the Company for a Fiscal Year (or portion thereof, if appropriate) shall be allocated among the Members in the same proportion as the net income and gains of the Company that were subject to the foreign taxes that gave rise to such credits. All other items of federal income tax credit shall be allocated among the Members in accordance with their Percentage Interests. 7.8 Adjustment of Capital Accounts. Unless the Members shall determine otherwise, the Book Values of all the Company's assets shall be adjusted to equal their respective gross fair market values, as determined by the Required Members (and the Capital Accounts of the Members shall be adjusted accordingly by treating any increase in Book Value as an item of Book Gain and any decrease in Book Value as an item of Book Loss), as of the following times: (a) the acquisition of an additional Interest in the Company by any new or existing Member in exchange for more than a de minimis additional Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of assets of the Company as consideration for an Interest; and (c) the liquidation of the Company; provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Required Members reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company. 7.9 Interpretation. It is the intent of the Members that the Company be treated as a partnership for federal tax purposes and that the provisions hereof relating to each Member's distributive share of income, gain, loss, deduction, and credit (and items thereof) comply with the provisions of Sections 704(b), 704(c), 706 and other relevant provisions of the Code and the applicable Regulations. In furtherance of the foregoing, the Members hereby agree that they will seek to resolve any ambiguity in the provisions of this Agreement in a manner that will preserve and protect the tax allocations provided for in this Article 7 for federal income tax purposes and, subject to the last sentence hereof, to adopt such curative provisions to offset the effect of the allocations required by Section 7.4 as they may deem necessary. Notwithstanding the foregoing, no Member shall have the right to require or compel any distribution of cash or property not authorized or provided for by the provisions of this Agreement or to alter any distribution of cash or property provided for by the provisions of this Agreement on the ground that such action is necessary to cause the provisions hereof to conform to the provisions of the Regulations. 7.10 Loans to Company. Nothing in this Agreement shall prevent any Member from making secured or unsecured loans to the Company by agreement with the Company. ARTICLE 8 TAX MATTERS MEMBER 8.1 Tax Matters Member. Unless and until another Member is designated as the Tax Matters Member by the Required Members, NEI shall be the tax matters partner of the Company as provided in the Regulations under Code Section 6231 and analogous provisions of state law (the "Tax Matters Member"). The Tax Matters Member shall represent the Company, at the Company's expense, in connection with all examinations of the Company's affairs by tax authorities including any resulting administrative or judicial proceedings. 8.2 Indemnity of Tax Matters Member. The Company shall indemnify and reimburse the Tax Matters Member for all expenses (including legal and accounting fees) incurred as Tax Matters Member pursuant to this Article 8 in connection with any administrative or judicial proceeding with respect to the tax liability of the Members as long as the Tax Matters Member has determined in good faith that its course of conduct was in, or not opposed to, the best interest of the Company. The payment of all such expenses shall be made before any Distributions are made to the Members. The taking of any action and the incurring of any expense by the Tax Matters Member in connection with any such proceeding, except to the extent provided herein or required by law, is a matter in the sole discretion of the Tax Matters Member and the provisions on limitations of liability of the Tax Matters Member and indemnification set forth in Article 13 shall be fully applicable to the Tax Matters Member in its capacity as such. 8.3 Information Furnished. To the extent and in the manner provided by applicable law and the Regulations, the Tax Matters Member shall furnish the name, address, profits interest, and taxpayer identification number of each Member to the Internal Revenue Service. 8.4 Notice of Proceedings. etc. The Tax Matters Member shall use its best efforts to keep each Member informed of any administrative and judicial proceedings for the adjustment at the Company level of any item required to be taken into account by a Member for income tax purposes or any extension of the period of limitations for making assessments of any tax against a Member with respect to any Company item, or of any agreement with the Internal Revenue Service that would result in any material change either in income or loss as previously reported. 8.5 Notices to Tax Matters Member. Any Member that receives a notice of an administrative proceeding under Code Section 6233 relating to the Company shall promptly notify the Tax Matters Member of the treatment of any Company item on such Member's federal income tax return that is or may be inconsistent with the treatment of that item on the Company's return. Any Member that enters into a settlement agreement with the Internal Revenue Service or any other government agency or official with respect to any Company item shall notify the Tax Matters Member of such agreement and its terms within sixty days after its date. ARTICLE 9 BOOKS, RECORDS, ACCOUNTING, AND REPORTS 9.1 Books and Records. The Company shall maintain at its principal office all of the following: 9.1.1 A current list of the full name and last known business address of each Member together with true and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each Member and which each Member has agreed to contribute in the future, and the date on which each Member became a member of the Company; 9.1.2 A copy of the Certificate, this Agreement, including any and all amendments to either thereof, together with executed copies of any powers of attorney pursuant to which the Certificate, this Agreement or any amendment has been executed; 9.1.3 Copies of the Company's federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years; 9.1.4 The audited financial statements of the Company for the six most recent Fiscal Years; and 9.1.5 The Company's books and records for at least the current and past five Fiscal Years. 9.2 Delivery to Members; Inspection. Upon the request of any Member for any purpose reasonably related to such Member's Interest as a Member of the Company: 9.2.1 The Company shall promptly deliver to the requesting Member, at the expense of the Company, a copy of the information required to be maintained by Sections 10.1.1. through 10.1.4. 9.2.2 The Members may review, at the Company's office during normal business hours, the Company's federal, state and local income tax or information returns prior to the filing thereof and the Company' 5 books and records referred to in Section 10.1.5. 9.2.3 The Company will provide any Member at such Member's expense such other information regarding the business affairs of the Company as the Member shall reasonably request. 9.3 Financial Statements. The Members shall maintain or cause to be maintained books of account reflecting the operations of the Company and shall cause to be prepared for the Members (i) monthly and quarterly financial statements in the form customarily prepared by NEES for similar operations, which financial statements shall show variances from the Annual Budget, and (ii) audited annual financial statements of the Company prepared in accordance with generally accepted accounting principles. 9.4 Filings. At the Company's expense the Members shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities and to have prepared and to furnish to each Member such information with respect to the Company as is necessary to enable the Members to prepare and timely file their federal and state income tax returns. The Members, at the Company's expense, shall also cause to be prepared and timely filed, with appropriate federal and state regulatory and administrative bodies, all reports required to be filed by the Company with those entities under then current applicable laws, rules, and regulations. The reports shall be prepared on the accounting or reporting basis required by the regulatory bodies. ARTICLE 10 AMENDMENTS TO AGREEMENT 10.1 Amendments. This Agreement may be amended or modified with the prior written consent of the Required Members; provided, that, the Members expressly agree that in the event of a Transfer of all or a portion of a Member's Interest or the admission of a new Member, this Agreement shall be revised to reflect such Transfer or such admission, as the case may be, and to amend such provisions of this Agreement as the Members shall determine to be appropriate, it being contemplated that in the event that either Member Transfers all of its Interest to another Person and such Person is admitted as a Member, such Person shall be subject to all of the provisions of this Agreement to which the transferor Member was previously subject. 10.2 Filings. The Members shall cause to be prepared and filed any amendment to the Certificate that may be required to be filed under the Act as a consequence of any amendment to this Agreement. 10.3 Binding Effect. Any modification or amendment to this Agreement pursuant to Section 11.1 shall be binding on all Members. ARTICLE 11 DISSOLUTION OF COMPANY 11.1 Termination of Membership. No Member shall resign or withdraw from the Company and any attempted resignation or withdrawal shall be, and is hereby declared, null and void ab initio, except that, (i) subject to the restrictions set forth in Article 9, any Member may Transfer its Interest in the Company and the transferee may become a Member in place of the Member which transferred its Interest and (ii) subject to the provisions of Section 9.6, any Member may withdraw from the Company in connection with its making of a Buy-Sell Offer. If any Member ceases to be a Member for any reason, the business of the Company may be continued by the remaining Members (so long as there are two such remaining Members) as provided in clause (d) of Section 12.2. The Members agree that the unauthorized resignation or withdrawal of a Member may cause irreparable injury to the Company and other Member for which monetary damages (or other remedies at law) are inadequate in view of (i) the complexities and uncertainties in measuring the actual damages that would be sustained by reason of such unauthorized resignation or withdrawal and (ii) the uniqueness of the Company's business and the relationship between the Members. Accordingly, the Members agree that the provisions of this Section 12.1 may be enforced by specific performance. 11.2 Events of Dissolution or Liquidation. The Company shall be dissolved upon the happening of any of the following events: (a) a Regulatory Dissolution Election unless the Special Purchase Right is exercised, (b)December 31, 2096 unless such date is extended pursuant to Section 2.4, (c) the unanimous written determination of the Members, (d) the withdrawal, bankruptcy or dissolution of any Member, unless there are at least two remaining Members and the business of the Company is continued by the consent of remaining Members holding Interests that together represent more than a 50% Percentage Interest within 90 days following the occurrence of any such event, or (e) the entry of a decree of judicial dissolution under Section 18-802 of the Act. 11.3 Liquidation. If the Company is dissolved and not continued, the Company shall immediately commence to wind up its affairs. A reasonable period of time shall be allowed for the orderly termination of the Company's business, discharge of its liabilities, and distribution or liquidation of the remaining assets so as to enable the Company to minimize the normal losses attendant to the liquidation process. The Company's property and assets or the proceeds from the liquidation thereof shall, subject to the requirements of the Act, be distributed in accordance with Section 12.4, after the Members' Capital Accounts have been adjusted to reflect all Net Profits and Net Losses of the Company through the date of distribution (including Net Profits and Net Losses arising from the revaluation of the Company's assets pursuant to Section 7.8; provided, however, that in the event of a liquidating distribution resulting from a Regulatory Dissolution Election, the gross fair market values of the Company' s assets shall not be adjusted pursuant to Section 7.8 and shall be deemed to equal their Book Values). A full accounting of the assets and liabilities of the Company shall be taken and a statement thereof shall be furnished to each Member within 30 days after the distribution of all of the assets of the Company. Such accounting and statements shall be prepared under the direction of the Required Members. Upon such final accounting, the Company shall terminate and an authorized person, appointed pursuant to Section 2.7, shall cancel the Certificate in accordance with the Act. 11.4 Distributions to Members. Distributions to Members upon liquidation shall be made in accordance with the Members' Capital Account balances. Notwithstanding Section 12.3 or the first sentence of this Section 12.4, the Company shall not make any Distribution pursuant to this Section 12.4 unless the Required Members shall have determined that the Company has sufficient assets to pay all accrued and contingent liabilities of which the Required Members are aware after making reasonable inquiry. 11.5 No Action for Dissolution. The Members acknowledge that irreparable damage would be done to the goodwill and reputation of the Company if any Member should bring an action in court to dissolve the Company under circumstances where dissolution is not required by Section 12.2. This Agreement has been drawn carefully to provide fair treatment of all parties and equitable payment in liquidation of the Interests of all Members. Accordingly, except where the Members have failed to liquidate the Company as required by Section 12.2 and except as specifically provided in Section 18-802(a) of the Act, each Member hereby waives and renounces its right to initiate legal action to seek dissolution or to seek the appointment of a receiver or trustee to liquidate the Company. 11.6 No Further Claim. Upon dissolution, each Member shall look solely to the assets of the Company for the return of its Capital Contributions, and if the Company's property remaining after payment or discharge of the debts and liabilities of the Company, including debts and liabilities owed to one or more of the Members, is insufficient to return the aggregate Capital Contributions of each Member, a Member shall have no recourse against the Company or any other Member except to the extent that the other Member has received Distributions in excess of those to which such Member was entitled to under the terms of this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 General. To the maximum extent permitted by law, the Company shall indemnify, defend, and hold harmless each Member, including the Tax Matters Member, and each Member's officers, trustees, directors, partners, members, shareholders, and employees (and each such Person's officers, trustees, directors, partners, members, shareholders, and employees), and the employees and officers of the Company (all indemnified persons being referred to as "Indemnified Persons"), from any liability, loss, or damage incurred by the Indemnified Person by reason of any act performed or omitted to be performed by the Indemnified Person in connection with the business of the Company and from liabilities or obligations of the Company imposed on such Person by virtue of such Person's position with the Company, including attorneys' fees and costs and any amounts expended in the settlement of any such claims of liability, loss, or damage; provided however, that, if the liability, loss, damage, or claim arises out of any action or inaction of an Indemnified Person, indemnification under this Section 13.1 shall be available only if (a) either (i) the Indemnified Person, at the time of such action or inaction, determined, in good faith, that its or his course of conduct was in, or not opposed to, the best interests of the Company, or (ii) in the case of inaction by the Indemnified Person, the Indemnified Person did not intend its or his inaction to be harmful or opposed to the best interests of the Company, and (b) the action or inaction did not constitute fraud or a Violation of the Business Judgment Rule by the Indemnified Person, and provided, further, that indemnification under this Section 13.1 shall be recoverable only from the assets of the Company and not from any assets of the Members. The Company may pay or reimburse attorneys' fees of an Indemnified Person as incurred, if such Indemnified Person executes an undertaking to repay the amount so paid or reimbursed if there is a final determination by a court of competent jurisdiction that such Indemnified Person is not entitled to indemnification under this Article 13. The Company may pay for insurance covering liability of the Indemnified Persons for negligence in operation of the Company s affairs. 12.2 Persons Entitled to Indemnity. Any Person who is within the definition of "Indemnified Person" at the time of any action or inaction in connection with the business of the Company shall be entitled to the benefits of this Article 13 as an "Indemnified Person" with respect thereto, regardless whether such Person continues to be within the definition of "Indemnified Person" at the time of such Person's claim for indemnification or exculpation hereunder. 12.3 Procedure Agreements. The Company may enter into an agreement with any of its officers and employees setting forth procedures consistent with applicable law for implementing the indemnities provided in this Article 13. 12.4 Extent of Duties. No Indemnified Person shall be liable, in damages or otherwise, to the Company or to any Member for any loss that arises out of any act performed or omitted to be performed by it or him pursuant to the authority granted by this Agreement if (a) either (i) the Indemnified Person, at the time of such action or inaction, determined, in good faith, that such Person's course of conduct was in, or not opposed to, the best interests of the Company, or (ii) in the case of inaction by the Indemnified Person, the Indemnified Person did not intend such Person's inaction to be harmful or opposed to the best interests of the Company, and (b) the conduct of the Indemnified Person did not constitute fraud or a Violation of the Business Judgment Rule by such Indemnified Person. 12.5 Fiduciary and Other Duties. 12.5.1 To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Company or to any other Indemnified Person, an Indemnified Person acting under this Agreement shall not be liable to the Company or to any other Indemnified Person for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties (including fiduciary duties) of an Indemnified Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties of such Indemnified Person. The provisions of this Section 13.5.1 shall not be construed to relieve any Indemnified Person from liability for such Person's fraud or a Violation of the Business Judgment Rule. 12.5.2 Whenever in this Agreement an Indemnified Person is permitted or required to make a decision (a) in its "discretion" (without qualification as to how the discretion is to be exercised) or under a grant of similar authority or latitude, the Indemnified Person shall act reasonably and in good faith based on facts known to the Person at the time, (b) in its "sole discretion" or under a grant of similar authority or latitude, the Indemnified Person shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Company or any other Person, and (c) under any other express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other general standard imposed by this Agreement or applicable law. ARTICLE 13 REPRESENTATIONS AND COVENANTS BY THE MEMBERS Each Member hereby represents, warrants and covenants to the Company and each other Member that the following statements are true and correct as of the Effective Date and shall be true and correct at all times thereafter that such Member is a Member: 13.1 Organization; Corporate Authority. It is duly incorporated, organized or formed (as applicable), validly existing, and (if applicable) in good standing under the laws of the jurisdiction of its incorporation, organization or formation; if required by applicable law, it is duly qualified and in good standing in the jurisdiction of its principal place of business, if different from its jurisdiction of incorporation, organization or formation, and is duly qualified to transact business and is in good standing in each other jurisdiction where such qualification is required; and it has full power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to engage in the types of activities proposed to be engaged in by the Company and has obtained any regulatory and other governmental approvals that may be required (or, with respect to NEI and the required regulatory approval under the PUHCA, it will, as soon as practicable but in no event more than 10 Business Days after the date of this Agreement, apply for such approval), and if such approvals are subject to any conditions, has disclosed such conditions to the other Members; and all necessary actions by the board of directors, shareholders, managers, members, partners, trustees, beneficiaries, or other applicable Persons necessary for the due authorization, execution, delivery, performance of this Agreement by it have been duly taken. 13.2 Legal, Valid and Binding Obligation. It has duly authorized, executed, and delivered this Agreement and the other documents contemplated herein, and, subject to the receipt of those regulatory and other governmental approvals, authorizations, or permits specified on the attached Schedule 1, this Agreement and such other documents constitute the legal, valid and binding obligation of such Member enforceable against it in accordance with their terms (except as may be limited by bankruptcy, insolvency or similar laws of general application and by the effect of general principles of equity, regardless of whether considered at law or in equity), its authorization, execution, delivery, and performance of this Agreement does not and will not (i) conflict with, or result in a breach, default or violation of (A) the organizational documents of such Member, (B) any contract or agreement to which such Member is a party or is otherwise subject, or (C) any law, order, judgment, decree, writ, injunction or arbitral award to which that Member is subject; or (ii) require any consent, approval or authorization from, filing or registration with, or notice to, any governmental authority or other Person, unless such requirement has already been satisfied or is listed on Schedule 1. 13.3 Investment Intent. It has acquired its Interest with the intent of holding the same for investment for its own account and without the intent or a view of participating directly or indirectly in any distribution of such Interests within the meaning of the Securities Act or any applicable state securities laws. 13.4 Securities Regulation. It acknowledges and agrees that its Interest is being issued and sold in reliance on the exemption from registration contained in Section 4(2) of the Securities Act and exemptions contained in applicable state securities laws, and that its Interest cannot and will not be sold or transferred except in a transaction that is exempt under the Securities Act and those state acts or pursuant to an effective registration statement under the Securities Act and those state acts or in a transaction that is otherwise in compliance with the Securities Act and those state acts. It understands that it has no contractual right for the registration under the Securities Act of its Interest for public sale and that, unless its Interest is registered or an exemption from registration is available, its Interests may be required to be held indefinitely. 13.5 Information. It has received all documents, books, and records pertaining to an investment in the Company requested by it. It has had a reasonable opportunity to ask questions of and receive answers from the other Members concerning the Company, and all such questions have been answered to its satisfaction. 13.6 Tax Position. Unless it provides prior written notice to the Company, it will not take a position on its federal income tax return, in any claim for refund, or in any administrative or legal proceedings that is inconsistent with any information return filed by the Company or with the provisions of this Agreement. ARTICLE 14 COMPANY REPRESENTATIONS In order to induce the Members to enter into this Agreement and to make the Capital Contributions contemplated hereby, the Company hereby represents and warrants to each Member as follows: 14.1 Legal Existence. The Company is a duly formed and validly existing limited liability company under the Act and the Certificate has been duly filed or will be filed on the date hereof as required by the Act. The Company has all necessary power and authority under the Act to issue the Interests to be issued to the Members hereunder. 14.2 Valid Issuance. When the Interest is issued to the Member as contemplated by this Agreement and the Capital Contributions required to be made by such Member are made, the Interest issued to the Member will be duly and validly issued and except as specifically provided in the Agreement, no liability for any additional capital contributions or for any obligations of the Company will attach thereto. 14.3 Options. etc. Except as set forth in this Agreement, the Company does not have outstanding any rights or options to subscribe for or purchase any warrants or other agreements providing for or requiring the issuance of Interests in the Company to any Person or any obligation to purchase or otherwise acquire any Interests in the Company. ARTICLE 15 MISCELLANEOUS 15.1 Additional Documents. At any time and from time to time after the date of this Agreement, upon the request of the Required Members, each Member shall do and perform, or cause to be done and performed, all such additional acts and deeds, and shall execute, acknowledge, and deliver, or cause to be executed, acknowledged, and delivered, all such additional instruments and documents, as may be required to effectuate the purposes and intent of this Agreement. 15.2 Execution of Papers. The Members agree to execute such instruments, documents and papers as the Required Members deem necessary or appropriate to carry out the intent of this Agreement. 15.3 General. This Agreement: (a) shall be binding upon the executors, administrators, estates, heirs, and legal successors of the Members; (b) shall be governed by and construed in accordance with the laws of the State of Delaware; (c) may be executed in more than one counterpart as of the day and year first above written; and (d) contains the entire contract among the Members as to the subject matter hereof. Without limiting the foregoing, the Limited Liability Company Agreement, dated as of September 18, 1996 is terminated and of no further force or effect. The waiver of any of the provisions, terms, or conditions contained in this Agreement shall not be considered as a waiver of any of the other provisions, terms, or conditions hereof. 15.4 Notices. Etc. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or receipt (which may be evidenced by a return receipt if sent by registered mail or by signature if delivered by courier or delivery service), addressed as set forth below, or at such other address as such Person shall have furnished to the Company in writing as the address to which notices are to be sent hereunder: if to NEI, at 25 Research Drive, Westborough, Massachusetts 01582. 15.5 Expenses in Event of Breach. In the event that a Member is determined to have breached any provision of this Agreement, such Member shall, subject to the terms of Section 16.5.1 regarding the sharing of costs where applicable, be liable for all costs and expenses incurred by the Company or the other Member in enforcing such provision. 15.6 Gender and Number. Whenever required by the context, as used in this Agreement, the singular number shall include the plural, the plural shall include the singular, and all words herein in any gender shall be deemed to include the masculine, feminine and neuter genders. 15.7 Severability. If any provision of this Agreement is determined by a court to be invalid or unenforceable, that determination shall not affect the other provisions hereof, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each said provision shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law. 15.8 Headings. The headings used in this Agreement are used for administrative convenience only and do not constitute substantive matter to be considered in construing the terms of this Agreement. 15.9 No Third Party Rights. The provisions of this Agreement are for the benefit of the Company and the Members and no other Person, including creditors of the Company shall have any right or claim against the Company or any Member by reason of this Agreement or any provision hereof or be entitled to enforce any provision of this Agreement. [THE REMAINDER OF THIS PAGE HAS DELIBERATELY BEEN LEFT BLANK.] IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. ALLENERGY MARKETING COMPANY, L.L.C. By: ______________________________________ Name: Title: NEES ENERGY, INC. By: ______________________________________ Name: Title: EXHIBIT 1 Defined Terms "Act" shall mean the Massachusetts Limited Liability Company Act (MGL c. 156C), as amended and in effect from time to time. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (a) credit to such Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the next to the last sentences of the Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) after taking into account any changes during such year in Company minimum gain and Member minimum gain (as determined under such Regulations); and (b) debit to such Capital Account the items described in Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. "Advisory Board" is defined in Section 5.12. "Affiliate" shall mean, with respect to any specified Person, any Person that directly or through one or more intermediaries controls or is controlled by or is under common control with the specified Person. As used in this definition, the term "control" means the possession, directly or indirectly, of the power or authority to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agreement" shall mean the Limited Liability Company Agreement of the Company dated as of September 18, 1996, as amended from time to time. "Annual Budget" is defined in Section 6.2. "Book Gain" or "Book Loss" or shall mean the gain or loss recognized by the Company for Code Section 704(b) book purposes in any Fiscal Year or other period by reason of the sale, exchange or other disposition of any asset of the Company or by reason of the reevaluation of such asset pursuant to Section 7.1.4 or Section 7.8. Such Book Gain or Book Loss shall be computed by reference to the Book Value of such asset as of the date of such sale, exchange or other disposition, or reevaluation, rather than by reference to the tax basis of such asset as of such date, and each and every reference herein to "gain" or "loss" shall be deemed to refer to Book Gain or Book Loss, rather than to tax gain or tax loss, unless otherwise expressly provided herein. "Book Value" of an asset shall mean, as of any particular date, the value at which the asset is properly reflected on the books and records of the Company as of such date. The initial Book Value of each asset shall be its cost, unless such asset was contributed to the Company by a Member, in which case the initial Book Value shall be the fair market value, as agreed to by the Members, and such Book Value shall thereafter be adjusted for Depreciation with respect to such asset rather than for the cost recovery deductions to which the Company is entitled for income tax purposes with respect thereto and shall be adjusted as appropriate pursuant to Section 7.8. "Business Day " shall mean a day when national banks are open for business in Boston, Massachusetts. "Business Plan" is defined in Section 6.1. "Capital Account" is defined in Section 3.2. "Capital Contribution" shall mean with respect to any Member, the amount of cash and the Book Value of any other property contributed to the Company with respect to the Interest held by such Member (net of liabilities secured by such contributed property or that the Company is considered to assume or take the property subject to pursuant to Code section 752). "Certificate" shall mean the Certificate of Formation of the Company filed as of September 18, 1996 and any and all amendments thereto and restatements thereof filed on behalf of the Company as permitted hereunder with the office of the Secretary of State of The Commonwealth of Massachusetts. "Change of Control" shall mean, as to any Member or any Parent Entity of a Member (other than NEES), any event as a result of which NEES, ceases to own, directly or indirectly on a fully diluted basis, stock (or if such Person is not a corporation, equity interests) which represent at least 50% of the voting power or value of the outstanding capital stock (of, if such Person is not a corporation, outstanding equity interests) of such Person. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the corresponding provisions of any future federal tax law. "Company" shall mean the limited liability company formed under and pursuant to the Act and this Agreement. "Confidential Information" is defined in Section 4.6.1. "Depreciation" shall mean for each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except if the Book Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of any such year or other period, Depreciation shall be an amount that bears the same relationship to the Book Value of such asset as the depreciation, amortization, or other cost recovery deduction computed for tax purposes with respect to such asset for the applicable period bears to the adjusted tax basis of such asset at the beginning of such period, or if such asset has a zero adjusted tax basis, Depreciation shall be an amount determined under any reasonable method selected by the Required Members, with the advice of its independent accountants. "Distribution" shall mean the amount of cash and the Book Value of any other property distributed to a Member in respect of the Member's Interest in the Company (net of liabilities secured by such distributed property or that the Member is considered to assume or take the property subject to pursuant to Code section 752). "Effective Date" shall mean September 18, 1996. "Energy Commodity" shall mean natural gas, electricity, oil and any other energy source, as well as all options, futures contracts, forward contracts, collars, spot contracts or swap contracts related to the choice, purchase or consumption of any energy commodity and any other financial products marketed or used in connection therewith. "Energy Related Products and Services" shall mean products and services related to the choice, purchase or consumption of any Energy Commodity, whether or not sold or provided on a bundled basis with such natural gas, electricity, oil or other energy source. "Fair Value" as applied to all or any portion of the Interest of any Member or to the non-cash consideration proposed to be paid as all or a portion of the Offered Price for an Interest by a third-party offeror, shall mean the fair market value of the relevant portion of the Interest or of such consideration as agreed upon by the Members or as shown by an appraisal performed by an independent appraiser satisfactory to all Members. In the event that the Members do not agree on such fair market value or on the selection of an independent appraiser within 10 days after the event which gives rise to the need to determine Fair Value, each Member shall select an appraiser within 20 days of such event and those two appraisers shall select within 30 days of such event another independent appraiser to perform the appraisal. The three appraisers so selected shall then have 15 days from the date of the selection of the third appraiser to determine the fair market value of the relevant portion of the Interest or consideration in question. When determining the fair market value of an Interest, the appraisers shall consider, among other factors, book value, liquidation value, replacement value and the value of future cash flows of the Company as a going concern and shall make no deduction, discount or other subtraction whatsoever for the possible minority status or limited voting rights of any Member. If the single appraiser has been appointed, such appraiser's determination of value shall be final and binding. If three appraisers shall have been appointed as hereinabove set forth, the values determined by the three appraisers shall be averaged, the determination which shall differ most from such average shall be disregarded, the remaining two determinations shall be averaged, and such average shall be final and binding. If one independent appraiser is selected, the Members shall each bear one-half of the expenses of the independent appraiser. If the Members have each selected an appraiser, each Member shall bear the expenses of its own appraiser and one-half the expenses of the independent appraiser selected by the two appraisers. "Fiscal Year" shall mean the fiscal year of the Company which shall end on December 31 in each year or on such other date in each year as the Required Members shall otherwise elect. "Indemnified Persons " is defined in Section 13.1. "Interest" shall mean the entire interest of a Member in the capital and profits of the Company, including the right of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement. "Member Nonrecourse Deductions" shall mean "partner non-recourse deductions" as defined in Regulations Section 1 .704-2(i)(1). "Members" shall mean the Persons listed as members on the signature page to the Agreement and any other Person that both acquires an Interest in the Company and is admitted to the Company as a Member pursuant to the Agreement. "NEES" shall mean New England Electric System, a Massachusetts voluntary business association. "NEI" is defined in the preamble of the Agreement. "Net Profit" and "Net Loss" shall mean, for each Fiscal Year or other period, an amount equal to the Company's taxable income or loss, respectively, for such year or period, determined in accordance with Section 703(a) of the Code (taking into account all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code), with the following adjustments: (a) any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Net Profit or Net Loss pursuant to this provision shall be added to such taxable income or reduce such taxable loss; (b) any expenditures of the Company described in Section 705(a)(2)(B) of the Code (relating to expenditures which are neither deductible nor properly chargeable to capital) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Section 1 .704-1(b)(2)(iv)(i) of the Regulations, and not otherwise taken into account in computing Net Profit or Net Loss pursuant to this provision, shall be subtracted from such taxable income or increase such taxable loss; (c) Book Gain or Book Loss from the sale or other disposition of any asset of the Company shall be taken into account in lieu of any federal income tax gain or loss recognized by the Company by reason of such sale or other disposition, and Book Gain and Book Loss from any revaluation of the Company's assets pursuant to Section 7.8 shall be taken into account; and (d) in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed as provided in this Agreement. "Nonrecourse Deduction" shall have the meaning set forth in Regulations Section 1.704-2(b)(1). "Parent Entity" shall mean, in respect of any Member, any entity that owns, directly or indirectly through one or more other entities, on a fully diluted basis, stock which represents more than 50% of the voting power or value of the outstanding capital stock of the Member. "Percentage Interest" is defined in Section 3.3. "Person" shall mean an individual, partnership, joint venture, association, corporation, trust, estate, limited liability company, limited liability partnership, or any other legal entity. "Profits Interest" is defined in Section 3.6. "PUHCA" shall mean the Public Utility Holding Company Act of 1935, as amended. "Qualified Income Offset" shall have the meaning set forth in Regulations Section 1.704-1(b)(2)(ii)(d). "Regulations" shall mean the Treasury regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including the corresponding provisions of any future regulations). "Regulatory Dissolution Election" shall mean an election made by any Member to dissolve the Company; provided, that, such election may be made by a Member only if (i) any governmental body or agency, or any other regulatory entity having jurisdiction over the Company or any Member or any Affiliate of a Member, has not, before the Regulatory Deadline, granted all approvals, permits, and other authorizations of any kind which in the reasonable opinion of the Member making such election is or may be necessary or appropriate to the operation of the Company or the participation of any Member in the Company as a Member, (ii) any such governmental body or agency or regulatory entity has granted one or more approvals, permits or other authorizations on terms or subject to conditions that are or may be, in the reasonable opinion of the Member making the election, materially adverse to the interests of the Company or such Member, or (iii) any such body, agency, or entity has taken any action, or has threatened to take any action, which in the reasonable opinion of the Member making such election is or may t)e materially adverse to the interests of the Company or such Member; provided, further, that any such Regulatory Dissolution Election must be made no later than the fifth Business Day following the Regulatory Deadline. "Representative" is defined in Section 5.1. "Required Members" shall mean NEI. "Required Portion" shall mean in respect of any Interest all or a portion of which is required to be transferred in a Required Regulatory Transfer, the smallest portion of such Interest that must be transferred in order to satisfy the requirements of such Required Regulatory Transfer, and in respect of the shares of stock of a Parent Entity (or if such entity is not a corporation, equity interests in such entity) all or a portion of which are required to be transferred in a Required Regulatory Transfer that will result in a Change of Control, the smallest number of shares of stock (or units of equity interest) that must be transferred in order to satisfy the requirements of such Required Regulatory Transfer. "Required Regulatory Transfer" shall mean any Transfer by a Member of all or a portion of its Interest or any Change of Control of a Parent Entity (other than NEES) which is required to be effected by any regulation, rule, administrative order or other administrative pronouncement of binding legal effect of any state public utility commission (or other similar agency). "Securities Act" shall mean the Securities Act of 1933, as amended. "Tax Matters Member" is defined in Section 8.1. "Term" is defined in Section 2.4. "Violation of the Business Judgment Rule" means conduct which is materially inconsistent with the obligation to be reasonably informed and to act in good faith or which is reckless, grossly negligent, willful misconduct or constitutes a knowing violation of law. SCHEDULE 1 Required Regulatory and Governmental Approvals NONE EX-24 17 NEES POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned directors of New England Electric System (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Gregory A. Hale, 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, 1998, 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 23rd day of February, 1999. s/Joan T. Bok s/William M. Bulger ________________________ _________________________ Joan T. Bok William M. Bulger s/Alfred D. Houston s/Paul L. Joskow _________________________ _________________________ Alfred D. Houston Paul L. Joskow s/John M. Kucharski s/Edward H. Ladd _________________________ _________________________ John M. Kucharski Edward H. Ladd s/Joshua A. McClure s/George M. Sage _________________________ _________________________ Joshua A. McClure George M. Sage s/Richard P. Sergel s/Charles E. Soule _________________________ _________________________ Richard P. Sergel Charles E. Soule s/Anne Wexler s/James Q. Wilson _________________________ _________________________ Anne Wexler James Q. Wilson s/James R. Winoker _________________________ James R. Winoker EX-27 18 NEES FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND ELECTRIC SYSTEM, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000071297 NEW ENGLAND ELECTRIC SYSTEM 1,000 DEC-31-1998 DEC-31-1998 12-MOS PER-BOOK 2,488,426 220,108 723,418 1,638,583 0 5,070,535 64,970 736,744 998,912 1,570,003 0 19,480 1,055,740 0 0 0 36,307 0 0 0 2,389,005 5,070,535 2,420,533 122,354 1,989,340 2,111,694 308,839 6,808 315,647 115,873 190,042 1,915 190,042 145,648 89,805 (157,197) $3.05 $3.04 Total deferred charges includes other assets. Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends reflect preferred stock dividends of subsidiaries. Total common stockholders equity includes treasury stock at cost and unrealized gain on securities. EX-10 19 NEP EXHIBIT 10(E) NEW ENGLAND POWER COMPANY Primary Service for Resale SUPPLEMENT TO AMENDMENT TO SERVICE AGREEMENT Dated as of: March 1, 1998 Parties: NEW ENGLAND POWER COMPANY, a Massachusetts corporation (the "Company" or "NEP"), and MASSACHUSETTS ELECTRIC COMPANY and NANTUCKET ELECTRIC COMPANY, both Massachusetts corporations (collectively, the "Customer" or "Mass. Electric"). WHEREAS, the Company and the Customer entered into an Amendment to Service Agreement dated as of February 1, 1997 (the "Amendment"), setting forth the conditions governing the termination of the sale by the Company and the purchase by the Customer of all-requirements electric service under the Company's FERC Tariff, Original Volume No. 1 (the "Tariff"); WHEREAS, on November 26, 1997, the Federal Energy Regulatory Commission ("Commission") accepted that Amendment in Docket No. ER97-678-000; WHEREAS, pursuant to chapter 164 of the Massachusetts General Laws, the Contract Termination Date under the Amendment will be March 1, 1998, the date that the Customer will commence providing retail access to its ultimate customers; WHEREAS, the terms of the Amendment included the Company's provision of wholesale Standard Offer Service to the Customer for a defined period following the Contract Termination Date, all as defined in the Amendment, to enable the Customer to meet its obligation to provide retail standard offer service to certain customers; WHEREAS, the Customer desires to arrange for a "Default Power Supply" for retail customers who are not eligible for retail standard offer service and who do not have another power supplier; WHEREAS, the Customer has requested the Company to provide a Default Power Supply to enable the Customer to provide retail default service during an interim period commencing on March 1, 1998; WHEREAS, the Company is willing to supply electric capacity and energy to the Customer for a Default Power Supply, in accordance with the terms and conditions of this Supplement to Amendment to Service Agreement ("Supplement"); WHEREAS, the Amendment to Service Agreement anticipated the sale of certain oil and gas properties owned by New England Energy, Inc. ("NEEI"), and provided that the estimated costs and sales proceeds included in the Contract Termination Charge formula would be adjusted upon the sale of the NEEI properties to reflect differences between the estimated and actual amounts; WHEREAS, the sale of the NEEI properties occurred on February 5, 1998; WHEREAS, a preliminary reconciliation of estimated to actual amounts associated with NEEI included in the Contract Termination Charge results in a reduction in the Customer's Contract Termination Charge obligation of approximately $15 million; WHEREAS, the Customer wishes to receive the net benefits from the sale of the NEEI properties on an accelerated basis commencing on March 1, 1998 and continuing over the twelve months thereafter; WHEREAS, pursuant to chapter 164 of the Massachusetts General Laws, retail customers eligible for service under the Customer's low-income rate R-2 have the right to return to Standard Offer Service from Mass. Electric at any time, and retail customers have the option to return to Standard Offer Service within 180 days after they commence service from a municipal aggregator; WHEREAS, the Amendment presently limits the Company's obligation to supply Standard Offer Service to the Customer on behalf of retail customers that elect to return to retail standard offer service to those residential and Rate G-1 customers who, during the first year after the Retail Access Date, elect to return to Standard Offer Service within 120 days of taking service from an alternative supplier; and WHEREAS, during the period prior to the divestiture of substantially all of NEP's non-nuclear generation facilities, the Company is willing to supply electric capacity and energy to the Customer for the requirements of all retail customers who can return to Standard Offer Service under the Massachusetts statute. NOW, THEREFORE, the Company and the Customer, in consideration of the mutual agreements set forth herein, agree as follows: 1. All capitalized terms that are used this Supplement and are not defined herein, but are defined in the Amendment or in the Tariff, shall have the meaning there stated. 2. For the period commencing on March 1, 1998 and extending through the first to occur of: (a) the date thirty (30) days after the Customer notifies the Company that the Customer seeks to terminate its purchase pursuant to this Supplement, said notification to occur upon the successful completion of a competitive solicitation for a default service supplier or the implementation of the New England Power Pool ("NEPOOL") Power Exchange; or (b) the closing of the sale of substantially all of the Company's non-nuclear generation to USGen New England, Inc. ("USGenNE"), such period to be referred to as the "Interim Period," the Company shall provide a Default Power Supply to the Customer in accordance with this section: (a) The Default Power Supply shall be made available at the Standard Offer Service prices stipulated in paragraph 7(a) of the Amendment per kilowatt-hour delivered to the meters of the Customer's ultimate customers receiving retail default service. (b) Default Service shall be made available by the Company to the Customer for resale to those ultimate customers in the Customer's service territory who purchase retail default service from the Customer during the Interim Period. 3. The Customer shall have no obligation to purchase its Default Power Supply from the Company after the end of the Interim Period and the Company shall have no obligation to sell or supply Default Power Supply to the Customer after the end of the Interim Period. In the event the Company bids to sell a Default Power Supply to the Customer beyond the end of the Interim Period, the Company shall have no obligation to offer to supply such power at the Standard Offer Service prices set forth in section 2 of this Supplement. 4. The Company further agrees to accelerate the return of net benefits associated with the sale of the NEEI properties to the twelve months from March 1998 through February 1999 by implementing a Reconciliation Factor of a credit of $0.00093 per kilowatthour during that twelve month period. 5. The calculation of the Reconciliation Factor is shown on the attached pages from the Amendment to Service Agreement, Appendix 1, First Revised Page 7 of 25, and Schedule 3, First Revised Page 2 of 2. The costs and revenues are preliminary and will be subject to a further reconciliation, and any changes shall be reflected in the Reconciliation Account at the time the adjustment or reconciliation is made. 6. For the period prior to the Divestiture Date, the Company shall provide Standard Offer Service to the Customer for: (1) all retail customers eligible for service under the Customer's residential rate R-2 who request such service; and (2) any retail customer of the Customer exercising its right to opt out of service from a municipal aggregator within 180 days of the date from which the retail customer began receiving service from such municipal aggregator. 7. This Supplement shall take effect as of March 1, 1998, or such other date as permitted by the Commission. 8. The provisions of this Supplement shall override any inconsistent provisions of the Amendment, but all provisions of the Tariff and the Amendment (specifically including the recovery of NEEI amortization and return as set forth in Sections 1.1.1(b)(iv) and 1.1.2.(b) and (c) of the Amendment and Schedule 1, page 6, column 2) that are not inconsistent with this Supplement, as well as the Service Agreement between the Company and the Customer, shall remain in full force and effect. 9. The rights conferred and obligations imposed on the Customer and the Company under this Supplement shall be binding on or inure to the benefit of their successors in interest or assignees as if each such successor or assignee was itself a signatory hereto. IN WITNESS WHEREOF, the parties have executed this Supplement to Amendment to Service Agreement as of the date first above written. NEW ENGLAND POWER COMPANY By_________________________________ Its_________________________________ MASSACHUSETTS ELECTRIC COMPANY and NANTUCKET ELECTRIC COMPANY By_________________________________ Their_______________________________ EX-10 20 NEP EXHIBIT 10(F) NEW ENGLAND POWER COMPANY Primary Service for Resale SUPPLEMENT TO AMENDMENT TO SERVICE AGREEMENT Dated as of: December 31, 1998 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 Company and the Customer are parties to an Amendment to Service Agreement dated as of February 1, 1997 approved by the Commission in Docket ER97-680-000 and amended by an October 1, 1997 filing approved by the Commission in Docket ER98-6-000 (the Amendment to Service Agreement, as amended on October 1, 1997 is hereinafter referred to as the "Amendment"); WHEREAS, the Customer expects to have available $21,400,000 as a result of the accrual of an over-collection in retail rates authorized by the Rhode Island Public Utilities Commission; WHEREAS, the Customer now desires to use those funds to make a prepayment of a portion of the Customer's Contract Termination Charge obligation to the Company as set forth in the Amendment; WHEREAS, the Company is willing to accept such prepayment; and WHEREAS, the Company and the Customer agree that such prepayment of Contract Termination Charges shall be made in accordance with the terms and conditions of this Supplement to Amendment to Service Agreement ("Supplement"). NOW, THEREFORE, the Company and the Customer, in consideration of the mutual agreements set forth herein, agree as follows: 1. All capitalized terms that are used in this Supplement and are not defined herein, but are defined in the Amendment or in the Tariff, shall have the meaning there stated. 2. On January 1, 1999, the Customer shall make a payment to the Company of $21,400,000, to be treated as a prepayment with a pre-tax return of 12.16 percent on the unreturned balances towards the Customer's Contract Termination Charge obligation to NEP. Such prepayment shall be used to reduce the Fixed Component of the Contract Termination Charge over two years. Specifically, the Company will reduce its Base Contract Termination Charge to Narragansett in 1999 and 2000 by a Prepayment Factor of $0.0023 (0.23 cent or 2.3 mills) per kilowatt-hour to reflect the Customer's prepayment. The attached Schedule 1 provides the derivation of the Prepayment Factor for 1999 and 2000 after accounting for the Customer's prepayment in the manner described in this paragraph. The difference between the estimated revenue reduction in Schedule 1 and the actual revenue reduction produced by the implementation of the $0.0023 Prepayment Factor as applied to actual kilowatt- hour deliveries shall be reflected in the Reconciliation Account. 3. This Supplement shall take effect as of January 1, 1999, or such other date as permitted by the Commission. 4. Except as expressly modified by this Supplement, all terms of the Amendment shall remain in full force and effect. 5. The rights conferred and obligations imposed on the Customer and the Company under this Supplement shall be binding on or inure to the benefit of their successors in interest or assignees as if each such successor or assignee was itself a signatory hereto. IN WITNESS WHEREOF, the parties have executed this Supplement to Amendment to Service Agreement as of the date first above written. NEW ENGLAND POWER COMPANY By_________________________________ Its_________________________________ THE NARRAGANSETT ELECTRIC COMPANY By_________________________________ Its_________________________________ EX-10 21 NEP EXHIBIT 10(FF)(V) QUEBEC INTERCONNECTION TRANSFER AGREEMENT WHEREAS, NEW ENGLAND POWER COMPANY, a Massachusetts corporation ("NEP"), and USGEN NEW ENGLAND, INC., a Delaware corporation ("Asset Purchaser"), along with The Narragansett Electric Company, are parties to an Asset Purchase Agreement, dated August 5, 1997; and WHEREAS, under section 2.3(a)(i) of the Asset Purchase Agreement, Asset Purchaser has agreed to assume NEP's rights and obligations under certain contracts associated with the purchase of energy from Hydro-Quebec, a Canadian utility, and the support and use of the HVDC interconnection ("Interconnection") between Hydro-Quebec, a Canadian utility, and the New England Power Pool ("NEPOOL"); and WHEREAS the respective rights and obligations of Hydro-Quebec and certain members of NEPOOL collectively regarding the Interconnection are set forth in the Interconnection Agreement between Hydro-Quebec and NEPOOL, dated March 21, 1983, and the Energy Banking Agreement between Hydro-Quebec, NEPOOL, New England Electric Transmission Company, and Vermont Electric Transmission Company, dated March 21, 1983; and WHEREAS Asset Purchaser intends to become a member of NEPOOL, and as such will enjoy the rights and undertake the obligations of NEPOOL members under the Interconnection Agreement, pursuant to section 15.3 thereof, and under the Energy Banking Agreement, under section 12.3 thereof; and WHEREAS, under the PPA Transfer Agreement (an agreement between NEP and Asset Purchaser transferring to Asset Purchaser NEP's rights and obligations under specified power purchase agreements) dated August 5, 1997, NEP has transferred to Asset Purchaser NEP's rights and obligations under the Energy Contract, an agreement between Hydro Quebec and NEPOOL dated March 21, 1983, and the Firm Energy Contract, an agreement between Hydro Quebec and 37 NEPOOL participants dated October 14, 1985; and WHEREAS the respective rights and obligations of NEPOOL members among themselves and of NEP with respect to Hydro-Quebec with respect to the Interconnection are set forth in, inter alia, the following agreements (each, as amended, supplemented, or restated, a "Commitment"): Agreement with Respect to Use of the Quebec Interconnection, dated December 1, 1981, as amended and restated as of September 1, 1985, and as further amended and restated as of November 19, 1997, and as further amended as of April 8, 1998 ("Use Agreement"); Phase I Vermont Transmission Line Support Agreement, dated December 1, 1981, as amended on June 1, 1982, November 1, 1982, and January 1, 1986; Phase I Terminal Facility Support Agreement, dated December 1, 1981, as amended June 1, 1982, November 1, 1982 and January 1, 1986. Phase II Boston Edison AC Facilities Support Agreement, dated June 1, 1985, as amended May 1, 1986, February 1, 1987, June 1, 1987, September 1, 1987, and August 1, 1988; Phase II New England Power AC Facilities Support Agreement, dated June 1, 1985, as amended May 1, 1986, February 1, 1987, June 1, 1987, September 1, 1987, and August 1, 1988 ("NEP Facilities Support Agreement"); Phase II Massachusetts Transmission Facilities Support Agreement, dated June 1, 1985, as amended May 1, 1986, February 1, 1987, June 1, 1987, September 1, 1987, October 1, 1987, August 1, 1988, and January 1, 1989; and Phase II New Hampshire Transmission Facilities Support Agreement, dated June 1, 1985, as amended May 1, 1986, February 1, 1987, June 1, 1987, September 1, 1987, October 1, 1987, August 1, 1988, January 1, 1989, and January 1, 1990; and NEP/Hydro-Quebec Interconnection Agreement dated as of December 19, 1996. WHEREAS, it is the intention of NEP and Asset Purchaser hereby to enter into an agreement to fulfil the commitment of section 2.3(a)(i) of the Asset Purchase Agreement; NOW THEREFORE, this QUEBEC INTERCONNECTION TRANSFER AGREEMENT ("Agreement") is dated as of September 1, 1998, and is made by and between NEP and Asset Purchaser. This Agreement sets forth the terms and conditions under which NEP will transfer to Asset Purchaser the benefits, rights, and privileges associated with the Commitments and Asset Purchaser will undertake the payment obligations associated with the Commitments, except for NEP's rights and obligations under the NEP Facilities Support Agreement and except that regarding NEP's right to designate a representative to serve on the Advisory Committee provided for in Section 6 of the Massachusetts Facilities Support Agreement and Section 6 of the New Hampshire Facilities Support Agreement (hereinafter "the Section 6 Right"), the Asset Purchaser shall have an option to exercise the Section 6 Right. With regard to the NEP Facilities Support Agreement NEP will transfer to Asset Purchaser such benefits, rights, and privileges, and only such benefits, rights, and privileges, as NEP enjoys as a Supporter under said Commitment, and Asset Purchaser will undertake such obligations, and only such obligations, as NEP has undertaken as a Supporter under said Commitment. NEP will retain all of its rights and obligations under the NEP Facilities Support Agreement as owner and operator of the facilities that are the subject of said agreement. NEP and Asset Purchaser desire said transfer and undertaking to occur concurrently with the sale of NEP's generation business to Asset Purchaser pursuant to the Asset Purchase Agreement. 1. The Commitments are incorporated into this Agreement by reference. A Commitment shall be automatically deleted from the Commitments incorporated in this Agreement without further action by the parties (I) on the effective date of any Novation (defined in Section as 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 12) and shall remain in effect until Asset Purchaser has made payment to NEP of amounts owed pursuant to Section 4 of this Agreement and NEP has made payment to Asset Purchaser of any amounts owed pursuant to Section 3 or 4 of this Agreement for the last month in which a Commitment remains incorporated in this Agreement. (a) Commencing as of the Effective Date, and terminating upon the termination of the Use Agreement, pursuant to section 6 of said Agreement, NEP transfers to Asset Purchaser the right to use all of NEP's Percentage Interest in the Transfer Capability of the Interconnection. Such transfer shall be subject to the conditions set forth in section 6 of said Agreement. (b) Asset Purchaser agrees that, to the extent it elects not to use a portion of the Transfer Capability transferred under subsection (a) of this section, Asset Purchase shall so notify NEP in writing, and NEP may make such Transfer Capability available under NEP's open access transmission tariff on file with the Federal Energy Regulatory Commission, and Asset Purchaser agrees to provide NEP with all information that NEP reasonably requests for the purpose of calculating the Annual Opportunity Cost Charge in Attachment Q, Exhibit 2 of the tariff to each Customer that uses a portion of the Transfer Capability. (c) Commencing as of the Effective Date, NEP agrees that it will provide to Asset Purchaser all benefits accruing to NEP under each of the Commitments, except for the NEP Facilities Support Agreement, and that Asset Purchaser may exercise all rights and privileges of NEP under each of the Commitments; provided, however, that NEP shall retain the Section 6 Right subject to Asset Purchaser's option, exercisable in Asset Purchaser's sole discretion, to direct NEP to transfer to it the Section 6 Right. Commencing as of the Effective Date, NEP agrees that, if and to the extent Asset Purchaser does not enjoy the rights of NEPOOL members under the Interconnection Agreement, NEP will provide to Asset Purchaser all benefits accruing to NEP under the Interconnection Agreement, and that Asset Purchaser may exercise all rights and privileges of NEP under the Interconnection Agreement, and that Asset Purchaser may exercise all rights and privileges of NEP under the Interconnection Agreement and the Interconnection Agreement shall be deemed to be a "Commitment" under this Agreement. Commencing as of the Effective Date, NEP agrees that, if and to the extent Asset Purchaser does not enjoy the rights of NEPOOL members under the Energy Banking Agreement, NEP will provide to Asset Purchaser all benefits accruing to NEP under the Energy Banking Agreement, and that Asset Purchaser may exercise all rights and privileges of NEP under the Energy Banking Agreement and the Energy Banking Agreement shall be deemed to be a "Commitment" under this Agreement. (d) Commencing as of the Effective Date, NEP agrees that it will provide Asset Purchaser such benefits accruing to NEP under the NEP Facilities Support Agreement, and only such benefits, as NEP enjoys jointly with the other Supporters of the NEP Facilities Support Agreement and that Asset Purchaser may exercise such rights and privileges of NEP under the NEP Facilities Support Agreement, and only such rights and privileges, as NEP enjoys jointly with the other Supporters of the NEP Facilities Support Agreement. (e) Commencing as of the Effective Date, Asset Purchaser agrees to maintain a billing settlement account at NEPOOL. The benefits and obligations relating to the NEPOOL settlement process that are being transferred under this Agreement, including but not limited to capability responsibility, shall be reflected in the Asset Purchaser's settlement account. 4. Commencing as of the month following the Effective Date, Asset Purchaser agrees to pay to NEP (unless mutually agreeable arrangements are in place for Asset Purchaser to make direct payments under a Commitment) each month all amounts properly due for the preceding month, under each Commitment that remained incorporated in the Agreement during the previous month, from NEP to any party to such Commitment, including such amounts for which NEP is responsible solely as a Supporter, and not as owner and/or operator, under the NEP Facilities Support Agreement, except that during the first month following the Effective Date, Asset Purchaser shall pay to NEP the amount described in subsection (b) of this section. The amounts properly due for the preceding month shall include any charges to NEP associated with goods or services provided pursuant to the Commitments in months prior to the preceding month but subsequent to the Effective Date, including billing adjustments and true-ups, any charges or costs resulting from regulatory or court orders, and any associated interest, but specifically excluding any general and administrative costs incurred by NEP in administering Attachment Q of NEP's open access transmission tariff, and shall be increased by any costs incurred by NEP or reduced by any revenues received by NEP, both associated with the sale of Transfer Capability under section 3(b). Asset Purchaser's rights to audit NEP's bills shall be governed by NEP's open access transmission tariff. Asset Purchaser shall make payment under this section by wire transfer of immediately available funds at least one business day before such payment is due by NEP under each Commitment as to allow NEP to make timely payment under such Commitment. In turn, each month NEP agrees to timely pay all amounts due under each Commitment, which includes the amount NEP receives from Asset Purchaser in connection with such Commitment. (a) During the first month following the Effective Date, Asset Purchaser agrees to pay to NEP a portion of all amounts properly due for the preceding month, under each Commitment that remained incorporated in the Agreement during the previous month, from NEP to any party to such Commitment, including such amounts for which NEP is responsible as a Supporter under the NEP Facilities Support Agreement. Such portion shall be determined according to 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. (b) Upon and after the Effective Date, NEP shall notify Asset Purchaser within a reasonable time of any and all amounts which are then or thereafter received, under each Commitment, by NEP from any other party to such Commitments, except for payments received by NEP as owner and operator of the facilities that are the subject of the NEP Facilities Support Agreement. Such amounts shall include, 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 such other party. At Asset Purchaser's direction, NEP shall pay such amount to Asset Purchaser or 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 hereof or at the termination of this Agreement. Such amount shall exclude 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 such other party to NEP with respect to disputes arising before the Effective Date that are attributable to a period prior to the Effective Date. 5. 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 except for the NEP Facilities Support Agreement and except for NEP's Section 6 Right, subject to the Asset Purchaser's exercise of the option described in Section 3(c). Effective as of the Effective Date, NEP hereby further irrevocably and unconditionally appoints Asset Purchaser as its representative and agent for any actions, and only such actions, that might be taken by NEP as a Supporter under the NEP Facilities Support Agreement. Asset Purchaser is hereby authorized under such appointments to take all actions that NEP may lawfully take under such Commitments without further approval by NEP, including, without limitation, the following: with respect to all matters arising under such Commitments, deal directly with the other parties to such Commitment, the New England Power Pool (NEPOOL), the Independent System Operator (as designated under the Restated NEPOOL Agreement as filed with the Federal Energy Regulatory Commission on December 31, 1996, and as amended from time to time), other transporters of electric energy, federal, state and local governmental authorities, and any other persons; act on NEP's behalf in the prosecution or defense, as the case may be, of any rights or liabilities arising under such Commitments; monitor the parties' performance under the Commitments; review and audit all bills and related documentation rendered pursuant to the Commitments; and on NEP's behalf enter into amendments to such Commitments of any nature; provided, however Asset Purchaser shall not (i) amend any Commitment in a manner that affects NEP's rights or obligations under such Commitment prior to the Effective Date; (ii) amend any Commitment to extend the term thereof or increase NEP's obligations thereunder without NEP's consent, which shall not be unreasonably withheld and provided, further, that Asset Purchaser need not seek NEP's consent for amendments, extensions, or increases in NEP obligations if (i) the net present value of any increase on NEP obligations created thereby is less than five million dollars ($5,000,000) and (ii) Asset Purchaser shall have attained and maintained (A) "net worth," or "consolidated net worth," if applicable, as determined in accordance with U.S. generally accepted accounting principles and reflected in an audited balance sheet (or consolidated balance sheet, if applicable) ("Net Worth") at least equal to $500,000,000, and (B) an Investment Grade Rating, as defined below. For purposes hereof, "Investment Grade Rating" means either (i) and S&P Credit Rating (as defined below) of BBB or above or (ii) a Moody's Credit Rating (as defined below) of Baa2 or above. "S&P Credit Rating" shall mean the rating assigned by Standard & Poor's Ratings Group ("S&P") to the senior unsecured long-term debt of the Asset Purchaser (or, in the event that none of the Asset Purchaser's senior unsecured debt is rated by S&P, the Asset Purchaser's implied senior unsecured debt rating), and "Moody's Credit Rating" shall mean the rating level assigned by Moody's Investor Service, Inc. ("Moody's") to the senior unsecured long-term debt of the Asset Purchaser (or, in the event that none of the Asset Purchaser's senior unsecured debt is rated by Moody's, the Asset Purchaser's implied senior unsecured debt rating). 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 with respect to such information to be subject to any confidentiality provisions of such Commitment and any restrictions on the dissemination of such information as are required by the Federal Energy Regulatory Commission. 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. Notwithstanding any provision to the contrary in this section, NEP shall have the right, and nothing in this Agreement shall limit NEP's right, to take a position on its own behalf and to submit testimony, make filings, and otherwise assert and defend such position in connection with any matter or proceeding concerning the recovery of costs associated with any Commitment in NEP's transmission rates. Neither of the parties shall institute proceedings concerning this Agreement under sections 205 or 206 of the Federal Power Act without the consent of the other party, which consent shall not be unreasonably withheld. (a) NEP agrees not to agree to any amendment to, termination of, or waiver of rights under a Commitment other than the NEP Facilities Support Agreement without Asset Purchaser's consent, which Asset Purchaser may grant or withhold in its sole discretion. NEP will not take any actions inconsistent with the provisions of Section 5. 6. 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 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 purpose hereof NEP's and Asset Purchaser's administrative costs incurred in administering the Commitments and performing their obligations under this Agreement shall not be an Indemnifiable Loss. For purposes hereof, any failure of NEP to perform any act required to be performed by it under a Commitment (other than as owner/operator under the NEP Facilities Support Agreement) which increases the amounts payable by Asset Purchaser under Section 4(a) hereof shall be entitled to indemnification hereunder. (a) 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 payment obligation of, or exercise of rights as NEP's agent by, Asset Purchaser resulting from or contained in this Agreement. (b) 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. (c) The expiration, termination or extinguishment of any covenant or agreement shall not affect the parties' obligations under this Section 6 if the Indemnitee provided to the person who is 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. (d) 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 payment obligation resulting from this Agreement. (e) 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. (f) 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. (g) 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. (h) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event not later than ten (10) calendar days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party will have a period of thirty (30) calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its rights to indemnification under this Agreement. (i) 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 Lose 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. (j) 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 other parties to the Commitment (a "Novation"), except that, with regard to the NEP Facilities Support Agreement, such assignment will be limited to the rights and obligations of NEP as a Supporter under the NEP Facilities Support Agreement and except that NEP shall retain its Section 6 Right, subject to Asset Purchaser's option, exercisable in Asset Purchaser's sole discretion, to direct NEP to assign its Section 6 Right, in which event there shall be a Novation of the Section 6 Right. Any such Novation shall include all modifications necessary to reflect the substitution of Asset Purchaser for NEP as the party under the Commitment and to properly describe interconnection, delivery point and transmission system references and obligations in the Commitment. 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 Commitment. NEP and Asset Purchaser agree to execute all agreements and documents reasonably required by the other in connection with all such Novations. 8. 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. 9. 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, not to be unreasonably withheld, 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 August 5, 1997, executed by PG&E Corporation for the purpose of financing or refinancing the Purchased Assets (as defined in the Asset Purchase Agreement); 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 Asset Purchase Agreement), 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. This Agreement, the Asset Purchase Agreement and any other agreement entered into by the parties pursuant to the Asset Purchase Agreement 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 except the parties hereto any rights or remedies. The interpretation and performance of this Agreement shall be according to and controlled by the Federal Power Act and the laws of The Commonwealth of Massachusetts (regardless of the laws that might otherwise govern under applicable Massachusetts principles of conflicts of laws). 11. 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. 12. This Agreement shall be of no force and effect until the Effective Date. If the Asset Purchase Agreement shall have been terminated before the occurrence of the Closing Date (as defined in the Asset Purchase Agreement), this Agreement shall, without any action of the parties hereto, terminate as of the time of the termination of the Asset Purchase Agreement. As used in this Agreement, "Effective Date" shall mean the Closing Date (as defined in the Asset Purchase 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 By: /s/ Michael E. Jesanis Name: Michael E. Jesanis Title: Vice President USGEN NEW ENGLAND, INC. By: /s/ James V. Mahoney Name: James V. Mahoney Title: Senior Vice President EX-13 22 NEP ANNUAL REPORT Annual Report 1998 New England Power Company A Subsidiary of New England Electric System [LOGO] New England Power A NEES Company New England Power Company 25 Research Drive Westborough, Massachusetts 01582 Directors (As of January 1, 1999) Peter G. Flynn President of the Company Alfred D. Houston Chairman of the Company and Chairman 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 January 1, 1999) Alfred D. Houston Chairman of the Company and Chairman of New England Electric System Peter G. Flynn 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 and of certain affiliates James S. Robinson Vice President of the Company Robert King Wulff Clerk of the Company and of certain affiliates, Secretary or Assistant Clerk of certain affiliates and Assistant Secretary of an affiliate John G. Cochrane Treasurer of the Company and of certain affiliates, Vice President of an affiliate, Assistant Treasurer of an affiliate and Treasurer of New England Electric System Kirk L. Ramsauer Assistant Clerk of the Company and of certain affiliates, and Secretary, Assistant Secretary or Clerk of certain affiliates Howard W. McDowell Assistant Treasurer and Controller of the Company and of certain affiliates, Senior Vice President of an affiliate, Treasurer or Controller of certain affiliates and Assistant Secretary of an affiliate Transfer Agent, Dividend Paying Agent, and Registrar of Preferred Stock, BankBoston, N.A., Boston, Massachusetts This report is not to be considered an offer to sell or buy or solicitation of an offer to sell or buy any security. New England Power Company New England Power Company, (the Company) a wholly owned subsidiary of New England Electric System (NEES), is a Massachusetts corporation qualified to do business in Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine, and Vermont. The Company is subject, for certain purposes, to the jurisdiction of the regulatory commissions of these six states, the Securities and Exchange Commission, under the Public Utility Holding Company Act of 1935, the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission. The Company's business is primarily the transmission of electric energy in wholesale quantities to other electric utilities, principally its distribution affiliates Granite State Electric Company, Massachusetts Electric Company, Nantucket Electric Company, and The Narragansett Electric Company (Narragansett Electric). In September 1998, the Company and Narragansett Electric completed the divestiture of substantially all of their nonnuclear generating business. However, the Company continues to own minority interests in two joint owned nuclear generating units as well as minority equity interests in 4 nuclear generating companies. For further information on industry restructuring and the divestiture of NEES' nonnuclear generating business, refer to the "Industry Restructuring" section of Financial Review. In December 1998, NEES agreed to a merger with The National Grid Group plc, whose principal subsidiary operates the transmission system in England and Wales. In February 1999, NEES entered into an agreement to acquire Eastern Utilities Associates, a utility holding company serving approximately 300,000 customers in Massachusetts and Rhode Island. For further information on these proposed mergers, refer to the "Merger Agreements" sections of Financial Review. Report of Independent Accountants New England Power Company, Westborough, Massachusetts: In our opinion, the accompanying balance sheets and the related statements of income, of retained earnings, and of cash flows present fairly, in all material respects, the financial position of New England Power Company (the Company), a wholly owned subsidiary of New England Electric System, at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Boston, Massachusetts PricewaterhouseCoopers LLP February 23, 1999 New England Power Company Financial Review Merger Agreement with The National Grid Group plc On December 11, 1998, New England Electric System (NEES), The National Grid Group plc (National Grid), and NGG Holdings LLC (Holdings), a directly and indirectly wholly owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly owned subsidiary of National Grid. New England Power Company (the Company) will remain a wholly owned subsidiary of NEES. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935 (1935 Act), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC), support or approval from the states in which NEES subsidiaries operate, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. Merger Agreement with Eastern Utilities Associates On February 1, 1999, NEES, Eastern Utilities Associates (EUA), and Research Drive LLC (Research Drive), a directly and indirectly wholly owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly owned subsidiary of NEES. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. Industry Restructuring During 1998, pursuant to legislation enacted in Massachusetts, Rhode Island, and New Hampshire, and settlement agreements approved by state and federal regulators (the Settlement Agreements), all customers were provided the right to purchase electricity from the power supplier of their choice. The NEES companies remain obligated to deliver that electricity over its transmission and distribution systems, with such delivery services provided under regulated rates approved by state and federal regulators. As described below, those delivery rates include a non-bypassable charge for the costs of NEES' former generating business which were not recovered through the sale of that business ("stranded costs"), which was substantially completed in 1998. As a result of the Settlement Agreements, customers' choice of power supplier has no impact on NEES' transmission and distribution business or on its ability to recover stranded costs. In order to facilitate the implementation of customer choice, the Settlement Agreements provided for the termination of the Company's requirements contracts with its affiliated distribution customers. The Company's requirements contracts with unaffiliated customers have also generally been terminated pursuant to settlement agreements or tariff provisions. However, the Company remains obligated to provide transition power supply service to new customer load in Rhode Island. On September 1, 1998, the Company and The Narragansett Electric Company (Narragansett Electric) (collectively, the Sellers) completed the sale of substantially all of their nonnuclear generating business, all of which had a book value of approximately $1.1 billion, to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The Sellers received $1.59 billion for the sale. In addition, the Company was reimbursed approximately $140 million for costs associated with early retirements and special severance programs for employees affected by industry restructuring, and the value of inventories. USGen assumed responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen also assumed the Sellers' obligations under long-term fuel and fuel transportation contracts, and certain collective bargaining agreements. As part of the sale, the Company also signed a purchased power transfer agreement through which USGen purchased the Company's entitlement to approximately 1,100 megawatts (MW) of power procured under long-term contracts in exchange for monthly fixed payments by the Company averaging $9.5 million per month through January 2008 (having a net present value of $833 million) toward the above-market cost of those contracts. In some cases, these transfers involved formal assignment of the contracts to USGen and a release of the Company from further obligations to the power supplier, while others did not. For those that involved formal assignment, the Company was required to make a lump sum payment equivalent to the present value of the monthly fixed payment obligations of those contracts. On or prior to the closing date, the Company made lump sum payments totaling approximately $340 million and was released from further obligations relating to two of the contracts. These lump sum payments are separate from the $833 million figure referred to above. As part of the divestiture plan, in February 1998, New England Energy Incorporated (NEEI), a wholly owned subsidiary of NEES, whose costs had been supported by the Company, 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. In addition, the Company agreed under the Settlement Agreements to endeavor to sell its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine. In February 1999, Vermont Yankee Nuclear Power Corporation entered into a letter of intent to sell its assets. For further information, refer to the "Nuclear Units" section of this Financial Review. The Settlement Agreements provide that the Company's stranded costs are to be recovered from its wholesale customers through contract termination charges (CTC). The affiliated wholesale customers, in turn, are recovering those costs through their delivery charges to distribution customers. Under the Settlement Agreements, the recovery of the Company's stranded costs is divided into several categories. Unrecovered costs associated with generating plants (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and earn a return on equity averaging 9.7 percent. The Company's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. The CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of the Company's nonnuclear generating business. As the CTC rate declines, the Company, under certain of the Settlement Agreements, earns incentives based on successful mitigation of its stranded costs. These incentives supplement the Company's return on equity. Finally, the Settlement Agreements provide that until such time as the Company divests its operating nuclear interests, the Company will share with customers, through the CTC, 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. 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 these charges because they are expected to be included in future customer charges. In 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) concluded that a utility that had 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 stranded costs. The Company has received authorization from the FERC to recover through the CTC substantially all of the costs associated with its former generating business not recovered through the sale of that business. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, substantially all of the Company's business, including the recovery of its stranded costs, remains under cost-based rate regulation. The Company believes these factors and the EITF conclusion allow it to continue to apply FAS 71. Because of the nuclear cost-sharing provisions related to the Company's CTC, the Company ceased applying FAS 71 in 1997 to 20 percent of its ongoing nuclear operations, the impact of which is immaterial. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates for the Company or its affiliates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets, including those being recovered through the Company's CTC. As a result of applying FAS 71, the Company has recorded a regulatory asset for the costs that are recoverable from customers through the CTC. The regulatory asset reflects the loss on the sale of NEES' oil and gas business and the unrecovered plant costs in operating nuclear plants (assuming no market value), the costs associated with permanently closed nuclear power plants, and the present value of the payments associated with the above-market costs of purchased power contracts, reduced by the gain from the sale of the nonnuclear generating business. At December 31, 1998, the regulatory asset related to the CTC was approximately $1.5 billion, of which $1.2 billion related to the above-market costs of purchased power contracts. As described above, the CTC regulatory asset includes the unrecovered plant costs associated with the Company's interest in operating nuclear plants. This balance sheet treatment is due to the Company's conclusion that its interests in the Millstone 3 and Seabrook 1 nuclear generating units have little, if any, market value. Three proposed sales of nuclear units by other utilities have required the seller to set aside amounts for decommissioning in excess of the proceeds from the sale of the units. Two of these proposed sales were agreed upon prior to the end of the third quarter of 1998. As a result, at the end of the third quarter of 1998, the Company recorded an impairment writedown in its reserve for depreciation of approximately $390 million, which represents the net book value at December 31, 1995, less applicable depreciation subsequent to that date, of Millstone 3 and Seabrook 1. Because the Settlement Agreements permit the Company to recover its pre-1996 investment as well as decommissioning expenses through the CTC, the Company established a regulatory asset in an amount equal to the impairment writedown. Should the Company's efforts to sell its nuclear interests result in a gain over the amounts remaining in the plant account, such gain will be credited to customers through the CTC. Overview of Financial Results Net income for 1998 decreased $22 million compared with 1997 primarily due to the sale of the Company's non-nuclear generating business on September 1, 1998. The decrease is also attributable to reduced revenues as a result of the termination of its all-requirements contracts with its primary customers. For further information on the termination of these contracts, see the "Operating Revenue" section. Net income for 1997 decreased $8 million compared with 1996. The decrease was primarily due to increased operation and maintenance costs, partially offset by a transmission rate increase, decreased purchased electric energy costs, excluding fuel, and decreased depreciation and amortization. Operating Revenue Operating revenue for 1998 decreased $460 million compared with 1997. Under the provisions of all-requirements contracts, the Company historically furnished all electrical requirements to its affiliated wholesale customers, obligating the Company to supply such requirements at its standard resale rates. As a result of the Settlement Agreements, the all-requirements provisions of the contracts with the Company's primary customers in Rhode Island, Massachusetts, and New Hampshire were terminated effective January 1, 1998, March 1, 1998, and July 1, 1998, respectively. As of those dates, the Company continued to supply power to the affiliates to meet their standard offer generation service obligations, but at lower rates. On September 1, 1998, the Company sold its nonnuclear generating business, and USGen and TransCanada Power Marketing, Ltd. became the principal wholesale suppliers for the affiliated companies. Partially offsetting this revenue decrease is billings of CTCs and an increase in transmission billings. Operating revenue for 1997 increased $78 million compared with 1996 primarily due to increased fuel recovery, the effect of a transmission rate increase that went into effect in mid-1996, and stranded investment recovery related to amounts recovered in connection with retail wheeling pilot programs and the first phase of customer choice in Rhode Island. These increases were offset by decreased sales due to a decrease in peak demand billing as a result of milder weather in the first quarter of 1997 and reduced load due to retail wheeling pilot programs. For a discussion of fuel recovery revenues, see the discussion of the 1997 increase in fuel costs in the "Operating Expenses" section. Operating Expenses Operating expenses for 1998 decreased $426 million compared with 1997. The September 1, 1998 sale of the Company's nonnuclear generating business had the impact of decreasing all categories of operating expenses. The decrease in operating expenses also reflects reduced charges of $22 million from the Maine Yankee nuclear power plant, which was closed in mid-1997 and reduced charges of $3 million and $12 million from the partially owned Seabrook 1 and Millstone 3 nuclear generating facilities, respectively. Operating expenses were also lower due to lower charges related to postretirement benefits other than pensions (PBOPs), reflecting the completion of the accelerated amortization of NEP's deferred PBOP costs in 1997 under the terms of a 1995 rate agreement. The decrease in depreciation and amortization expense related to the sale of the nonnuclear generating business was more than offset by CTC amortization and the accelerated amortization of Millstone 3, a portion of which was attributable to the completion of the PBOP amortization discussed above. Operating expenses for 1997 increased $91 million compared with 1996 primarily due to increased fuel costs, increased charges from the Maine Yankee nuclear power plant, and increased other operation and maintenance expenses. Fuel costs represented fuel for generation and the portion of purchased electric energy permitted in the past to be recovered through the Company's fuel adjustment clause. The increase in fuel costs reflected 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 other operation and maintenance expenses in 1997 was due to an increase in transmission wheeling costs, increased maintenance costs at the partially owned Seabrook 1 and Millstone 3 nuclear facilities, an increase in deferred PBOP amortization, 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 increase in operating expenses in 1997 was partially offset by a decrease in purchased power 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. Nuclear Units Nuclear Units Permanently Shut Down Three regional nuclear generating companies in which the Company has a minority interest own nuclear generating units that have been permanently shut down. These three units are as follows:
Future Estimated NEP's Billings Investment Date to NEP Unit % $ (millions) Retired $ (millions) - ----------------------------------------------------- ------------ Yankee Atomic 30 6 Feb 1992 24 Connecticut Yankee 15 16 Dec 1996 75 Maine Yankee 20 16 Aug 1997 143
In the case of each of these units, the Company has recorded a liability and an offsetting regulatory asset reflecting the 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. In August 1998, a FERC Administrative Law Judge (ALJ) issued an initial decision which would allow for full recovery of Connecticut Yankee's unrecovered investment, but precluded a return on that investment. Connecticut Yankee, the Company, and other parties have filed with the FERC exceptions to the ALJ's decision. Should the FERC uphold the ALJ's initial decision in its current form, the Company's share of the loss of the return component would total approximately $12 million to $15 million before taxes. In January 1999, parties in the Maine Yankee proceeding filed a comprehensive settlement agreement with the FERC, under which Maine Yankee would recover all unamortized investment in the plant, including a return on its equity investment of 6.5 percent, as well as decommissioning costs and other costs. This settlement agreement requires FERC approval. The Company's industry restructuring settlements allow it to recover all costs that the FERC allows these Yankee companies to bill to the Company. The Company and several other shareholders (Sponsors) of Maine Yankee are parties to 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlements 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 had ceased making payments under the Secondary Purchase Agreements, claiming that such agreements excuse further payments upon plant shutdown. In February 1999, a settlement agreement which fully resolves the dispute between the Sponsors and Secondary Purchasers was filed with the FERC, under which the Secondary Purchasers would be required to make certain payments to Maine Yankee, and, in turn, to the Company, related to both past and future obligations under the Secondary Purchase Agreements. This settlement agreement requires FERC approval. Shutdown costs are recoverable from customers under the Settlement Agreements. 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. 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. Vermont Yankee On February 25, 1999, the Board of Directors of Vermont Yankee Nuclear Power Corporation granted an exclusive right to AmerGen Energy Company (AmerGen), a joint venture by PECO Energy and British Energy to conduct a due diligence review over the next 120 days and negotiate a possible agreement to purchase the assets of Vermont Yankee, Vermont's sole nuclear generating plant. Provided the due diligence review leads to successful completion of negotiations for a sale, consummation of such a sale would be contingent on regulatory approvals by the NRC, the SEC, under the 1935 Act, and the Vermont Public Service Board, among others. The sale process could take eight to twelve months or longer. In past negotiations for the sale of nuclear plants, due diligence review has not guaranteed that a sale will occur. The Company has a 20 percent ownership interest in Vermont Yankee and an investment of approximately $11 million at December 31, 1998. Millstone 3 In July 1998, Millstone 3 returned to full operation after being shut down since April 1996. Millstone 3 remains on the NRC "Watch List," signifying that it continues to warrant increased NRC attention. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). The Company is not an owner of the Millstone 2 nuclear generating unit, which is temporarily shut down under NRC orders, or the Millstone 1 nuclear generating unit, which has been permanently shut down. A criminal investigation related to Millstone 3 is ongoing. In August 1997, the Company sued NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU that caused the shutdown of Millstone 3. The Company's damages include the costs of replacement power during the outage, costs necessary to return Millstone 3 to safe operation, and other additional costs. Most of the Company's incremental replacement power costs have been recovered from customers, either through fuel adjustment clauses or through provisions in the Settlement Agreements. The Company also seeks punitive damages. 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. The arbitration is scheduled for October 1999. In July 1998, the court denied NU's motion to dismiss and its motion to stay pending arbitration. The Company subsequently amended its complaint by, among other things, adding NU's Trustees as defendants. In December 1998, NU moved for summary judgement. The Company's suit has been consolidated with suits filed by other joint owners. The court is in the process of scheduling a trial date. Some or all of the damages awarded from the lawsuit would be refunded to customers. Year 2000 Readiness Disclosure Over the next year, most companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates associated with the year 2000 (Y2K). This could cause computers to either shut down or lead to incorrect calculations. During 1996, the NEES companies began the process of identifying the changes required to their computer software and hardware to mitigate Y2K issues. The NEES companies established a Y2K Project team to manage these issues, which has consisted of as many as 70 full-time equivalent staff at some points in time, primarily external consultants being overseen by an internal Y2K management team. To facilitate the Y2K Project, NEES entered into contracts with Keane, Inc. and International Business Machines Corporation to provide personnel support to the Y2K Project. Through December 31, 1998, the NEES companies have spent approximately $14 million with these vendors, which is included in the cost figures disclosed below. The Y2K Project team reports project progress to a Y2K Executive Oversight Committee each month. The team also makes regular reports to NEES' Board of Directors and its Audit Committee. The NEES companies have separated their Y2K Project into four parts as shown below, along with the estimated completion dates for each part.
Substantial Contingency Testing Completion Documentation, of Critical and Clean Category Specific Example Systems Management - -------- ---------------- ----------- ------------------- Mainframe/Midrange Accounting/Customer Completed Throughout 1999 systems service integrated systems Desktop systems Personal computers/ June 30, 1999 Throughout 1999 Department software/ Networks Operational/ Dispatching systems/ June 30, 1999 Throughout 1999 Embedded Transmission and systems Distribution systems/ Telephone systems External issues Electronic Data June 30, 1999 Throughout 1999 Interchange/Vendor communications
The NEES companies are using a three-phase approach in coordinating their Y2K Project for system-related issues: (I) Assessment and Inventory, (II) Pilot Testing, and (III) Renovation, Conversion, or Replacement of Application and Operating Software Packages and Testing. Phase I, which was an initial assessment of all systems and devices for potential Y2K defects, was completed in mid-1997. These assessments included, but were not limited to, the review of program code for mainframe and midrange systems, analysis of personal computer hardware and network equipment for desktop systems, reaching consensus with key "data exchange" partners regarding the approach and execution of plans to address Y2K-related issues, and coordination with other New England Power Pool (NEPOOL) member utilities related to operational systems, such as transmission systems. Phase II, which consisted of renovation pilots for a cross-section of systems in order to facilitate the establishment of templates for Phase III work, was completed in late 1997. Phase III, which is currently ongoing, requires the renovation, conversion, or replacement of the remaining applications and operating software packages. Critical systems include major operational and informational systems such as the NEES companies' financial-related and customer information systems. These mission critical systems were first addressed at an individual component level, and then, upon satisfactory completion of that testing, reviewed at an integrated level, during which the Y2K Project team tested for Y2K problems which could be caused by various system interfaces. Additionally, contingency plans are being formulated for mission critical systems, as described below. The overall Y2K Project has also been designed such that Y2K- related work performed by external consultants is reviewed by NEES employees, and vice-versa. The Y2K Project team management periodically benchmarks its progress against the recommended progress schedule documented by the North American Electric Reliability Council (NERC), and is currently ahead of the recommended schedule. The NEES companies have also implemented a formalized communication process with third parties to give and receive information related to their progress in remediating their own Y2K issues, and to communicate the NEES companies' progress in addressing the Y2K issue. These third parties include major customers, suppliers, and significant businesses with which the NEES companies have data links (such as banks). The NEES companies have identified standard offer generation service providers, telecommunications companies, and the Independent System Operator-New England (ISO New England) as critical to business operations. The NEES companies have been in contact with all of these parties regarding the progress of their Y2K remediation efforts, and will continue to monitor their ongoing remediation efforts through continued communications. The NEES companies cannot predict the outcome of other companies' remediation efforts. Therefore, contingency plans are being developed, as described below. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $28 million. These costs include the replacement of approximately one thousand desktop computers. In addition, the NEES companies are spending $4 million related to the replacement of the human resources and payroll system, in part due to the Y2K issue. To date, total Y2K-related costs of $25 million have been incurred, of which $3 million has been capitalized. The NEES companies continually review their cost estimates based upon the overall Y2K Project status, and update these estimates as warranted. The NEES companies are in the process of developing Y2K contingency plans to allow for critical information and operating systems to function from January 1, 2000 forward. If required, these plans are intended to address both internal risks as well as potential external risks related to suppliers and customers. Part of the contingency planning for accounting and desktop systems will include taking extensive data back-ups prior to year-end closing. For operational systems, the NEES companies have in place an overall disaster recovery program, which already includes periodic disaster simulation training (for outages due to severe weather, for instance). As part of Y2K contingency planning, the NEES companies will review their disaster recovery plans, modifying them for Y2K-specific issues, such as a potential loss of telecommunication services. The NEES companies expect that these contingency plans will be in place by the third quarter of 1999. Interregional and regional contingency plans are being formulated that address emergency scenarios due to the interconnection of utility systems throughout the United States. At a regional level, the NEES companies are participating and cooperating with NEPOOL and ISO New England. Overall regional activities, including those of NEPOOL and ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by NERC. The target for the completion of this planning process is mid-1999. The NEES companies have noted that the Y2K coordination efforts by ISO New England began in May 1998, resulting in a demanding and difficult schedule to attain regional and interregional target dates. The NEES companies believe the worst case scenario with a reasonable chance of occurring is temporary disruptions of electric service. This scenario could result from a failure to adequately remediate Y2K problems at NEES company facilities or could be caused by the inability of entities, such as ISO New England, to maintain the short-term reliability of various generators and/or transmission lines on a regional or interregional basis. The NEES companies believe that the contingency plans being developed both internally and on a regional level, as described above, should substantially mitigate the risks of this potential scenario. In the event that a short-term disruption in service occurs, NEES does not expect that it would have a material impact on its financial position and results of operations. While the NEES companies believe that their overall Y2K program will satisfactorily address all critical operational and system-related issues, significant risks remain. These risks include, but are not limited to, the Y2K readiness of third parties, including other utilities and power suppliers, cost and timeline estimates of remaining Y2K mitigation efforts, and the overall accuracy of assumptions made related to future events in the development of the Y2K mitigation effort. New Accounting Standards In 1997, the FASB released Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income (FAS 130), which was adopted by the Company in the first quarter of 1998. FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the year ended December 31, 1998. Also in 1997, the FASB released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which went into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. FAS 131 does not currently impact the Company's reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company has adopted FAS 132 in its financial statements for the year ended December 31, 1998. The adoption of FAS 130, FAS 131, and FAS 132 had no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Risk Management The Company's major financial market risk exposure is changing interest rates. Changing interest rates will affect interest paid on variable rate debt. At December 31, 1998, the Company's variable rate debt had a fair value of $372 million, a weighted average interest rate of 3.28 percent, and maturity dates of greater than five years. See the "Industry Restructuring" section above for a discussion of the Company's purchased power transfer agreement with USGen. The Company retained one purchased power contract, with Vermont Yankee, which carries fixed payment requirements of approximately $35 million in 1999, $30 million in 2000, $35 million in 2001 and 2002, $30 million in 2003, and approximately $300 million thereafter. Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $64 million in 1998. These expenditures were primarily transmission-related. The funds necessary for utility plant expenditures during 1998 were primarily provided by internally generated funds and the proceeds from the sale of the nonnuclear generating business. Cash expenditures for 1999 are estimated to be $65 million, principally related to transmission functions. Internally generated funds are expected to fully cover the Company's capital expenditures in 1999. In 1998, the Company defeased or retired all of its mortgage bonds. The Company also paid down all of its short-term debt outstanding. In 1998, the Company repurchased or redeemed preferred stock with an aggregate par value of $38 million. In 1998, the Company repurchased 2.7 million shares of its common stock from NEES for $418 million. Approximately $194 million in connection with the repurchase was charged to retained earnings. At December 31, 1998, the Company had lines of credit and standby bond purchase facilities with banks totaling $455 million. These lines and facilities were available at December 31, 1998 for liquidity support for $372 million of the Company's bonds in tax-exempt commercial paper mode and for other corporate purposes. There were no borrowings under these lines of credit at December 31, 1998. New England Power Company Statements of Income
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating revenue, principally from affiliates $1,218,340 $1,677,903 $1,600,309 Operating expenses: Fuel for generation 223,828 372,734 342,545 Purchased electric energy 399,836 527,647 508,910 Other operation 155,065 241,506 203,456 Maintenance 60,239 89,820 79,118 Depreciation and amortization 99,924 98,024 104,209 Taxes, other than income taxes 48,492 67,311 66,416 Income taxes 73,594 90,009 91,894 ---------- ---------- ---------- Total operating expenses 1,060,978 1,487,051 1,396,548 ---------- ---------- ---------- Operating income 157,362 190,852 203,761 Other income: Allowance for equity funds used during construction 633 - - Equity in income of nuclear power companies 5,284 5,189 5,159 Other income (expense), net 118 (3,404) (1,851) ---------- ---------- ---------- Operating and other income 163,397 192,637 207,069 ---------- ---------- ---------- Interest: Interest on long-term debt 30,775 42,277 45,111 Other interest 10,688 7,055 10,066 Allowance for borrowed funds used during construction - credit (961) (1,238) (591) ---------- ---------- ---------- Total interest 40,502 48,094 54,586 ---------- ---------- ---------- Net income $ 122,895 $ 144,543 $ 152,483 ========== ========== ========== Statements of Retained Earnings Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Retained earnings at beginning of year $ 407,630 $ 400,610 $ 385,309 Net income 122,895 144,543 152,483 Dividends declared on cumulative preferred stock (1,230) (2,075) (2,574) Dividends declared on common stock, $20.25, $21.00, and $20.80 per share, respectively (130,610) (135,448) (134,158) Premium on redemption of preferred stock (264) - (450) Repurchase of common stock (193,818) - - --------- --------- --------- Retained earnings at end of year $ 204,603 $ 407,630 $ 400,610 ========= ========= ========= The accompanying notes are an integral part of these financial statements.
New England Power Company Balance Sheets
At December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------- Assets Utility plant, at original cost $1,262,461 $3,057,749 Less accumulated provisions for depreciation and amortization 837,637 1,196,972 ---------- ---------- 424,824 1,860,777 Construction work in progress 33,289 29,015 ---------- ---------- Net utility plant 458,113 1,889,792 ---------- ---------- Investments: Nuclear power companies, at equity (Note E-1) 48,538 49,825 Nonutility property and other investments 39,583 34,723 ---------- ---------- Total investments 88,121 84,548 ---------- ---------- Current assets: Cash and temporary cash investments (including $109,911 and $-0- with affiliates) 179,413 1,643 Accounts receivable: Affiliated companies 107,878 233,308 Accrued NEEI revenues - 11,419 Others 32,573 26,638 Fuel, materials, and supplies, at average cost 9,220 47,492 Prepaid and other current assets 21,569 17,837 ---------- ---------- Total current assets 350,653 338,337 ---------- ---------- Regulatory assets (Note B) 1,512,562 441,038 Deferred charges and other assets 5,339 9,377 ---------- ---------- $2,414,788 $2,763,092 ========== ========== Capitalization and Liabilities Capitalization: Common stock, par value $20 per share, Authorized - 6,449,896 shares Outstanding - 3,749,896 and 6,449,896 shares $ 74,998 $ 128,998 Premium on capital stock 50,371 86,779 Other paid-in capital 190,852 289,818 Retained earnings 204,603 407,630 Unrealized gain on securities, net 72 34 ---------- ---------- Total common equity 520,896 913,259 Cumulative preferred stock, par value $100 per share (Note I) 1,567 39,666 Long-term debt 371,765 647,720 ---------- ---------- Total capitalization 894,228 1,600,645 ---------- ---------- Current liabilities: Long-term debt due in one year - 50,000 Short-term debt, including $-0- and $3,125 to affiliates - 111,250 Accounts payable (including $119,657 and $14,373 to affiliates) 162,360 109,121 Accrued liabilities: Taxes 15,009 39 Interest 2,440 8,905 Other accrued expenses (Note H) 20,086 23,554 Dividends payable 24 35,474 ---------- ---------- Total current liabilities 199,919 338,343 ---------- ---------- Deferred federal and state income taxes 165,115 369,757 Unamortized investment tax credits 30,870 53,463 Accrued Yankee nuclear plant costs (Note E-2) 242,138 299,564 Purchased power obligations 832,668 - Other reserves and deferred credits 49,850 101,320 Commitments and contingencies (Note E) ---------- ---------- $2,414,788 $2,763,092 ========== ========== The accompanying notes are an integral part of these financial statements.
New England Power Company Statements of Cash Flows
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating activities: Net income $ 122,895 $ 144,543 $ 152,483 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 104,331 101,186 108,338 Deferred income taxes and investment tax credits, net (226,722) (12,728) (7,458) Allowance for funds used during construction (1,594) (1,238) (591) Reimbursement to New England Energy Incorporated of loss on sale of oil and gas properties (120,900) - - Buyout of purchased power contracts (326,590) - - Decrease (increase) in accounts receivable 130,914 (25,128) 19,629 Decrease (increase) in fuel, materials, and supplies (10,270) 11,217 (4,045) Decrease (increase) in prepaid and other current assets (8,778) 7,213 2,936 Increase (decrease) in accounts payable (31,761) (18,105) (36,565) Increase (decrease) in other current liabilities 5,037 (1,905) 9,640 Other, net (49,611) 19,919 28,582 ----------- --------- --------- Net cash provided by (used in) operating activities $ (413,049) $ 224,974 $ 272,949 =========== ========= ========= Investing activities: Proceeds from sale of generating assets $ 1,688,863 $ - $ - Plant expenditures, excluding allowance for funds used during construction (64,446) (69,863) (65,981) Other investing activities (5,474) (4,040) (3,878) ----------- --------- --------- Net cash provided by (used in) investing activities $ 1,618,943 $ (73,903) $ (69,859) ----------- --------- --------- Financing activities: Capital contribution from parent $ 34,881 $ - $ - Dividends paid on common stock (166,084) (127,386) (138,995) Dividends paid on preferred stock (1,206) (2,075) (2,574) Changes in short-term debt (111,250) 17,650 (31,550) Long-term debt - issues - - 47,850 Long-term debt - retirements (328,000) (38,500) (57,850) Repurchase of common shares (417,960) - - Preferred stock - retirements (38,505) - (19,532) Premium on reacquisition of long-term debt - (2,163) - ----------- --------- --------- Net cash used in financing activities $(1,028,124) $(152,474) $(202,651) ----------- --------- --------- Net increase (decrease) in cash and cash equivalents $ 177,770 $ (1,403) $ 439 Cash and cash equivalents at beginning of year 1,643 3,046 2,607 ----------- --------- --------- Cash and cash equivalents at end of year $ 179,413 $ 1,643 $ 3,046 =========== ========= ========= Supplementary Information: Interest paid less amounts capitalized $ 43,419 $ 46,033 $ 51,212 ----------- --------- --------- Federal and state income taxes paid $ 282,076 $ 109,109 $ 96,006 ----------- --------- --------- Dividends received from investments at equity $ 6,571 $ 3,267 $ 4,313 ----------- --------- --------- The accompanying notes are an integral part of these financial statements.
New England Power Company Notes to Financial Statements Note A - Significant Accounting Policies 1. Nature of operations: New England Power Company (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), under the Public Utility Holding Company Act of 1935 (1935 Act), the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission (NRC). The Company's business is primarily the transmission of electric energy in wholesale quantities to other electric utilities, principally its distribution affiliates Granite State Electric Company, Massachusetts Electric Company (Massachusetts Electric), Nantucket Electric Company, and The Narragansett Electric Company (Narragansett Electric). See Note C for a discussion of industry restructuring and Note D for a discussion of the Company's divestiture of its nonnuclear generating business. The Company also owns minority interests in two joint owned nuclear generating units as well as minority equity interests in 4 nuclear generating companies. The output from these generating facilities is sold to third parties. 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. 4. Depreciation and amortization: The depreciation and amortization expense included in the statements of income is composed of the following:
Year ended December 31 (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Depreciation - transmission related $12,553 $11,828 $ 10,931 Depreciation - all other 46,256 68,432 67,256 Nuclear decommissioning costs (Note E-2) 2,719 2,638 2,629 Amortization: Investment in Seabrook 1 pursuant to rate settlement - - 15,210 Seabrook 2 property losses - 113 6,279 Millstone 3 additional amortization, pursuant to 1995 rate settlement 22,040 15,013 1,904 Regulatory assets covered by CTC (See Note C) 16,356 - - ------- -------- -------- Total depreciation and amortization expense $99,924 $98,024 $104,209 ======= ======== ========
Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable transmission property was 2.3 percent in 1998, 1997, and 1996. Amortization of Seabrook and Millstone 3 investments above normal depreciation accruals was in accordance with rate settlement agreements. 5. Cash: The Company classifies short-term investments with a maturity of 90 days or less as cash. 6. New Accounting Standards: In 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income (FAS 130), which was adopted by the Company in the first quarter of 1998. FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the year ended December 31, 1998. Also in 1997, the FASB released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which went into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. FAS 131 does not currently impact the Company's reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company has adopted FAS 132 in its financial statements for the year ending December 31, 1998. The adoption of FAS 130, FAS 131, and FAS 132 had no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Note B - Merger Agreements Merger Agreement with The National Grid Group plc On December 11, 1998, NEES, The National Grid Group plc (National Grid), and NGG Holdings LLC (Holdings), a directly and indirectly wholly owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly owned subsidiary of National Grid. The Company will remain a wholly owned subsidiary of NEES. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC and NRC, support or approval from the states in which NEES subsidiaries operate, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. Merger Agreement with Eastern Utilities Associates On February 1, 1999, NEES, Eastern Utilities Associates (EUA), and Research Drive LLC (Research Drive), a directly and indirectly wholly owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly owned subsidiary of NEES. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. Note C - Industry Restructuring During 1998, pursuant to legislation enacted in Massachusetts, Rhode Island, and New Hampshire, and settlement agreements approved by state and federal regulators (the Settlement Agreements), all customers were provided the right to purchase electricity from the power supplier of their choice. The NEES companies remain obligated to deliver that electricity over its transmission and distribution systems, with such delivery services provided under regulated rates approved by State and federal regulators. As described below, those delivery rates include a non-bypassable charge for the costs of NEES' former generating business which were not recovered through the sale of that business ("stranded costs"), which was substantially completed in 1998. As a result of the Settlement Agreements, customers' choice of power supplier has no impact on NEES' transmission and distribution business or on its ability to recover stranded costs. In order to facilitate the implementation of customer choice, the Settlement Agreements provided for the termination of the Company's requirements contracts with its affiliated distribution customers. The Company's requirements contracts with unaffiliated customers have also generally been terminated pursuant to settlement agreements or tariff provisions. However, the Company remains obligated to provide transition power supply service to new customer load in Rhode Island. The Settlement Agreements provide that the Company's stranded costs are to be recovered from its wholesale customers through contract termination charges (CTC). The affiliated wholesale customers, in turn, are recovering those costs through their delivery charges to distribution customers. Under the Settlement Agreements, the recovery of the Company's stranded costs is divided into several categories. Unrecovered costs associated with generating plants (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and earn a return on equity averaging 9.7 percent. The Company's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. The CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of the Company's nonnuclear generating business. As the CTC rate declines, the Company, under certain of the Settlement Agreements, earns incentives based on successful mitigation of its stranded costs. These incentives supplement the Company's return on equity. Finally, the Settlement Agreements provide that until such time as the Company divests its operating nuclear interests, the Company will share with customers, through the CTC, 80 percent of the revenues and operating costs related to the units, with shareholders retaining the balance. 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 these charges because they are expected to be included in future customer charges. In 1997, the Emerging Issues Task Force (EITF) of the FASB concluded that a utility that had 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 stranded costs. The Company has received authorization from the FERC to recover through the CTC substantially all of the costs associated with its former generating business not recovered through the sale of that business. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, substantially all of the Company's business, including the recovery of its stranded costs, remains under cost-based rate regulation. The Company believes these factors and the EITF conclusion allow it to continue to apply FAS 71. Because of the nuclear cost-sharing provisions related to the Company's CTC, the Company ceased applying FAS 71 in 1997 to 20 percent of its ongoing nuclear operations, the impact of which is immaterial. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates for the Company or its affiliates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets, including those being recovered through the Company's CTC. As a result of applying FAS 71, the Company has recorded a regulatory asset for the costs that are recoverable from customers through the CTC. The regulatory asset reflects the loss on the sale of NEES' oil and gas business and the unrecovered plant costs in operating nuclear plants (assuming no market value), the costs associated with permanently closed nuclear power plants, and the present value of the payments associated with the above-market cost of purchased power contracts, reduced by the gain from the sale of the nonnuclear generating business. At December 31, 1998, the regulatory asset related to the CTC was approximately $1.5 billion, of which $1.2 billion related to the above-market costs of purchased power contracts. As described above, the CTC regulatory asset includes the unrecovered plant costs associated with the Company's interest in operating nuclear plants. This balance sheet treatment is due to the Company's conclusion that its interests in the Millstone 3 and Seabrook 1 nuclear generating units have little, if any, market value. Three proposed sales of nuclear units by other utilities have required the seller to set aside amounts for decommissioning in excess of the proceeds from the sale of the units. Two of these proposed sales were agreed upon prior to the end of the third quarter of 1998. As a result, at the end of the third quarter of 1998, the Company recorded an impairment writedown in its reserve for depreciation of approximately $390 million, which represents the net book value at December 31, 1995, less applicable depreciation subsequent to that date, of Millstone 3 and Seabrook 1. Because the Settlement Agreements permit the Company to recover its pre-1996 investment as well as decommissioning expenses through the CTC, the Company established a regulatory asset in an amount equal to the impairment writedown. Should the Company's efforts to sell its nuclear interests result in a gain over the amounts remaining in the plant account, such gain will be credited to customers through the CTC. Note D - Divestiture of Generating Business On September 1, 1998, the Company and Narragansett Electric (collectively, the Sellers) completed the sale of substantially all of their nonnuclear generating business, all of which had a book value of approximately $1.1 billion, to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The Sellers received $1.59 billion for the sale. In addition, the Company was reimbursed approximately $140 million for costs associated with early retirements and special severance programs for employees affected by industry restructuring, and the value of inventories. USGen assumed responsibility for environmental conditions at the Sellers' nonnuclear generating stations. USGen also assumed the Sellers' obligations under long-term fuel and fuel transportation contracts, and certain collective bargaining agreements. As part of the sale, the Company also signed a purchased power transfer agreement through which USGen purchased the Company's entitlement to approximately 1,100 megawatts (MW) of power procured under long-term contracts in exchange for monthly fixed payments by the Company averaging $9.5 million per month through January 2008 (having a net present value of $833 million) toward the above-market cost of those contracts. In some cases, these transfers involved formal assignment of the contracts to USGen and a release of the Company from further obligations to the power supplier, while others did not. For those that involved formal assignment, the Company was required to make a lump sum payment equivalent to the present value of the monthly fixed payment obligations of those contracts. On or prior to the closing date, the Company made lump sum payments totaling approximately $340 million and was released from further obligations relating to two of the contracts. These lump sum payments are separate from the $833 million figure referred to above. USGen is responsible for the balance of the costs under the purchased power contracts. The present value of the future monthly fixed payments is recorded as a liability on the balance sheet. This liability, as well as the lump sum payments previously made, net of amortization, are also recorded as a regulatory asset on the balance sheet. As part of the divestiture plan, in February 1998, New England Energy Incorporated (NEEI), a wholly owned subsidiary of NEES, whose costs had been supported by the Company, 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. In addition, the Company agreed under the Settlement Agreements to endeavor to sell its minority interest in three nuclear power plants and a 60 MW interest in a fossil-fueled generating station in Maine. In February 1999, Vermont Yankee Nuclear Power Corporation entered into a letter of intent to sell its assets. For further information refer to the "Nuclear Units" section of Financial Review. Note E - Commitments and Contingencies 1. Yankee Nuclear Power Companies (Yankees) The Company has minority interests in four Yankee Nuclear Power Companies. These ownership interests are accounted for on the equity method. The Company's share of the expenses of the Yankees is accounted for in "Purchased electric energy" on the statements of income. A summary of combined results of operations, assets, and liabilities of the four Yankees is as follows:
(In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Operating revenue $ 439,046$ 660,742$ 697,054 ================================= Net income $ 23,218$ 29,959$ 27,567 ================================= Company's equity in net income $ 5,284$ 5,189$ 5,159 ================================= Net plant 171,582 204,689 401,049 Other assets 2,810,613 3,100,589 2,031,336 Liabilities and debt (2,723,454) (3,036,845) (2,177,068) --------------------------------- Net assets $ 258,741$ 268,433$ 255,317 ================================= Company's equity in net assets $ 48,538$ 49,825$ 47,902 ================================= Company's purchased electric energy: Vermont Yankee $ 35,108$ 31,240$ 32,676 All other Yankees $ 48,543$ 75,900$ 78,102 =================================
At December 31, 1998, $15 million of undistributed earnings of the Yankees were included in the Company's retained earnings. 2. Nuclear Units Nuclear Units Permanently Shut Down Three regional nuclear generating companies in which the Company has a minority interest own nuclear generating units that have been permanently shut down. These three units are as follows:
Future Estimated NEP's Billings Investment Date to NEP Unit % $ (millions) Retired $(millions) - ----------------------------------------------------------------- Yankee Atomic 30 6 Feb 1992 24 Connecticut Yankee 15 16 Dec 1996 75 Maine Yankee 20 16 Aug 1997 143
In the case of each of these units, the Company has recorded a liability and an offsetting regulatory asset reflecting the 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. In August 1998, a FERC Administrative Law Judge (ALJ) issued an initial decision which would allow for full recovery of Connecticut Yankee's unrecovered investment, but precluded a return on that investment. Connecticut Yankee, the Company, and other parties have filed with the FERC exceptions to the ALJ's decision. Should the FERC uphold the ALJ's initial decision in its current form, the Company's share of the loss of the return component would total approximately $12 million to $15 million before taxes. In January 1999, parties in the Maine Yankee proceeding filed a comprehensive settlement agreement with the FERC, under which Maine Yankee would recover all unamortized investment in the plant, including a return on its equity investment of 6.5 percent, as well as decommissioning costs and other costs. This settlement agreement requires FERC approval. The Company's industry restructuring settlements allow it to recover all costs that the FERC allows these Yankee companies to bill to the Company. The Company and several other shareholders (Sponsors) of Maine Yankee are parties to 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlements 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 had ceased making payments under the Secondary Purchase Agreements, claiming that such agreements excuse further payments upon plant shutdown. In February 1999, a settlement agreement which fully resolves the dispute between the Sponsors and Secondary Purchasers was filed with the FERC, under which the Secondary Purchasers would be required to make certain payments to Maine Yankee, and, in turn, to the Company, related to both past and future obligations under the Secondary Purchase Agreements. This settlement agreement requires FERC approval. Shutdown costs are recoverable from customers under the Settlement Agreements. 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. 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. Vermont Yankee On February 25, 1999, the Board of Directors of Vermont Yankee Nuclear Power Corporation granted an exclusive right to AmerGen Energy Company (AmerGen), a joint venture by PECO Energy and British Energy to conduct a due diligence review over the next 120 days and negotiate a possible agreement to purchase the assets of Vermont Yankee, Vermont's sole nuclear generating plant. Provided the due diligence review leads to successful completion of negotiations for a sale, consummation of such a sale would be contingent on regulatory approvals by the NRC, the SEC, under the 1935 Act, and the Vermont Public Service Board, among others. The sale process could take eight to twelve months or longer. In past negotiations for the sale of nuclear plants, due diligence review has not guaranteed that a sale will occur. The Company has a 20 percent ownership interest in Vermont Yankee and an investment of approximately $11 million at December 31, 1998. Millstone 3 In July 1998, Millstone 3 returned to full operation after being shut down since April 1996. Millstone 3 remains on the NRC "Watch List," signifying that it continues to warrant increased NRC attention. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). The Company is not an owner of the Millstone 2 nuclear generating unit, which is temporarily shut down under NRC orders, or the Millstone 1 nuclear generating unit, which has been permanently shut down. A criminal investigation related to Millstone 3 is ongoing. In August 1997, the Company sued NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU that caused the shutdown of Millstone 3. The Company's damages include the costs of replacement power during the outage, costs necessary to return Millstone 3 to safe operation, and other additional costs. Most of the Company's incremental replacement power costs have been recovered from customers, either through fuel adjustment clauses or through provisions in the Settlement Agreements. The Company also seeks punitive damages. 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. The arbitration is scheduled for October 1999. In July 1998, the court denied NU's motion to dismiss and its motion to stay pending arbitration. The Company subsequently amended its complaint by, among other things, adding NU's Trustees as defendants. In December 1998, NU moved for summary judgement. The Company's suit has been consolidated with suits filed by other joint owners. The court is in the process of scheduling a trial date. Some or all of the damages awarded from the lawsuit would be refunded to customers. Nuclear Decommissioning 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. In New Hampshire, legislation was recently enacted which makes owners of Seabrook 1, in which the Company owns a 10 percent interest, proportional guarantors for decommissioning costs in the event that an owner without a franchise service territory fails to fund its share of decommissioning costs. Currently, a single owner of an approximate 12 percent share of Seabrook 1 has no franchise service territory. The New Hampshire Nuclear Decommissioning Finance Committee is reviewing Seabrook Station's decommissioning estimate and associated annual funding levels. Among the items being considered is the imposition of joint and several liability among the Seabrook joint owners for decommissioning funding. The Company cannot predict what additional liability, if any, may be imposed on it. 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 generating units. Prior to 1998, the Company recovered this fee through its fuel clause. Under the Settlement Agreements, substantially all of these costs are recovered through CTCs. Similar costs are billed to the Company by Vermont Yankee and also recovered from customers through the same mechanism. In November 1997, ruling on a lawsuit brought against the DOE by numerous utilities and state regulatory commissions, the U.S. Court of Appeals for the District of Columbia (the Appeals Court) held that the DOE was obligated to begin disposing of utilities' spent nuclear fuel by January 31, 1998. The DOE failed to meet this deadline, and is not expected to have a temporary or permanent repository for spent nuclear fuel for many years. In February 1998, Maine Yankee petitioned the Appeals Court to compel the DOE to remove Maine Yankee's spent fuel from the site. In May 1998, the Appeals Court rejected the petitions of Maine Yankee and the other utilities and state regulatory commissions, stating that the issue of damages was a contractual matter. The operators of the units in which the Company has an obligation, including Maine Yankee, Connecticut Yankee, and Yankee Atomic, continue to pursue damage claims against the DOE in the Federal Court of Claims (Claims Court). In October 1998, the Claims Court ruled that the DOE violated a commitment to remove spent fuel from Yankee Atomic. The Claims Court issued similar rulings in November 1998 related to cases brought by Connecticut Yankee and Maine Yankee. Further proceedings will be scheduled by the Claims Court to decide the amount of damages. 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. The table below lists information on each operating nuclear plant in which the Company has an ownership interest.
NEP's share of (millions of dollars) ------------------------------------------- Nep's Estimated Decommissioning Ownership Net Decommissioning Fund License Unit Interest (%) Plant Assets Cost (in 1998 $) Balances* Expiration - ----------------------------------------------------------------------------------------- Vermont Yankee 20 34 105 38 2012 Millstone 3 12 9** 67 21 2025 Seabrook 1 10 15** 50 10 2026 * Certain additional amounts are anticipated to be available through tax deductions. ** Represents post-December 1995 spending including nuclear fuel. See Note C for a discussion of an impairment writedown and establishment of an offsetting regulatory asset.
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. The temporary low-level repository located in Barnwell, South Carolina may become unavailable, which could increase the cost of decommissioning the Yankee Atomic, Connecticut Yankee, and Maine Yankee plants. If any of the operating 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 C, the Company will recover decommissioning costs through CTCs. 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 $9.7 billion (based upon 108 licensed reactors). The maximum amount of commercially available insurance coverage to pay such claims is $200 million. The remaining $9.5 billion would be provided by an assessment of up to $88.1 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 1998, is adjusted for inflation at least every five years. The Company's current interest in Vermont Yankee, Millstone 3, and Seabrook 1 would subject the Company to a $35.4 million maximum assessment per incident. The Company's payment of any such assessment would be limited to a maximum of $4.0 million per year. As a result of the permanent cessation of power operation of the Yankee Atomic, Connecticut Yankee, and Maine Yankee plants, these units have received from the NRC an exemption from participating in the secondary financial protection system under the Price-Anderson Act. However, these plants must continue to maintain $100 million of commercially available nuclear liability insurance coverage. Each of the nuclear units in which the Company has either an ownership or purchased power interest also carries nuclear property insurance to cover the costs of property damage, decontamination, and premature decommissioning resulting from a nuclear incident. These policies may require additional premium assessments if losses relating to nuclear incidents at units covered by this insurance occur in a prior six-year period. The Company's maximum potential exposure for these assessments, either directly or indirectly, is approximately $4.6 million with respect to the current policy period. 3. Plant expenditures The Company's utility plant expenditures are estimated to be approximately $65 million in 1999. At December 31, 1998, substantial commitments had been made relative to future planned expenditures. 4. Hydro-Quebec Interconnection Three affiliates of the Company were created to construct and operate transmission facilities to transmit power from Hydro- Quebec to New England. Under support agreements entered into at the time these facilities were constructed, the Company agreed to guarantee a portion of the project debt. That portion at December 31, 1998 amounted to $23 million. 5. Long-term contracts for the purchase of electricity Historically, the Company purchased 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. See Note D for a discussion of USGen's purchase of the Company's entitlement to approximately 1,100 MW of power procured under long-term contracts. The Company retained one purchased power contract, with Vermont Yankee, which requires minimum fixed payments, even when the supplier is unable to deliver power, to cover a proportionate share of the capital and fixed operating costs of the unit. This contract has fixed payment requirements of approximately $35 million in 1999, $30 million in 2000, $35 million in 2001 and 2002, $30 million in 2003, and approximately $300 million thereafter. The Company holds an ownership interest in Vermont Yankee. 6. 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 possible hazardous waste sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. The NEES companies have recovered amounts from certain insurers, and, where appropriate, 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. The Company believes that hazardous waste liabilities for all sites of which it is aware are not material to its financial position. 7. Town of Norwood dispute In September 1998, the United States District Court (District Court) for the District of Massachusetts dismissed the lawsuit filed in April 1997 by the Town of Norwood, Massachusetts against NEES and the Company. The Company had been a wholesale power supplier for Norwood pursuant to rates approved by the FERC. In the lawsuit, Norwood had alleged that the Company's divestiture of its power generating assets would violate the terms of a 1983 power contract. Norwood also alleged that the divestiture and recovery of stranded investment costs contravened federal antitrust laws. The District Court judge granted NEES' and the Company's motion for dismissal on the grounds that the contract did not require the Company to retain its generating units, that the FERC-approved filed rates govern these matters, and that Norwood had adequate opportunity at the FERC to litigate these matters. Norwood filed a motion to alter or amend the order of dismissal, which was denied. In December 1998, Norwood filed a second motion to amend judgement and also filed an appeal with the First Circuit Court of Appeals (First Circuit). In March 1999, the District Court denied Norwood's second motion to amend judgement. 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 began taking power from another supplier commencing in April 1998. In May 1998, the FERC ruled that the Company could assess a CTC to any of the Company's unaffiliated customers that choose to terminate their wholesale power contracts early. Norwood claimed that the CTC approved by the FERC did not apply to Norwood; however, in denying Norwood's motion for rehearing, the FERC ruled that the charge did apply to Norwood. Norwood has appealed this decision to the First Circuit. The Company's billings to Norwood for this charge through December 1998 have been approximately $6 million, which remain unpaid. The Company filed a collection action with the Massachusetts Superior Court in December 1998 to recover these amounts. Norwood filed a motion to dismiss or stay in January 1999. Norwood also appealed the FERC's orders approving the divestiture and the Massachusetts and Rhode Island industry restructuring settlement agreements (including modification of the Company's contracts with Massachusetts Electric and Narragansett Electric) to the First Circuit, despite the FERC's finding that those settlement agreements do not apply to Norwood. The First Circuit has consolidated all three of Norwood's appeals from the FERC's orders with two other appeals filed by the Northeast Center for Social Issue Studies, which challenge the FERC's approval of the Company's sale of its hydroelectric facilities. The case is to be fully briefed by May 1999. Note F - Employee Benefits 1. Pension Plans: The Company participates with other subsidiaries of NEES in noncontributory, defined-benefit plans covering substantially all employees of the Company. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. Absent unusual circumstances, the Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount.
Net pension cost for 1998, 1997, and 1996 included the following components: - ----------------------------------------------------------------------------------------- Year ended December 31 (thousands of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 2,430$ 2,887 $ 2,769 Plus (less): Interest cost on projected benefit obligation 7,435 7,003 6,669 Return on plan assets at expected long-term rate (8,675) (7,842) (7,204) Amortization of transition obligation (184) (175) (171) Amortization of prior service cost 161 171 168 Amortization of net (gain)/loss 159 65 273 Curtailment (gain)/loss (5,680) - - - ----------------------------------------------------------------------------------------- Benefit cost $ (4,354)$ 2,109 $ 2,504 - ----------------------------------------------------------------------------------------- Special termination benefits not included above $ 10,911$ - $ - - -----------------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------- (millions of dollars) 1998 1997 - --------------------------------------------------------------------------- Benefit obligation $843 $819 Unrecognized prior service costs (6) (8) Transition liability not yet recognized (amortized) (2) (4) Additional minimum liability 7 4 - --------------------------------------------------------------------------- 842 811 - --------------------------------------------------------------------------- Plan assets at fair value 837 834 Transition asset not yet recognized (amortized) (6) (8) Net (gain)/loss not yet recognized (amortized) (92) (52) - --------------------------------------------------------------------------- 739 774 - --------------------------------------------------------------------------- Accrued pension/(prepaid) payments recorded on books $103 $ 37 - ---------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations and plan assets:
- --------------------------------------------------------------------------- (millions of dollars) 1998 1997 - --------------------------------------------------------------------------- Changes in benefit obligation: Benefit obligation at January 1 $819 $807 Service cost 14 15 Interest cost 55 53 Actuarial (gain)/loss (5) 59 Benefits paid from plan assets (94) (47) Special termination benefits 64 - Curtailment (11) - Plan amendments 1 - Dispositions (Yankee Atomic) - (68) - --------------------------------------------------------------------------- Benefit obligation at December 31 $843 $819 - --------------------------------------------------------------------------- Reconciliation of change in plan assets: Fair value of plan assets at January 1 $834 $812 Actual return on plan assets during year 93 130 Company contributions 4 8 Benefits paid from plan assets (94) (47) Dispositions (Yankee Atomic) - (69) - --------------------------------------------------------------------------- Fair value of plan assets at December 31 $837 $834 - ---------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 - ---------------------------------------------------------------------- Assumptions used to determine pension cost: Discount rate 6.75% 6.75% 7.25% 7.25% Average rate of increase in future compensation level 4.13% 4.13% 4.13% 4.13% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.50%
The plans' funded status at December 31, 1998 and 1997 were calculated using the assumed rates from 1999 and 1998, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. 2. Postretirement Benefit Plans Other than Pensions (PBOPs): The Company provides health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The Company's total cost of PBOPs for 1998, 1997, and 1996 included the following components:
- ----------------------------------------------------------------------------------------- Year ended December 31 (thousands of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 1,109 $ 1,363 $ 1,407 Plus (less): Interest cost on projected benefit obligation 3,244 3,545 3,580 Return on plan assets at expected long-term rate (2,656) (2,343) (1,832) Amortization of transition obligation 1,732 2,556 2,556 Amortization of prior service cost 5 8 8 Amortization of net (gain)/loss (1,138) (983) (697) Curtailment (gain)/loss 27,149 - - - ----------------------------------------------------------------------------------------- Benefit cost $29,445 $ 4,146 $ 5,022 - ----------------------------------------------------------------------------------------- Special termination benefits not included above $ 439 $ - $ - - -----------------------------------------------------------------------------------------
The following table sets forth the Company's benefits earned and the plans' funded status:
- ----------------------------------------------------------------------------- At December 31 (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Benefit obligation $ 41 $ 51 Unrecognized prior service costs - - Transition liability not yet recognized (amortized) (1) (38) - ----------------------------------------------------------------------------- 40 13 - ----------------------------------------------------------------------------- Plan assets at fair value 36 34 Net (gain)/loss not yet recognized (amortized) (26) (21) - ----------------------------------------------------------------------------- 10 13 - ----------------------------------------------------------------------------- Accrued pension/(prepaid) payments recorded on books $ 30 $ - - -----------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations and plan assets:
- ----------------------------------------------------------------------------- (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Changes in benefit obligation: Benefit obligation at January 1 $ 51 $ 54 Service cost 1 1 Interest cost 3 4 Actuarial (gain)/loss 2 (6) Benefits paid from plan assets (2) (2) Special termination benefits - - Curtailment (14) - - ----------------------------------------------------------------------------- Benefit obligation at December 31 $ 41 $ 51 - ----------------------------------------------------------------------------- Reconciliation of change in plan assets: Fair value of plan assets at January 1 $ 34 $ 29 Actual return on plan assets during year 4 6 Company contributions - 1 Benefits paid from plan assets (2) (2) - ----------------------------------------------------------------------------- Fair value of plan assets at December 31 $ 36 $ 34 - -----------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 - ---------------------------------------------------------------------- Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 6.75% 7.25% 7.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.25% Health care cost rate - 1996 to 1999 5.25% 5.25% 8.00% 8.00% Health care cost rate - 2000 to 2004 5.25% 5.25% 6.25% 6.25% Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 5.25%
The plans' funded status at December 31, 1998 and 1997 were calculated using the assumed rates in effect for 1999 and 1998, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. A one percentage point change in the assumed rates would increase the accumulated postretirement benefit obligation (APBO) as of December 31, 1998 by approximately $5 million or decrease the APBO by approximately $4 million, and change the net periodic cost for 1998 by approximately $1 million. The Company generally funds the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. 3. Early Retirement and Special Severance Programs: In 1998, the Company offered a voluntary early retirement program to all employees who were at least 55 years old with 10 years of service. This program was part of an organizational review with the goal of streamlining operations and reducing the work force to reflect the sale of the nonnuclear generating business. The early retirement offer was accepted by 104 employees. A special severance program was also utilized in 1998 for employees affected by the organizational restructuring, but who were not eligible for, or did not accept, the early retirement offer. The cost of these programs was in part reimbursed by USGen at the closing of the sale of the nonnuclear generating business and will be recovered in part from customers as a component of stranded cost recovery. Note G - Income Taxes The Company and other subsidiaries participate with NEES in filing consolidated federal income tax returns. The Company's income tax provision is calculated on a separate return basis. Federal income tax returns have been examined and reported on by the Internal Revenue Service through 1993. Total income taxes in the statements of income are as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Income taxes charged to operations $ 73,594 $90,009 $91,894 Income taxes charged (credited) to "Other income" (19,582) (373) 555 -------- ------- ------- Total income taxes $ 54,012 $89,636 $92,449 ======== ======= =======
Total income taxes, as shown above, consist of the following components:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Current income taxes $ 280,734 $102,364 $99,907 Deferred income taxes (204,129) (10,705) (5,435) Investment tax credits, net (22,593) (2,023) (2,023) --------- -------- ------- Total income taxes $ 54,012 $ 89,636 $92,449 ========= ======== =======
Investment tax credits (ITC) have been deferred and amortized over the estimated lives of the property giving rise to the credits. The increase in amortization of ITC in 1998 results from the recognition in income of unamortized ITC relating to the generating assets divested during 1998. Total income taxes, as shown above, consist of federal and state components as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Federal income taxes $41,255 $73,077 $76,656 State income taxes 12,757 16,559 15,793 ------- ------- ------- Total income taxes $54,012 $89,636 $92,449 ======= ======= =======
With regulatory approval from the FERC, the Company has adopted comprehensive interperiod tax allocation (normalization) for temporary book/tax differences. Total income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Computed tax at statutory rate $ 61,917 $81,963 $85,726 Increases (reductions) in tax resulting from: Amortization of investment tax credits (15,157) (2,023) (2,023) State income taxes, net of federal income tax benefit 8,292 10,763 10,265 All other differences (1,040) (1,067) (1,519) -------- ------- ------- Total income taxes $ 54,012 $89,636 $92,449 ======== ======= =======
The following table identifies the major components of total deferred income taxes:
At December 31, (In millions) 1998 1997 - ---------------------------------------------------------------- Deferred tax asset: Plant related $ 76 $ 87 Investment tax credits 13 22 All other 24 44 ----- ----- 113 153 ----- ----- Deferred tax liability: Plant related (22) (418) Equity AFDC (31) (43) All other (225) (62) ----- ----- (278) (523) ----- ----- Net deferred tax liability $(165) $(370) ===== =====
Note H - Short-term Borrowings and Other Accrued Expenses At December 31, 1998, the Company had no short-term debt outstanding. 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, 1998, the Company had lines of credit and standby bond purchase facilities with banks totaling $455 million. These lines and facilities were used at December 31, 1998 for liquidity support for $372 million of the Company's bonds in tax-exempt commercial paper mode (see Note J) and for other corporate purposes. There were no borrowings under these lines of credit at December 31, 1998. Fees are paid on the lines and facilities in lieu of compensating balances. The components of other accrued expenses are as follows:
At December 31, (In thousands) 1998 1997 - ---------------------------------------------------------------- Accrued wages and benefits $3,059 $ 9,838 Capital lease obligations due within one year - 4,333 Rate adjustment mechanisms 16,781 6,957 Other 246 2,426 ------- ------- $20,086 $23,554 ------- -------
Note I - Cumulative Preferred Stock A summary of cumulative preferred stock at December 31, 1998 and 1997 is as follows (in thousands of dollars except for share data):
Shares Dividends Call Outstanding Amount Declared Price - ------------------------------------------------------------------------------ 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------ $100 par value 6.00% Series 15,672 75,020 $1,567 $ 7,502 $ 277 $ 451 (a) 4.56% Series - 100,000 - 10,000 247 456 4.60% Series - 80,140 - 8,014 236 368 4.64% Series - 41,500 - 4,150 98 192 6.08% Series - 100,000 - 10,000 372 608 - ------------------------------------------------------------------------------ Total 15,672 396,660 $1,567 $39,666 $1,230 $2,075 (a) Noncallable.
The annual dividend requirement for total cumulative preferred stock was $94,000 and $2,075,000 at the end of 1998 and 1997, respectively. In 1998, the Company repurchased or redeemed preferred stock with an aggregate par value of $38 million. Note J - Long-term Debt A summary of long-term debt is as follows:
At December 31, (In thousands) Series Rate % Maturity 1998 1997 - ----------------------------------------------------------------------------- General and Refunding (G&R) Mortgage Bonds: W(93-2) 6.17 February 2, 1998 $ - 4,300 W(93-4) 6.14 February 2, 1998 - 1,300 W(93-5) 6.17 February 3, 1998 - 5,000 W(93-7) 6.10 February 4, 1998 - 10,000 W(93-9) 6.04 February 4, 1998 - 29,400 Y(94-4) 8.28 December 21, 1999 - 10,000 W(93-6) 6.58 February 10, 2000 - 5,000 Y(95-1) 7.94 February 14, 2000 - 5,000 Y(95-2) 7.93 February 14, 2000 - 10,000 Y(95-3) 7.40 March 21, 2000 - 10,000 Y(95-4) 6.69 June 5, 2000 - 25,000 W(93-1) 7.00 February 3, 2003 - 25,000 Y(94-2) 8.33 November 8, 2004 - 10,000 U 8.00 August 1, 2022 - 134,500 Y(94-1) 8.53 September 20, 2024 - 5,000 Pollution Control Revenue Bonds (a): K 7.25 October 15, 2015 - 38,500 MIFA 1 (b) variable March 1, 2018 79,250 79,250 BFA 1 (c) variable November 1, 2020 135,850 135,850 BFA 2 (c) variable November 1, 2020 50,600 50,600 MIFA 2 (b) variable October 1, 2022 106,150 106,150 Unamortized discounts (85) (2,130) -------- -------- Total long-term debt 371,765 697,720 ======== ======== Long-term debt due in one year - (50,000) -------- -------- $371,765 $647,720 ======== ======== (a) Prior to September 1, 1998, the following debt was secured by G&R mortgage bonds. (b) MIFA = Massachusetts Industrial Finance Authority (c) BFA = Business Finance Authority of the State of New Hampshire
At December 31, 1998, interest rates on the Company's variable rate bonds ranged from 3.05 percent to 3.45 percent. At December 31, 1998, the Company's long-term debt had a carrying value and fair value of $372,000,000. The fair value of debt that reprices frequently at market rates approximates carrying value. In order to satisfy certain terms of its mortgage indenture, the Company defeased or retired all $641 million of its mortgage bonds outstanding at the time of the sale of its nonnuclear generating business. The Company retired $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs), leaving the underlying PCRBs outstanding as unsecured obligations of the Company. Pursuant to a tender offer, the Company purchased $183 million of bonds. Provisions for the payment of the remaining mortgage bonds were made by depositing with trustees approximately $97 million of U.S. treasury obligations sufficient to pay principal, interest, and premium, as applicable, to the maturity date, or to the first date on which the bonds could be redeemed. Both the U.S. treasury obligations and defeased bonds were removed from the balance sheet effective September 30, 1998. Note K - Common Stock The Company repurchased shares of its common stock in 1998 as follows (dollar amounts expressed in thousands):
Reductions to : ----------------------------------------- Common stock Number of Cash and related Other paid- Retained Year Shares Paid premium in capital earnings - ------------------------------------------------------------------------------------ 1998 2,700,000 $417,960 $90,266 $133,876 $193,818
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 1998, 1997, or 1996. Taxes, other than income taxes, charged to operating expenses are set forth by classes as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Municipal property taxes $42,080 $59,102 $58,942 Federal and state payroll and other taxes 6,412 8,209 7,474 ------- ------- ------- $48,492 $67,311 $66,416 ======= ======= =======
New England Power Service Company, an affiliated service company operating pursuant to the provisions of Section 13 of the 1935 Act, furnished services to the Company at the cost of such services. These costs amounted to $74,203,000, $91,985,000, and $85,124,000, including capitalized construction costs of $21,281,000, $24,347,000, and $19,412,000, for each of the years 1998, 1997, and 1996, respectively.
New England Power Company Selected Financial Information Year ended December 31, (In millions) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------- Operating revenue $1,218 $1,678 $1,600 $1,571 $1,541 Net income $ 123 $ 145 $ 152 $ 151 $ 149 Total assets $2,415 $2,763 $2,648 $2,648 $2,613 Capitalization: Common equity $ 521 $ 913 $ 906 $ 889 $ 877 Cumulative preferred stock 1 40 40 61 61 Long-term debt 372 648 733 735 695 ------ ------ ------ ------ ------ Total capitalization $ 894 $1,601 $1,679 $1,685 $1,633 Preferred dividends declared $ 1 $ 2 $ 3 $ 3 $ 3 Common dividends declared $ 131 $ 135 $ 134 $ 135 $ 119 ------ ------ ------ ------ ------
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 Operating revenue $401,147 $358,320 $321,569 $137,304 Operating income $ 48,740 $ 32,523 $ 54,647 $ 21,452 Net income $ 35,950 $ 20,425 $ 47,956 $ 18,564 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
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, 1998 will be available on or about April 1, 1999, upon request at no charge by contacting: Merrill IR Edge, 33 Boston Post Road, Suite 270, Marlborough, MA 01752, Telephone: 508-786-1907, Fax: 508-786-1915, E-mail: iredge@merrillcorp.com. EX-21 23 SUBSIDIARY LIST EXHIBIT (21) Subsidiaries of New England Power Company -----------------------------------------
State of Incorporation or Name of Company Organization - --------------- ------------------------- Connecticut Yankee Atomic Connecticut Power Company Maine Yankee Atomic Maine Power Company Vermont Yankee Nuclear Vermont Power Corporation Yankee Atomic Electric Company Massachusetts
EX-24 24 NEP POWER OF ATTORNEY EXHIBIT (24) POWER OF ATTORNEY ----------------- Each of the undersigned directors of New England Power Company (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine M. Zipser, individually, as attorney-in-fact to execute on behalf of the undersigned the Company's annual report on Form 10-K for the year ended December 31, 1998 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 16th day of March, 1999. s/Peter G. Flynn s/Cheryl A. LaFleur _________________________ _________________________ Peter G. Flynn Cheryl A. LaFleur s/Alfred D. Houston s/Richard P. Sergel _________________________ _________________________ Alfred D. Houston Richard P. Sergel EX-27 25 NEP FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND POWER COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 0000071337 NEW ENGLAND POWER COMPANY 1,000 DEC-31-1998 DEC-31-1998 12-MOS PER-BOOK 458,113 88,121 350,653 1,517,901 0 2,414,788 74,998 241,223 204,603 520,896 0 1,567 371,765 0 0 0 0 0 0 0 1,520,560 2,414,788 1,218,340 73,594 987,384 1,060,978 157,362 6,035 163,397 40,502 122,895 1,230 121,665 130,610 30,775 (413,049) 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. Total common stockholders equity includes the unrealized gain on securities. EX-12 26 MECO COMPUTATION OF RATIOS
MASSACHUSETTS ELECTRIC COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited) Years Ended December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Net Income $ 50,386 $ 65,758 $37,926 $29,101 $34,726 - ---------- Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 10,978 34,244 25,867 9,437 (6,762) Deferred federal income taxes 18,558 912 (6,052) 6,156 24,932 Investment tax credits - net (1,086) (1,103) (1,118) (1,132) (1,228) Massachusetts franchise tax 6,999 7,514 4,479 3,935 4,681 Interest on long-term debt 27,073 27,612 27,089 25,901 20,967 Interest on short-term debt and other 7,368 7,214 6,473 6,784 6,366 -------- -------- ------- ------- ------- Net earnings available for fixed charges $120,276 $142,151 $94,664 $80,182 $83,682 -------- -------- ------- ------- ------- Fixed charges: Interest on long-term debt $ 27,073 $ 27,612 $27,089 $25,901 $20,967 Interest on short-term debt and other 7,368 7,214 6,473 6,784 6,366 -------- -------- ------- ------- ------- Total fixed charges $ 34,441 $ 34,826 $33,562 $32,685 $27,333 ======== ======== ======= ======= ======= Ratio of earnings to fixed charges 3.49 4.08 2.82 2.45 3.06 - ----------------------------------
EX-13 27 MEC ANNUAL REPORT Annual Report 1998 Massachusetts Electric Company A Subsidiary of New England Electric System [LOGO] Massachusetts Electric A NEES Company Massachusetts Electric Company 55 Bearfoot Road, Northborough, Massachusetts 01532 Directors (As of January 1, 1999) 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 Nancy H. Sala Senior Vice President of the Company and of an affiliate Officers (As of January 1, 1999) 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 Nancy H. Sala Senior Vice President of the Company and of an affiliate William J. Flaherty Vice President of the Company Andrea Foley-Stapleford Vice President of the Company Richard W. Frost Vice President of the Company and of certain affiliates Rita A. Moran Vice President of the Company Joseph D. Newman Vice President of the Company Kwong O. Nuey Vice President of the Company Timothy R. Roughan Vice President of the Company William T. Sherry 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, Senior Vice President of an affiliate, Treasurer or Controller of certain affiliates and Assistant Secretary of an affiliate Transfer Agent, Dividend Paying Agent, and Registrar of Preferred Stock, State Street Bank and Trust Company, Boston, Massachusetts This report is not to be considered an offer to sell or buy or solicitation of an offer to sell or buy any security. Massachusetts Electric Company Massachusetts Electric Company (the Company) is a wholly owned subsidiary of New England Electric System (NEES) operating in Massachusetts. The Company's business is the distribution of electricity at retail. Electric service is provided to approximately 980,000 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. As described in the "Industry Restructuring" section of Financial Review, all customers gained the right to choose their power supplier effective 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, the Company's transmission affiliate. In September 1998, NEES completed the divestiture of substantially all of its nonnuclear generating business. For further information on industry restructuring and the divestiture of NEES' nonnuclear generating business, refer to the "Industry Restructuring" section of Financial Review. In December 1998, NEES agreed to a merger with The National Grid Group plc, whose principal subsidiary operates the transmission system in England and Wales. In February 1999, NEES entered into an agreement to acquire Eastern Utilities Associates, a utility holding company serving approximately 300,000 customers in Massachusetts and Rhode Island. For further information on these proposed mergers, refer to the "Merger Agreements" sections of Financial Review. Report of Independent Accountants Massachusetts Electric Company, Westborough, Massachusetts: In our opinion, the accompanying balance sheets and the related statements of income, of retained earnings, and of cash flows present fairly, in all material respects, the financial position of Massachusetts Electric Company (the Company), a wholly owned subsidiary of New England Electric System, at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Boston, Massachusetts PricewaterhouseCoopers LLP February 23, 1999 Massachusetts Electric Company Financial Review Merger Agreement with The National Grid Group plc On December 11, 1998, New England Electric System (NEES), The National Grid Group plc (National Grid), and NGG Holdings LLC (Holdings), a directly and indirectly wholly owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly owned subsidiary of National Grid. Massachusetts Electric Company (the Company) will remain a wholly owned subsidiary of NEES. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935 (1935 Act), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC), support or approval from the states in which NEES subsidiaries operate, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. Merger Agreement with Eastern Utilities Associates On February 1, 1999, NEES, Eastern Utilities Associates (EUA), and Research Drive LLC (Research Drive), a directly and indirectly wholly owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly owned subsidiary of NEES. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. Industry Restructuring Pursuant to legislation enacted in Massachusetts and settlement agreements approved by state and federal regulators (Massachusetts Settlement), all customers were provided the right to purchase electricity from the power supplier of their choice effective March 1, 1998. Customers who do not choose a power supplier are able, for a period of time, to continue to purchase their electricity from the Company at a transition rate ("standard offer generation service") which, when combined with delivery charges, results in a total rate reduction of 19 percent compared with the rates that had been in effect in August 1997. In addition to addressing customer choice, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. On September 1, 1998, NEES subsidiaries New England Power Company (NEP) and The Narragansett Electric Company completed the sale of substantially all of their nonnuclear generating business, all of which had a book value of approximately $1.1 billion, to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The NEES companies received $1.59 billion for the sale. Effective September 1, 1998, USGen and TransCanada Power Marketing, Ltd. (TCPM) became the Company's principal suppliers for meeting standard offer generation service obligations. The Massachusetts Settlement also provides that the costs of NEP's generating investments and related contractual commitments that were not recovered from the divestiture of those investments ("stranded costs") (the Company's share is 73 percent) are to be recovered from distribution customers through contract termination charges (CTC), 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 (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and would earn a return on equity of 9.4 percent. NEP's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. NEP's CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of NEP's nonnuclear generating business as described above. 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 these charges because they are expected to be included in future customer charges. At December 31, 1998, the Company had approximately $38 million in net regulatory assets. Under existing ratemaking practices and provisions of the Massachusetts Settlement, the Company will have the ability 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. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets. In addition, reserves for depreciation may also have to be increased to comply with unregulated accounting practices. Impact of Restructuring on Distribution Business 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, including an $11 million increase in annual depreciation expense, a $3 million annual contribution to a storm fund, and increased annual amortization of unfunded deferred income taxes of approximately $1 million over six years. Through the year 2000, the Company's return on equity is 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. Overview of Financial Results Net income for 1998 decreased $15 million compared with 1997. The decrease was primarily due to the decreases in revenues related to the recovery of purchased power and transmission costs being greater than the decreases in the related expenses. This amounted to approximately $35 million, before tax, and was in part due to the reversal in 1997 of prior period refund accruals related to the Company's purchased power cost adjustment mechanism (PPCA). It was also in part due to 1998 being a transition year to new fully reconciling rate mechanisms for purchased power and transmission costs as well as CTC costs billed by NEP. Increases in depreciation and property tax expenses of $12 million and $7 million, respectively, also contributed to the decrease. These decreases in income were partially offset by the effects of a distribution rate increase that went into effect in March 1998. Net income for 1997 increased $28 million compared with 1996. The increase was primarily due to the reversal of prior period refund accruals 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. Operating Revenue Operating revenue decreased $134 million in 1998 compared with 1997 reflecting lower purchased power related rates pursuant to the Massachusetts Settlement and a change in true-up mechanisms. Rates were reduced by 10 percent in March 1998, and an additional 9 percent in September 1998 in conjunction with the sale of NEES' nonnuclear generating assets, compared with rates that had been in effect in August 1997. Commencing in March 1998, the revenues that the Company is billing related to purchased power costs, transmission wheeling costs and CTC charges from NEP, are all subject to fully reconciling true-up mechanisms based on actual billings. Prior to March, only the fuel component of purchased power expense was subject to a similar fully reconciling true-up mechanism. The decrease in 1998 operating revenue was partially offset by a 1.0 percent increase in kWh deliveries. The increase in kWh deliveries reflects a strong economy. For the year as a whole, weather had a negative impact on 1998 deliveries when compared with 1997. Operating revenue increased $86 million in 1997 compared with 1996, and reflected the reversal of the prior period refund accruals related to rate mechanisms referred to above, and increased kWh deliveries due to an improved economy. The Massachusetts Settlement provided for the end of the Company's PPCA mechanism effective July 31, 1996. Prior to FERC approval, the Company had 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 a net $18 million PPCA balance at July 31, 1996. The Company received approval from the Massachusetts Department of Telecommunications and Energy (MDTE) to recover demand-side management (DSM) program expenditures in rates on a current basis through 1998. These expenditures were $46 million, $51 million, and $48 million in 1998, 1997, and 1996, respectively. The Massachusetts Settlement and statute provide for recovery of DSM-related costs. The MDTE approved the Company's DSM program expenditure recovery plans through 2002. Since 1990, the Company has been allowed to earn incentives based on the results of its DSM programs and has recorded before-tax incentives of $6.6 million, $7.0 million, and $5.7 million in 1998, 1997, and 1996, respectively. Operating Expenses Operating expenses for 1998 decreased $120 million compared with 1997 primarily due to reduced purchased electric energy expenses, partially offset by CTC billings, increased operation and maintenance costs, increased depreciation expense, and increased property tax expense. The decrease in purchased electric energy is principally due to reduced rates billed to the Company by suppliers. Historically, the Company purchased all of its electrical requirements from NEP under the provisions of an all-requirements contract at NEP's standard resale rate. Effective March 1, 1998, the contract was amended, terminating the all-requirements provision of the contract. The Company's customers also gained the right to choose their power supplier. NEP continued to supply power to the Company, at lower rates, for customers that continued to take power from the Company, until September 1, 1998, when USGen and TCPM became the Company's principal wholesale power suppliers. The increase in other operation and maintenance expenses is primarily due to increased transmission costs of approximately $76 million which, as of March 1, 1998 are billed separately and recorded as operation and maintenance expense instead of as a component of purchased power expense. The increase in operation and maintenance expenses is also due to costs associated with year 2000 (Y2K) computer readiness. These increases were offset by decreased DSM spending and the effects of workforce reductions. The increase in depreciation expense in 1998 primarily reflects a portion of the $11 million increase in annual depreciation expense provided for in the Massachusetts Settlement, and depreciation expense on new utility plant expenditures. The increase in taxes, other than income taxes reflects one-time property tax adjustments paid in the third quarter of 1998 to certain municipalities. Operating expenses for 1997 increased $56 million compared with 1996 primarily due to increased purchased power expenses, increased other operation and maintenance expenses and increased income taxes. The increase in purchased electric energy expenses was 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 increase in other operation and maintenance expenses was primarily due to increased distribution-system related costs, including increased tree-trimming expenses, as well as increased transmission wheeling charges from NEP related to the use of NEP's transmission network for the Company's 1997 retail wheeling pilot programs. 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 1970s, 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 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 approximately 20 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 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 located 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, 1998, the Company had total reserves for environmental response costs of $44 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 Readiness Disclosure Over the next year, most companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates associated with Y2K. This could cause computers to either shut down or lead to incorrect calculations. During 1996, the NEES companies began the process of identifying the changes required to their computer software and hardware to mitigate Y2K issues. The NEES companies established a Y2K Project team to manage these issues, which has consisted of as many as 70 full-time equivalent staff at some points in time, primarily external consultants being overseen by an internal Y2K management team. To facilitate the Y2K Project, NEES entered into contracts with Keane, Inc. and International Business Machines Corporation to provide personnel support to the Y2K Project. Through December 31, 1998, the NEES companies have spent approximately $14 million with these vendors, which is included in the cost figures disclosed below. The Y2K Project team reports project progress to a Y2K Executive Oversight Committee each month. The team also makes regular reports to NEES' Board of Directors and its Audit Committee. The NEES companies have separated their Y2K Project into four parts as shown below, along with the estimated completion dates for each part.
Substantial Contingency Testing Completion Documentation, of Critical and Clean Category Specific Example Systems Management - -------- ---------------- ----------- ------------------- Mainframe/Midrange Accounting/Customer Completed Throughout 1999 systems service integrated systems Desktop systems Personal computers/ June 30, 1999 Throughout 1999 Department software/ Networks Operational/ Dispatching systems/ June 30, 1999 Throughout 1999 Embedded Transmission and systems Distribution systems/ Telephone systems External issues Electronic Data June 30, 1999 Throughout 1999 Interchange/Vendor communications
The NEES companies are using a three-phase approach in coordinating their Y2K Project for system-related issues: (I) Assessment and Inventory, (II) Pilot Testing, and (III) Renovation, Conversion, or Replacement of Application and Operating Software Packages and Testing. Phase I, which was an initial assessment of all systems and devices for potential Y2K defects, was completed in mid-1997. These assessments included, but were not limited to, the review of program code for mainframe and midrange systems, analysis of personal computer hardware and network equipment for desktop systems, reaching consensus with key "data exchange" partners regarding the approach and execution of plans to address Y2K-related issues, and coordination with other New England Power Pool (NEPOOL) member utilities related to operational systems, such as transmission systems. Phase II, which consisted of renovation pilots for a cross-section of systems in order to facilitate the establishment of templates for Phase III work, was completed in late 1997. Phase III, which is currently ongoing, requires the renovation, conversion, or replacement of the remaining applications and operating software packages. Critical systems include major operational and informational systems such as the NEES companies' financial-related and customer information systems. These mission critical systems were first addressed at an individual component level, and then, upon satisfactory completion of that testing, reviewed at an integrated level, during which the Y2K Project team tested for Y2K problems which could be caused by various system interfaces. Additionally, contingency plans are being formulated for mission critical systems, as described below. The overall Y2K Project has also been designed such that Y2K- related work performed by external consultants is reviewed by NEES employees, and vice-versa. The Y2K Project team management periodically benchmarks its progress against the recommended progress schedule documented by the North American Electric Reliability Council (NERC), and is currently ahead of the recommended schedule. The NEES companies have also implemented a formalized communication process with third parties to give and receive information related to their progress in remediating their own Y2K issues, and to communicate the NEES companies' progress in addressing the Y2K issue. These third parties include major customers, suppliers, and significant businesses with which the NEES companies have data links (such as banks). The NEES companies have identified standard offer generation service providers, telecommunications companies, and the Independent System Operator-New England (ISO New England) as critical to business operations. The NEES companies have been in contact with all of these parties regarding the progress of their Y2K remediation efforts, and will continue to monitor their ongoing remediation efforts through continued communications. The NEES companies cannot predict the outcome of other companies' remediation efforts. Therefore, contingency plans are being developed, as described below. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $28 million. These costs include the replacement of approximately one thousand desktop computers. In addition, the NEES companies are spending $4 million related to the replacement of the human resources and payroll system, in part due to the Y2K issue. To date, total Y2K-related costs of $25 million have been incurred, of which $3 million has been capitalized. The NEES companies continually review their cost estimates based upon the overall Y2K Project status, and update these estimates as warranted. The NEES companies are in the process of developing Y2K contingency plans to allow for critical information and operating systems to function from January 1, 2000 forward. If required, these plans are intended to address both internal risks as well as potential external risks related to suppliers and customers. Part of the contingency planning for accounting and desktop systems will include taking extensive data back-ups prior to year-end closing. For operational systems, the NEES companies have in place an overall disaster recovery program, which already includes periodic disaster simulation training (for outages due to severe weather, for instance). As part of Y2K contingency planning, the NEES companies will review their disaster recovery plans, modifying them for Y2K-specific issues, such as a potential loss of telecommunication services. The NEES companies expect that these contingency plans will be in place by the third quarter of 1999. Interregional and regional contingency plans are being formulated that address emergency scenarios due to the interconnection of utility systems throughout the United States. At a regional level, the NEES companies are participating and cooperating with NEPOOL and ISO New England. Overall regional activities, including those of NEPOOL and ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by NERC. The target for the completion of this planning process is mid-1999. The NEES companies have noted that the Y2K coordination efforts by ISO New England began in May 1998, resulting in a demanding and difficult schedule to attain regional and interregional target dates. The NEES companies believe the worst case scenario with a reasonable chance of occurring is temporary disruptions of electric service. This scenario could result from a failure to adequately remediate Y2K problems at NEES company facilities or could be caused by the inability of entities, such as ISO New England, to maintain the short-term reliability of various generators and/or transmission lines on a regional or interregional basis. The NEES companies believe that the contingency plans being developed both internally and on a regional level, as described above, should substantially mitigate the risks of this potential scenario. In the event that a short-term disruption in service occurs, NEES does not expect that it would have a material impact on its financial position and results of operations. While the NEES companies believe that their overall Y2K program will satisfactorily address all critical operational and system-related issues, significant risks remain. These risks include, but are not limited to, the Y2K readiness of third parties, including other utilities and power suppliers, cost and timeline estimates of remaining Y2K mitigation efforts, and the overall accuracy of assumptions made related to future events in the development of the Y2K mitigation effort. New Accounting Standards In 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income (FAS 130), which was adopted by the Company in the first quarter of 1998. FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the year ended December 31, 1998. Also in 1997, the FASB released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which went into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. FAS 131 does not currently impact the Company's reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company has adopted FAS 132 in its financial statements for the year ended December 31, 1998. The adoption of FAS 130, FAS 131, and FAS 132 had no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Risk Management The Company's major financial market risk exposure is changing interest rates. Changing interest rates will affect the fair value of fixed rate debt. The table below presents the average rate on the Company's long-term debt at December 31, 1998, the amounts maturing during each of the next five years, and the fair value of the Company's debt at December 31, 1998.
Fixed Long-Term --------- Weighted Average Rate 7.20% Maturities (millions of dollars) 1999 $ 15 2000 21 2001 - 2002 25 2003 35 Cumulative thereafter 274 ---- Total $370 ---- Fair Value $403 ----
Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $78 million in 1998. The funds necessary for utility plant expenditures during 1998 were primarily provided by net cash from operating activities, after the payment of dividends, and increased short- term debt. Cash expenditures for utility plant for 1999 are estimated to be approximately $75 million. Internally generated funds are expected to fully meet capital expenditure requirements in 1999. In 1998, the Company issued $50 million of long-term debt, retired $40 million of mortgage bonds and increased its short- term debt outstanding by $46 million. In 1998, the Company repurchased or redeemed preferred stock with an aggregate par value of $5.1 million. Total premiums paid of $0.2 million in connection with the preferred stock repurchase and redemption were charged to retained earnings. At December 31, 1998, the Company had $81 million of short- term debt outstanding representing borrowings from affiliates. The Company's ability to issue short-term debt is limited by the need to obtain regulatory approval from the SEC under the 1935 Act. Approval has been granted for up to $150 million. As of December 31, 1998, the Company had lines of credit with banks totaling $55 million which are available to provide liquidity support for commercial paper borrowings and other commercial purposes. There were no borrowings under these lines of credit at December 31, 1998.
Massachusetts Electric Company Statements of Income Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------- Operating revenue $1,490,417 $1,624,085 $1,538,537 ---------- ---------- ---------- Operating expenses: Purchased electric energy (Note A): Contract termination charges from New England Power Company, an affiliate 300,630 - - Other 640,110 1,145,047 1,120,709 Other operation 292,509 217,150 211,663 Maintenance 33,522 36,906 31,102 Depreciation 61,700 49,694 47,357 Taxes, other than income taxes 37,983 31,143 30,559 Income taxes 36,319 42,454 25,186 ---------- ---------- ---------- Total operating expenses 1,402,773 1,522,394 1,466,576 ---------- ---------- ---------- Operating income 87,644 101,691 71,961 Other income (expense), net (3,510) (1,536) (1,213) ---------- ---------- ---------- Operating and other income 84,134 100,155 70,748 ---------- ---------- ---------- Interest: Interest on long-term debt 27,073 27,612 27,089 Other interest 7,368 7,214 6,473 Allowance for borrowed funds used during construction - credit (693) (429) (740) ---------- ---------- ---------- Total interest 33,748 34,397 32,822 ---------- ---------- ---------- Net income $ 50,386 $ 65,758 $ 37,926 ========== ========== ========== Statements of Retained Earnings Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------- Retained earnings at beginning of year $201,156 $165,936 $150,308 Net income 50,386 65,758 37,926 Dividends declared on cumulative preferred stock (873) (2,821) (3,114) Dividends declared on common stock, $17.50, $10.00, and $8.00 per share, respectively (41,967) (23,981) (19,184) Premium on redemption of preferred stock (165) (3,736) - -------- -------- -------- Retained earnings at end of year $208,537 $201,156 $165,936 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Balance Sheets At December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------ Assets Utility plant, at original cost $1,626,569 $1,579,309 Less accumulated provisions for depreciation 499,975 465,796 ---------- ---------- 1,126,594 1,113,513 Construction work in progress 16,575 13,363 ---------- ---------- Net utility plant 1,143,169 1,126,876 ---------- ---------- Current assets: Cash 6,994 6,743 Accounts receivable: From electric energy services 188,956 158,627 Other (including $6,629 and $1,321 from affiliates) 7,358 2,112 Less reserves for doubtful accounts 12,450 12,808 ---------- ---------- 183,864 147,931 Unbilled revenues (Note A-3) 56,133 49,513 Materials and supplies, at average cost 9,281 9,599 Prepaid and other current assets 13,886 22,255 ---------- ---------- Total current assets 270,158 236,041 ---------- ---------- Deferred charges and other assets (Note C) 41,235 45,450 ---------- ---------- $1,454,562 $1,408,367 ========== ========== 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 45,942 45,945 Other paid-in capital 193,498 193,224 Retained earnings 208,537 201,156 Unrealized gain on securities, net 273 129 ---------- ---------- Total common equity 508,203 500,407 Cumulative preferred stock (Note H) 10,674 15,739 Long-term debt 353,329 338,387 ---------- ---------- Total capitalization 872,206 854,533 ---------- ---------- Current liabilities: Long-term debt due in one year 15,000 20,000 Short-term debt (including $80,725 and $4,800 to affiliates) 80,725 34,700 Accounts payable (including $34,506 and $179,211 to affiliates) 127,621 195,023 Accrued liabilities: Taxes - 8,275 Interest 8,509 9,183 Other accrued expenses (Note G) 40,626 22,081 Customer deposits 4,456 4,487 Dividends payable 4,951 5,036 ---------- ---------- Total current liabilities 281,888 298,785 ---------- ---------- Deferred federal and state income taxes 200,965 179,474 Unamortized investment tax credits 14,377 15,463 Other reserves and deferred credits 85,126 60,112 Commitments and contingencies (Note D) ---------- ---------- $1,454,562 $1,408,367 ========== ========== The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Statements of Cash Flows
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating activities: Net income $ 50,386 $ 65,758 $ 37,926 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 61,700 49,694 47,357 Deferred income taxes and investment tax credits, net 22,280 478 (7,850) Allowance for borrowed funds used during construction (693) (429) (740) Amortization of unbilled revenues Decrease (increase) in accounts receivable, net and unbilled revenues (42,553) 1,266 2,868 Decrease (increase) in materials and supplies 318 (779) 1,782 Decrease (increase) in prepaid and other current assets 8,369 3,668 (3,409) Increase (decrease) in accounts payable (67,402) 16,760 (3,680) Increase (decrease) in other current liabilities 9,565 (25,711) 31,095 Other, net 31,281 36,902 (2,430) -------- -------- -------- Net cash provided by operating activities $ 73,251 $147,607 $102,919 -------- -------- ------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(77,588) $(87,998) $(93,828) Other investing activities (3,557) (1,408) (598) -------- -------- -------- Net cash used in investing activities $(81,145) $(89,406) $(94,426) -------- -------- -------- Financing activities: Capital contributions from parent $ 274 $ 37,914 $ - Dividends paid on common stock (41,967) (26,380) (13,188) Dividends paid on preferred stock (958) (3,359) (3,114) Long-term debt - issues 50,000 15,000 20,000 Long-term debt - retirements (40,000) (30,000) - Preferred stock - retirements (5,064) (34,178) - Premium on redemption of preferred stock (165) (3,736) - Changes in short-term debt 46,025 (9,075) (11,675) -------- -------- -------- Net cash provided by(used in) financing activities $ 8,145 $(53,814) $ (7,977) -------- -------- -------- Net increase in cash and cash equivalents $ 251 $ 4,387 $ 516 Cash and cash equivalents at beginning of year 6,743 2,356 1,840 -------- -------- -------- Cash and cash equivalents at end of year $ 6,994 $ 6,743 $ 2,356 ======== ======== ======== Supplementary information: Interest paid less amounts capitalized $ 30,364 $ 31,251 $ 30,569 -------- -------- -------- Federal and state income taxes paid $ 34,111 $ 31,711 $ 39,174 -------- -------- -------- The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company Notes to Financial Statements Note A - Significant Accounting Policies 1. Nature of Operations: 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 980,000 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 transmission affiliate. Under an all- requirements contract with NEP, the Company had previously purchased all of its electric energy requirements from NEP under a contract which obligated 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 allow NEP to recover its above-market generation commitments through a contract termination charge (CTC), which the Company collects from its customers. See Note C for a discussion of industry restructuring and NEES' 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 Utility 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, in 1997, included 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. 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. 5. Depreciation: Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 3.9 percent in 1998 and 3.3 percent in 1997 and 1996. 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 (FASB) released Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income (FAS 130), which was adopted by the Company in the first quarter of 1998. FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the year ended December 31, 1998. Also in 1997, the FASB released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which went into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. FAS 131 does not currently impact the Company's reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company has adopted FAS 132 in its financial statements for the year ended December 31, 1998. The adoption of FAS 130, FAS 131, and FAS 132 had no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Note B - Merger Agreements Merger Agreement with The National Grid Group plc On December 11, 1998, NEES, The National Grid Group plc (National Grid), and NGG Holdings LLC (Holdings), a directly and indirectly wholly owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly owned subsidiary of National Grid. The Company will remain a wholly owned subsidiary of NEES. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935 (1935 Act), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC), support or approval from the states in which NEES subsidiaries operate, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. Merger Agreement with Eastern Utilities Associates On February 1, 1999, NEES, Eastern Utilities Associates (EUA), and Research Drive LLC (Research Drive), a directly and indirectly wholly owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly owned subsidiary of NEES. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. Note C - Industry Restructuring Pursuant to legislation enacted in Massachusetts and settlement agreements approved by state and federal regulators (Massachusetts Settlement), all customers were provided the right to purchase electricity from the power supplier of their choice effective March 1, 1998. Customers who do not choose a power supplier are able, for a period of time, to continue to purchase their electricity from the Company at a transition rate ("standard offer generation service") which, when combined with delivery charges, results in a total rate reduction of 19 percent compared with the rates that had been in effect in August 1997. In addition to addressing customer choice, the Massachusetts Settlement also required the NEES companies to divest their nonnuclear generating business. On September 1, 1998, NEES subsidiaries NEP and The Narragansett Electric Company completed the sale of substantially all of their nonnuclear generating business, all of which had a book value of approximately $1.1 billion, to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The NEES companies received $1.59 billion for the sale. Effective September 1, 1998, USGen and TransCanada Power Marketing, Ltd. became the Company's principal suppliers for meeting standard offer generation service obligations. The Massachusetts Settlement also provides that the costs of NEP's generating investments and related contractual commitments that were not recovered from the divestiture of those investments ("stranded costs") (the Company's share is 73 percent) are to be recovered from distribution customers through CTCs, 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 (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and would earn a return on equity of 9.4 percent. NEP's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. NEP's CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of NEP's nonnuclear generating business as described above. 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 these charges because they are expected to be included in future customer charges. Under existing ratemaking practices and provisions of the Massachusetts Settlement, the Company will have the ability 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. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets. In addition, reserves for depreciation may also have to be increased to comply with unregulated accounting practices. The components of regulatory assets are as follows:
At December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------ Regulatory assets (liabilities) included in current assets and liabilities: Rate adjustment mechanisms $ 24,913 $ 2,960 -------- -------- Regulatory assets (liabilities) included in deferred charges and other reserves and deferred credits: Unamortized losses on reacquired debt 6,424 6,939 Deferred FAS No. 106 costs 6,332 9,950 Deferred FAS No. 109 costs 6,307 8,275 Environmental response costs (12,874) (18,294) Deferred storm costs 6,447 8,108 Other - 412 -------- -------- 12,636 15,390 -------- -------- $ 37,549 $ 18,350 ======== ========
Note D - Commitments and Contingencies 1. Plant Expenditures: The Company's utility plant expenditures are estimated to be approximately $75 million in 1999. At December 31, 1998, 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 early 1970s, NEES was a combined electric and gas holding company system.) The Company is aware of approximately 35 such manufactured gas locations in Massachusetts. The Company has been identified as a PRP at eight of these manufactured gas locations, which are included in the 16 PRP sites discussed above. The Company has reported the existence of all manufactured gas locations of which it is aware to state environmental regulatory agencies. The Company is engaged in various phases of investigation and remediation work at 17 of the manufactured gas locations. The Company is currently aware of other possible hazardous waste sites, and may in the future become aware of additional sites, that it may be held responsible for remediating. In 1993, the 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 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. Rate- recoverable contributions of $3 million, adjusted since 1993 for inflation, are added annually to the fund along with interest, lease payments, and any recoveries from insurance carriers and other third parties. At December 31, 1998, the fund had a balance of $47 million. 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, 1998, the Company had total reserves for environmental response costs of $44 million which includes reserves established in connection with the Company's hazardous waste fund referred to above. The Company believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. Note E - Employee Benefits 1. Pension Plans: The Company participates with other subsidiaries of NEES in noncontributory, defined-benefit plans covering substantially all employees of the Company. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. Absent unusual circumstances, the Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount. Net pension cost for 1998, 1997, and 1996 included the following components:
- ----------------------------------------------------------------------------------------- Year ended December 31 (thousands of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 4,760$ 4,474 $ 4,429 Plus (less): Interest cost on projected benefit obligation 18,176 17,413 16,935 Return on plan assets at expected long-term rate (21,379)(19,961) (18,562) Amortization of transition obligation (658) (660) (656) Amortization of prior service cost 417 465 462 Amortization of net (gain)/loss 246 100 510 Curtailment (gain)/loss (465) - - - ----------------------------------------------------------------------------------------- Benefit cost $ 1,097 $ 1,831$ 3,118 - ----------------------------------------------------------------------------------------- Special termination benefits not included above $21,670$ - $ - - -----------------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------- (millions of dollars) 1998 1997 - --------------------------------------------------------------------------- Benefit obligation $843 $819 Unrecognized prior service costs (6) (8) Transition liability not yet recognized (amortized) (2) (4) Additional minimum liability 7 4 - --------------------------------------------------------------------------- 842 811 - --------------------------------------------------------------------------- Plan assets at fair value 837 834 Transition asset not yet recognized (amortized) (6) (8) Net (gain)/loss not yet recognized (amortized) (92) (52) - --------------------------------------------------------------------------- 739 774 - --------------------------------------------------------------------------- Accrued pension/(prepaid) payments recorded on books $103 $ 37 - ---------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations and plan assets:
- ----------------------------------------------------------------------------- (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Changes in benefit obligation: Benefit obligation at January 1 $819 $807 Service cost 14 15 Interest cost 55 53 Actuarial (gain)/loss (5) 59 Benefits paid from plan assets (94) (47) Special termination benefits 64 - Curtailment (11) - Plan Amendments 1 - Dispositions (Yankee Atomic) - (68) - ----------------------------------------------------------------------------- Benefit obligation at December 31 $843 $819 - ----------------------------------------------------------------------------- Reconciliation of change in plan assets: Fair value of plan assets at January 1 $834 $812 Actual return on plan assets during year 93 130 Company contributions 4 8 Benefits paid from plan assets (94) (47) Dispositions (Yankee Atomic) - (69) - ----------------------------------------------------------------------------- Fair value of plan assets at December 31 $837 $834 - -----------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 - ---------------------------------------------------------------------- Assumptions used to determine pension cost: Discount rate 6.75% 6.75% 7.25% 7.25% Average rate of increase in future compensation level 4.13% 4.13% 4.13% 4.13% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.50%
The plans' funded status at December 31, 1998 and 1997 were calculated using the assumed rates from 1999 and 1998, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. 2. Postretirement Benefit Plans Other than Pensions (PBOPs): The Company provides health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The Company's total cost of PBOPs for 1998, 1997, and 1996 included the following components:
- ----------------------------------------------------------------------------------------- Year ended December 31 (thousands of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 2,202$ 2,164 $ 2,232 Plus (less): Interest cost on projected benefit obligation 9,258 9,486 9,661 Return on plan assets at expected long-term rate (7,963) (6,871) (5,455) Amortization of transition obligation 7,186 7,300 7,300 Amortization of prior service cost 30 30 30 Amortization of net (gain)/loss (3,103) (2,865) (2,063) Curtailment (gain)/loss 4,909 - - - ----------------------------------------------------------------------------------------- Benefit cost $ 12,519 $ 9,244$ 11,705 - ----------------------------------------------------------------------------------------- Special termination benefits not included above $ 1,982$ - $ - - -----------------------------------------------------------------------------------------
The following table sets forth the Company's benefits earned and the plans' funded status:
- ----------------------------------------------------------------------------- At December 31 (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Benefit obligation $149 $ 136 Unrecognized prior service costs - - Transition liability not yet recognized (amortized) (98) (109) - ----------------------------------------------------------------------------- 51 27 - ----------------------------------------------------------------------------- Plan assets at fair value 106 98 Net (gain)/loss not yet recognized (amortized) (58) (60) - ----------------------------------------------------------------------------- 48 38 - ----------------------------------------------------------------------------- Accrued pension/(prepaid) payments recorded on books $ 3 $ (11) - -----------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations and plan assets:
- ----------------------------------------------------------------------------- (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Changes in benefit obligation: Benefit obligation at January 1 $136 $144 Service cost 2 2 Interest cost 9 9 Actuarial (gain)/loss 2 (14) Benefits paid from plan assets (6) (5) Special termination benefits 2 - Curtailment 4 - - ----------------------------------------------------------------------------- Benefit obligation at December 31 $149 $136 - ----------------------------------------------------------------------------- Reconciliation of change in plan assets: Fair value of plan assets at January 1 $ 98 $ 82 Actual return on plan assets during year 14 16 Company contributions - 5 Benefits paid from plan assets (6) (5) - ----------------------------------------------------------------------------- Fair value of plan assets at December 31 $106 $ 98 - -----------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 - ---------------------------------------------------------------------- Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 6.75% 7.25% 7.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.25% Health care cost rate - 1996 to 1999 5.25% 5.25% 8.00% 8.00% Health care cost rate - 2000 to 2004 5.25% 5.25% 6.25% 6.25% Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 5.25%
The plans' funded status at December 31, 1998 and 1997 were calculated using the assumed rates in effect for 1999 and 1998, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. A one percentage point change in the assumed rates would increase the accumulated postretirement benefit obligation (APBO) as of December 31, 1998 by approximately $18 million or decrease the APBO by approximately $16 million, and change the net periodic cost for 1998 by approximately $2 million. The Company generally funds the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. 3. Early Retirement and Special Severance Programs: In 1998, the Company offered a voluntary early retirement program to all employees who were at least 55 years old with 10 years of service. This program was part of an organizational review with the goal of streamlining operations and reducing the work force to reflect the sale of the nonnuclear generating business. The early retirement offer was accepted by 292 employees. A special severance program was also utilized in 1998 for employees affected by the organizational restructuring, but who were not eligible for, or did not accept, the early retirement offer. The cost of these programs is being reimbursed by NEP. Note F - Income Taxes The Company and other subsidiaries participate with NEES in filing consolidated federal income tax returns. The Company's income tax provision is calculated on a separate return basis. Federal income tax returns have been examined and reported on by the Internal Revenue Service through 1993. Total income taxes in the statements of income are as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Income taxes charged to operations $36,319 $42,454 $25,186 Income taxes charged (credited) to "Other income" (870) (887) (2,010) ------- ------- ------- Total income taxes $35,449 $41,567 $23,176 ======= ======= =======
Total income taxes, as shown above, consist of the following components:
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Current income taxes $13,169 $41,089 $31,026 Deferred income taxes 23,366 1,581 (6,732) Investment tax credits, net (1,086) (1,103) (1,118) ------- ------- ------- Total income taxes $35,449 $41,567 $23,176 ======= ======= =======
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) 1998 1997 1996 - ----------------------------------------------------------------------------- Federal income taxes $28,450 $34,053 $18,697 State income taxes 6,999 7,514 4,479 ------- ------- ------- Total income taxes $35,449 $41,567 $23,176 ======= ======= =======
Consistent with rate-making policies of the Massachusetts Department of Telecommunications and Energy, the Company has adopted comprehensive interperiod tax allocation (normalization) for temporary book/tax differences. Total income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Computed tax at statutory rate $30,042 $37,564 $21,386 Increases (reductions) in tax resulting from: Amortization of investment tax credits (1,086) (1,103) (1,118) State income taxes, net of federal income tax benefit 4,549 4,884 2,911 All other differences 1,944 222 (3) ------- ------- ------- Total income taxes $35,449 $41,567 $23,176 ======= ======= =======
The following table identifies the major components of total deferred income taxes:
At December 31, (In millions) 1998 1997 - ----------------------------------------------------------------- Deferred tax asset: Plant related $ 9 $ 9 Investment tax credits 6 6 All other 35 57 ----- ----- 50 72 ----- ----- Deferred tax liability: Plant related (231) (223) All other (20) (28) ----- ----- (251) (251) ----- ----- Net deferred tax liability $(201) $(179) ===== =====
Note G - Short-term Borrowings and Other Accrued Expenses At December 31, 1998, the Company had $81 million of short-term debt outstanding representing 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, 1998, the Company had lines of credit with banks totaling $55 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, 1998. Fees are paid in lieu of compensating balances on most lines of credit. The components of other accrued expenses are as follows:
- --------------------------------------------------------------------------- At December 31, (In thousands) 1998 1997 - --------------------------------------------------------------------------- Rate adjustment mechanisms $28,333 $ 4,227 Accrued wages and benefits 9,972 15,244 Other 2,321 2,610 ------- ------- $40,626 $22,081 ======= =======
Note H - Cumulative Preferred Stock A summary of cumulative preferred stock at December 31, 1998 and 1997 is as follows (in thousands except for share data):
Shares Dividends Call Outstanding Amount Declared Price - ----------------------------------------------------------------------------------- 1998 1997 1998 1997 1998 1997 - ----------------------------------------------------------------------------------- $25 par value - 6.84% Series - 192,161 $ - $ 4,804 $246 $ 931 $100 par value - 4.44% Series 27,615 27,815 2,761 2,782 124 305 $104.068 4.76% Series 25,130 27,530 2,513 2,753 125 326 $103.730 6.99% Series 54,000 54,000 5,400 5,400 378 1,259 (a) - ----------------------------------------------------------------------------------- Total 106,745 301,506 $10,674$15,739 $873 $2,821 =================================================================================== (a) Callable on or after August 1, 2003 at $103.50.
The annual dividend requirement for total cumulative preferred stock was $620,000 and $961,000 at the end of the 1998 and 1997, respectively. There are no mandatory redemption provisions on the Company's cumulative preferred stock. In 1998, the Company repurchased or redeemed preferred stock with an aggregate par value of $5.1 million. Total premiums paid of $0.2 million in connection with the preferred stock repurchase and redemption were charged to retained earnings. Note I - Long-term Debt A summary of long-term debt is as follows:
At December 31, (In thousands) - --------------------------------------------------------------------------- Series Rate % Maturity 1998 1997 =========================================================================== First Mortgage Bonds: U(95-3) 7.800 February 13, 1998 $ - $ 5,000 U(95-4) 7.790 February 16, 1998 - 5,000 R(92-1) 7.240 December 30, 1998 - 10,000 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 V(98-3) 5.720 November 24, 2008 25,000 - 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 T(93-3) 7.980 January 27, 2023 - 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 15,000 V(98-1) 6.910 January 12, 2028 20,000 - V(98-2) 6.940 January 12, 2028 5,000 - Unamortized discounts (1,671) (1,613) -------- -------- Total long-term debt $368,329 $358,387 ======== ======== Long-term debt due in one year 15,000 20,000 -------- -------- $353,329 $338,387 ======== ========
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 $15,000,000 in 1999, $21,000,000 in 2000, $25,000,000 in 2002, $35,000,000 in 2003 and $274,000,000 thereafter, to retire maturing mortgage bonds. At December 31, 1998, the Company's long-term debt had a carrying value of approximately $370,000,000 and had a fair value of approximately $403,000,000. 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, 1998 was 57 percent of total capitalization, and accordingly, none of the Company's retained earnings at December 31, 1998 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, 1998 were restricted as to dividends on common stock. Note K - Supplementary Income Statement Information Advertising expenses, expenditures for research and development, and rents were not material and there were no royalties paid in 1998, 1997, or 1996. Taxes, other than income taxes, charged to operating expenses are set forth by classes as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Municipal property taxes $30,561 $23,796 $23,304 Federal and state payroll and other taxes 7,422 7,347 7,255 ------- ------- ------- $37,983 $31,143 $30,559 ======= ======= =======
New England Power Service Company, an affiliated service company operating pursuant to the provisions of Section 13 of the 1935 Act, furnished services to the Company at the cost of such services. These costs amounted to $88,630,000, $73,145,000, and $67,756,000, including capitalized construction costs of $8,909,000, $7,907,000, and $9,330,000 for each of the years 1998, 1997, and 1996, respectively.
Selected Financial Information Year ended December 31, (In millions) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------- Operating revenue $1,490 $1,624 $1,539 $1,506 $1,482 Net income $ 50 $ 66 $ 38 $ 29 $ 35 Total assets $1,455 $1,408 $1,390 $1,343 $1,296 Capitalization: Common equity $ 508 $ 500 $ 427 $ 412 $ 384 Cumulative preferred stock 11 16 50 50 50 Long-term debt 353 339 343 353 266 ------ ------ ------ ------ ------ Total capitalization $ 872 $ 855 $ 820 $ 815 $ 700 Preferred dividends declared $ 1 $ 3 $ 3 $ 3 $ 3 Common dividends declared $ 42 $ 24 $ 19 $ 13 $ 30
Selected Quarterly Financial Information (Unaudited) - --------------------------------------------------------------------------- First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter =========================================================================== 1998 Operating revenue $396,714 $361,889 $380,409 $351,405 Operating income $ 22,843 $ 18,488 $ 20,350 $ 25,963 Net income $ 11,811 $ 9,612 $ 11,920 $ 17,043 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 * * 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.
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, 1998 will be available on or about April 1, 1999, upon request at no charge by contacting: Merrill IR Edge, 33 Boston Post Road, Suite 270, Marlborough, MA 01752, Telephone: 508-786-1907, Fax: 508-786-1915, E-mail: iredge@merrillcorp.com. EX-24 28 MECO POWER OF ATTORNEY EXHIBIT (24) POWER OF ATTORNEY ----------------- Each of the undersigned directors of Massachusetts Electric Company (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert 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, 1998, 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, 1999. s/Cheryl A. LaFleur s/Christopher E. Root _________________________ _________________________ Cheryl A. LaFleur Christopher E. Root s/Robert L. McCabe s/Nancy H. Sala _________________________ _________________________ Robert L. McCabe Nancy H. Sala s/Lydia M. Pastuszek s/Richard P. Sergel _________________________ _________________________ Lydia M. Pastuszek Richard P. Sergel s/Lawrence J. Reilly _________________________ Lawrence J. Reilly EX-27 29 MECO FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF MASSACHUSETTS ELECTRIC COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 2 0000063073 MASSACHUSETTS ELECTRIC COMPANY 1,000 DEC-31-1998 DEC-31-1998 12-MOS PER-BOOK 1,143,169 0 270,158 41,235 0 1,454,562 59,953 239,440 208,537 508,203 0 10,674 353,329 80,725 0 0 15,000 0 0 0 486,631 1,454,562 1,490,417 36,319 1,366,454 1,402,773 87,644 (3,510) 84,134 33,748 50,386 873 49,513 41,967 27,073 73,251 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. Total common stockholders equity includes the unrealized gain on securities. EX-12 30 NARRA COMPUTATION OF RATIOS
THE NARRAGANSETT ELECTRIC COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited) Years Ended December 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Net Income $32,253 $27,932 $22,954 $23,910 $14,589 - ---------- Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 19,312 14,185 6,918 7,212 1,020 Deferred federal income taxes (2,212) 79 4,675 3,512 3,930 Investment tax credits - net (489) (495) (498) (503) (508) Interest on long-term debt 14,925 16,179 17,205 16,627 14,334 Interest on short-term debt and other 3,615 2,475 2,883 3,663 2,897 ------- ------- ------- ------- ------- Net earnings available for fixed charges $67,404 $60,355 $54,137 $54,421 $36,262 ------- ------- ------- ------- ------- Fixed charges: Interest on long-term debt $14,925 $16,179 $17,205 $16,627 $14,334 Interest on short-term debt and other 3,615 2,475 2,883 3,663 2,897 ------- ------- ------- ------- ------- Total fixed charges $18,540 $18,654 $20,088 $20,290 $17,231 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 3.64 3.24 2.69 2.68 2.10 - ----------------------------------
EX-13 31 NEC ANNUAL REPORT Annual Report 1998 The Narragansett Electric Company A Subsidiary of New England Electric System [LOGO] Narragansett Electric A NEES Company The Narragansett Electric Company 280 Melrose Street Providence, Rhode Island 02901 Directors (As of January 1, 1999) 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 January 1, 1999) 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 of certain affiliates, and Senior Vice President and Chief Financial Officer of New England Electric System 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, Senior Vice President of an affiliate, Treasurer or Controller of certain affiliates and Assistant Secretary of an affiliate 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. 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 335,000 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. As described in the "Industry Restructuring" section of Financial Review, all customers gained the right to choose their power supplier effective January 1, 1998. The properties of the Company include an integrated system of transmission and distribution lines and substations. In September 1998, NEES completed the divestiture of substantially all of its nonnuclear generating business, including the Company's 10 percent share of the Manchester Street generating station. For further information on industry restructuring and the divestiture of NEES' nonnuclear generating business, refer to the "Industry Restructuring" section of Financial Review. In December 1998, NEES agreed to a merger with The National Grid Group plc, whose principal subsidiary operates the transmission system in England and Wales. In February 1999, NEES entered into an agreement to acquire Eastern Utilities Associates, a utility holding company serving approximately 300,000 customers in Massachusetts and Rhode Island. For further information on these proposed mergers, refer to the "Merger Agreements" sections of Financial Review. Report of Independent Accountants The Narragansett Electric Company, Providence, Rhode Island: In our opinion, the accompanying balance sheets and the related statements of income, of retained earnings, and of cash flows present fairly, in all material respects, the financial position of The Narragansett Electric Company (the Company), a wholly owned subsidiary of New England Electric System, at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Boston, Massachusetts PricewaterhouseCoopers LLP February 23, 1999 The Narragansett Electric Company Financial Review Merger Agreement with The National Grid Group plc On December 11, 1998, New England Electric System (NEES), The National Grid Group plc (National Grid), and NGG Holdings LLC (Holdings), a directly and indirectly wholly owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly owned subsidiary of National Grid. The Narragansett Electric Company (the Company) will remain a wholly owned subsidiary of NEES. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935 (1935 Act), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC), support or approval from the states in which NEES subsidiaries operate, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. Merger Agreement with Eastern Utilities Associates On February 1, 1999, NEES, Eastern Utilities Associates (EUA), and Research Drive LLC (Research Drive), a directly and indirectly wholly owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly owned subsidiary of NEES. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. Industry Restructuring Pursuant to legislation enacted in Rhode Island and settlement agreements approved by state and federal regulators, all customers were provided the right to purchase electricity from the power supplier of their choice effective January 1, 1998. Customers who do not choose a power supplier are able, for a period of time, to continue to purchase their electricity from the Company at a transition rate ("standard offer generation service") which, when combined with delivery charges, results in a total rate reduction of 8 percent compared with the rates that had been in effect prior to the introduction of customer choice. 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. On September 1, 1998, the Company and New England Power Company (NEP) (collectively, the Sellers) completed the sale of substantially all of their nonnuclear generating business, all of which had a book value of approximately $1.1 billion, to USGen New England Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. Included in the sale was the Company's 10 percent share of Manchester Street Station. The Sellers received $1.59 billion for the sale, of which the Company received approximately $40 million equal to the net book value of its assets included in the sale. Effective September 1, 1998, USGen and TransCanada Power Marketing, Ltd. (TCPM) became the Company's principal suppliers for meeting standard offer generation service obligations. However, NEP remained obligated for standard offer service for new customer load in Rhode Island. The Rhode Island Settlement also provides that the costs of NEP's generating investments and related contractual commitments that were not recovered from the divestiture of those investments ("stranded costs") (the Company's share is 22 percent) are to be recovered from distribution customers through contract termination charges (CTC), 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 (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and would earn a return on equity of 11 percent. NEP's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. NEP's CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of NEP's nonnuclear generating business as described above. 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 these charges because they are expected to be included in future customer charges. At December 31, 1998, the Company had approximately $16 million in net regulatory assets. 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. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets. In addition, reserves for depreciation may also have to be increased to comply with unregulated accounting practices. Impact of Restructuring on Distribution Business Under the Rhode Island statute, the Company increased distribution rates by approximately $7 million and $11 million in 1998 and 1997, respectively. The statute does not limit Narragansett Electric's ability to seek approval from state regulators to increase rates in the future. Overview of Financial Results Net income in 1998 and 1997 increased $4 million and $5 million, respectively, from the prior year. Both increases were primarily due to the previously mentioned distribution rate increases which went into effect in January of each year and increases in kWh deliveries. The increase in 1998 earnings was partially offset by an underrecovery of transmission wheeling costs of approximately $4 million. Operating Revenue Operating revenue decreased $44 million in 1998 compared with 1997, reflecting lower purchased power related rates pursuant to Rhode Island legislation, a change in true-up mechanisms and a decrease in postretirement benefits other than pensions (PBOPs). Rates were reduced by 8 percent effective January 1998. The revenues that the Company is billing related to purchased power costs both prior to and subsequent to the September 1 sale are subject to fully reconciling true-up mechanisms, as are CTC charges from NEP. However, transmission wheeling costs are not subject to a true-up mechanism until 1999, and the Company incurred an underrecovery of such costs in 1998. The decrease in PBOPs is due to lower costs being incurred as well as refunds made by the Company in January 1998 of past overrecoveries of PBOP costs, for which reserves had previously been established. The decrease in 1998 operating revenue was partially offset by the $7 million distribution rate increase mentioned above and a 2.9 percent increase in kWh deliveries. The increase in kWh deliveries reflects a strong economy. For the year as a whole, weather had a negative impact on 1998 deliveries when compared to 1997. Operating revenue increased $17 million in 1997 compared with 1996, reflecting an $11 million increase in base rates effective January 1, 1997, increased fuel recovery (see 1997 fuel costs discussion in the "Operating Expenses" section), and a 1.3 percent increase in kWh deliveries. The Company received approval from the Rhode Island Public Utilities Commission (RIPUC) to recover demand-side management (DSM) program expenditures in rates on a current basis through 1998. These expenditures were $11 million, $10 million, and $10 million in 1998, 1997, and 1996, respectively. The Company has also received approval from the RIPUC to recover its 1999 DSM program expenditures. Since 1990, the Company has been allowed to earn incentives based on the results of its DSM programs and has recorded before-tax incentives of $0.3 million, $0.3 million, and $0.2 million in 1998, 1997, and 1996, respectively. Operating Expenses Operating expenses for 1998 decreased $47 million compared with 1997 primarily due to reduced purchased electric energy expenses, partially offset by increased operation and maintenance costs. The decrease in purchased electric energy is principally due to reduced rates billed to the Company by suppliers. Historically, the Company purchased all of its electrical requirements from NEP under the provisions of an all-requirements contract at NEP's standard resale rate. Effective January 1, 1998, the contract was amended, terminating the all-requirements provision of the contract. The Company's customers also gained the right to choose their power supplier. NEP continued to supply power to the Company, at lower rates, for customers that continued to take power from the Company, until September 1, 1998, when USGen and TCPM became the Company's principal wholesale power suppliers. This decrease in purchased electric energy was partially offset by a reduction in the level of reimbursements received from NEP for costs associated with the Company's 10 percent ownership of the Manchester Street generating station as a result of the sale of this facility in September 1998. All of the output of this generating unit had been previously supplied to NEP. The increase in other operation and maintenance expenses in 1998 is primarily due to increased transmission costs of approximately $23 million which, as of January 1, 1998 are billed separately and recorded as operation and maintenance expense instead of as a component of purchased power expense. The Company also experienced increased costs associated with year 2000 (Y2K) computer readiness. The increases were partially offset by decreased charges related to postretirement benefits other than pensions and the effect of workforce reductions during the year. Operating expenses for 1997 increased $13 million compared with 1996 primarily due to increased purchased electric energy expenses and increased other operation and maintenance expenses. The increase in purchased electric energy expenses was due to increased replacement power fuel costs due to reduced generation from NEP's partially owned nuclear units and reduced reimbursements received from NEP for dismantlement costs associated with the previously retired South Street generating facility. These replacement power costs were passed on to the Company through NEP's fuel clause. The increase in other operation and maintenance expenses was primarily due to increased customer accounts expenses, transmission and distribution system related expenses, and increased general and administrative expenses. 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 Readiness Disclosure Over the next year, most companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates associated with Y2K. This could cause computers to either shut down or lead to incorrect calculations. During 1996, the NEES companies began the process of identifying the changes required to their computer software and hardware to mitigate Y2K issues. The NEES companies established a Y2K Project team to manage these issues, which has consisted of as many as 70 full-time equivalent staff at some points in time, primarily external consultants being overseen by an internal Y2K management team. To facilitate the Y2K Project, NEES entered into contracts with Keane, Inc. and International Business Machines Corporation to provide personnel support to the Y2K Project. Through December 31, 1998, the NEES companies have spent approximately $14 million with these vendors, which is included in the cost figures disclosed below. The Y2K Project team reports project progress to a Y2K Executive Oversight Committee each month. The team also makes regular reports to NEES' Board of Directors and its Audit Committee. The NEES companies have separated their Y2K Project into four parts as shown below, along with the estimated completion dates for each part.
Substantial Contingency Testing Completion Documentation, of Critical and Clean Category Specific Example Systems Management - -------- ---------------- ----------- ------------------- Mainframe/Midrange Accounting/Customer Completed Throughout 1999 systems service integrated systems Desktop systems Personal computers/ June 30, 1999 Throughout 1999 Department software/ Networks Operational/ Dispatching systems/ June 30, 1999 Throughout 1999 Embedded Transmission and systems Distribution systems/ Telephone systems External issues Electronic Data June 30, 1999 Throughout 1999 Interchange/Vendor communications
The NEES companies are using a three-phase approach in coordinating their Y2K Project for system-related issues: (I) Assessment and Inventory, (II) Pilot Testing, and (III) Renovation, Conversion, or Replacement of Application and Operating Software Packages and Testing. Phase I, which was an initial assessment of all systems and devices for potential Y2K defects, was completed in mid-1997. These assessments included, but were not limited to, the review of program code for mainframe and midrange systems, analysis of personal computer hardware and network equipment for desktop systems, reaching consensus with key "data exchange" partners regarding the approach and execution of plans to address Y2K-related issues, and coordination with other New England Power Pool (NEPOOL) member utilities related to operational systems, such as transmission systems. Phase II, which consisted of renovation pilots for a cross-section of systems in order to facilitate the establishment of templates for Phase III work, was completed in late 1997. Phase III, which is currently ongoing, requires the renovation, conversion, or replacement of the remaining applications and operating software packages. Critical systems include major operational and informational systems such as the NEES companies' financial-related and customer information systems. These mission critical systems were first addressed at an individual component level, and then, upon satisfactory completion of that testing, reviewed at an integrated level, during which the Y2K Project team tested for Y2K problems which could be caused by various system interfaces. Additionally, contingency plans are being formulated for mission critical systems, as described below. The overall Y2K Project has also been designed such that Y2K- related work performed by external consultants is reviewed by NEES employees, and vice-versa. The Y2K Project team management periodically benchmarks its progress against the recommended progress schedule documented by the North American Electric Reliability Council (NERC), and is currently ahead of the recommended schedule. The NEES companies have also implemented a formalized communication process with third parties to give and receive information related to their progress in remediating their own Y2K issues, and to communicate the NEES companies' progress in addressing the Y2K issue. These third parties include major customers, suppliers, and significant businesses with which the NEES companies have data links (such as banks). The NEES companies have identified standard offer generation service providers, telecommunications companies, and the Independent System Operator-New England (ISO New England) as critical to business operations. The NEES companies have been in contact with all of these parties regarding the progress of their Y2K remediation efforts, and will continue to monitor their ongoing remediation efforts through continued communications. The NEES companies cannot predict the outcome of other companies' remediation efforts. Therefore, contingency plans are being developed, as described below. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $28 million. These costs include the replacement of approximately one thousand desktop computers. In addition, the NEES companies are spending $4 million related to the replacement of the human resources and payroll system, in part due to the Y2K issue. To date, total Y2K-related costs of $25 million have been incurred, of which $3 million has been capitalized. The NEES companies continually review their cost estimates based upon the overall Y2K Project status, and update these estimates as warranted. The NEES companies are in the process of developing Y2K contingency plans to allow for critical information and operating systems to function from January 1, 2000 forward. If required, these plans are intended to address both internal risks as well as potential external risks related to suppliers and customers. Part of the contingency planning for accounting and desktop systems will include taking extensive data back-ups prior to year-end closing. For operational systems, the NEES companies have in place an overall disaster recovery program, which already includes periodic disaster simulation training (for outages due to severe weather, for instance). As part of Y2K contingency planning, the NEES companies will review their disaster recovery plans, modifying them for Y2K-specific issues, such as a potential loss of telecommunication services. The NEES companies expect that these contingency plans will be in place by the third quarter of 1999. Interregional and regional contingency plans are being formulated that address emergency scenarios due to the interconnection of utility systems throughout the United States. At a regional level, the NEES companies are participating and cooperating with NEPOOL and the Independent System Operator of the NEPOOL area (ISO New England). Overall regional activities, including those of NEPOOL and ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by NERC. The target for the completion of this planning process is mid-1999. The NEES companies have noted that the Y2K coordination efforts by ISO New England began in May 1998, resulting in a demanding and difficult schedule to attain regional and interregional target dates. The NEES companies believe the worst case scenario with a reasonable chance of occurring is temporary disruptions of electric service. This scenario could result from a failure to adequately remediate Y2K problems at NEES company facilities or could be caused by the inability of entities, such as ISO New England, to maintain the short-term reliability of various generators and/or transmission lines on a regional or interregional basis. The NEES companies believe that the contingency plans being developed both internally and on a regional level, as described above, should substantially mitigate the risks of this potential scenario. In the event that a short-term disruption in service occurs, NEES does not expect that it would have a material impact on its financial position and results of operations. While the NEES companies believe that their overall Y2K program will satisfactorily address all critical operational and system-related issues, significant risks remain. These risks include, but are not limited to, the Y2K readiness of third parties, including other utilities and power suppliers, cost and timeline estimates of remaining Y2K mitigation efforts, and the overall accuracy of assumptions made related to future events in the development of the Y2K mitigation effort. New Accounting Standards In 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income (FAS 130), which was adopted by the Company in the first quarter of 1998. FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the year ended December 31, 1998. Also in 1997, the FASB released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which went into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. FAS 131 does not currently impact the Company's reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company has adopted FAS 132 in its financial statements for the year ended December 31, 1998. The adoption of FAS 130, FAS 131, and FAS 132 had no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Risk Management The Company's major financial market risk exposure is changing interest rates. Changing interest rates will affect the fair value of fixed rate debt. The table below presents the average rate on the Company's long-term debt at December 31, 1998, the amounts maturing during each of the next five years, and the fair value of the Company's debt at December 31, 1998.
Fixed Long-Term --------------- Weighted Average Rates 7.67% Maturities (millions of dollars) 1999 $ 8 2000 15 2001 - 2002 15 2003 18 Cumulative thereafter 122 ---- Total $178 ---- Fair Value $195 ----
Utility Plant Expenditures and Financing Cash expenditures for utility plant totaled $22 million in 1998. The funds necessary for utility plant expenditures during 1998 were primarily provided by increased short-term debt and proceeds from the sale of the nonnuclear generating business. Cash expenditures for utility plant for 1999 are estimated to be approximately $25 million. Internally generated funds are expected to fully meet capital expenditure requirements in 1999. In 1998, the Company retired $12 million of long-term debt. In 1998, the Company repurchased preferred stock with an aggregate par value of $5.6 million. Total premiums paid of $1.2 million in connection with the preferred stock redemption were charged to retained earnings. At December 31, 1998, the Company had $27 million of short- term debt outstanding representing borrowings from affiliates. The Company's ability to issue short-term debt is limited by the need to obtain regulatory approval from the SEC under the 1935 Act. Approval has been granted for up to $100 million. As of December 31, 1998, the Company had lines of credit with banks totaling $41 million. There were no borrowings under these lines of credit at December 31, 1998. The Narragansett Electric Company Statements of Income
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating revenue $475,654 $520,038 $503,585 -------- -------- -------- Operating expenses: Fuel for generation and purchased electric energy (Note A): Contract termination charges from New England Power Company, an affiliate 117,756 - - Other 122,351 309,430 297,060 Other operation 95,792 74,375 71,625 Maintenance 11,997 12,447 13,009 Depreciation 22,759 22,957 27,899 Taxes, other than federal income taxes 38,915 39,366 38,530 Federal income taxes 16,177 14,247 11,951 -------- -------- -------- Total operating expenses 425,747 472,822 460,074 -------- -------- -------- Operating income 49,907 47,216 43,511 -------- -------- -------- Other income: Other income (expense), net 801 (750) (732) -------- -------- -------- Operating and other income 50,708 46,466 42,779 -------- -------- -------- Interest: Interest on long-term debt 14,925 16,179 17,205 Other interest 3,615 2,475 2,883 Allowance for borrowed funds used during construction credit (85) (120) (263) -------- -------- -------- Total interest 18,455 18,534 19,825 -------- -------- -------- Net income $ 32,253 $ 27,932 $ 22,954 ======== ======== ======== Statements of Retained Earnings Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Retained earnings at beginning of year $129,567 $119,978 $108,227 Net income 32,253 27,932 22,954 Dividends declared on cumulative preferred stock (567) (1,955) (2,143) Dividends declared on common stock, $65.00, $13.00, and $8.00 per share, respectively (73,612) (14,722) (9,060) Premium on redemption of preferred stock (1,176) (1,666) - -------- -------- -------- Retained earnings at end of year $ 86,465 $129,567 $119,978 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Balance Sheets
At December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------- Assets Utility plant, at original cost $732,077 $760,923 Less accumulated provisions for depreciation 209,155 198,551 -------- -------- 522,922 562,372 Construction work in progress 2,566 5,739 -------- -------- Net utility plant 525,488 568,111 -------- -------- Current assets: Cash 2,957 3,122 Accounts receivable: From electric energy services 53,727 54,109 Other (including $4,444 and $1,112 from affiliates) 5,575 2,571 Less reserves for doubtful accounts 4,240 4,707 -------- -------- 55,062 51,973 Unbilled revenues (Note A-3) 20,752 15,997 Fuel, materials, and supplies, at average cost 3,494 4,165 Prepaid and other current assets 739 14,202 -------- -------- Total current assets 83,004 89,459 -------- -------- Deferred charges and other assets (Note C) 55,628 55,285 -------- -------- $664,120 $712,855 ======== ======== 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 81 36 Other paid-in capital 105,713 105,500 Retained earnings 86,465 129,567 Unrealized gain on securities, net 237 112 -------- -------- Total common equity 249,120 291,839 Cumulative preferred stock, par value $50 per share (Note H) 7,238 12,800 Long-term debt 168,702 183,545 -------- -------- Total capitalization 425,060 488,184 -------- -------- Current liabilities: Long-term debt due in one year 8,000 5,000 Short-term debt - (including $26,675 and $4,425 to affiliates) 26,675 16,350 Accounts payable (including $1,929 and $50,751 to affiliates) 28,260 56,048 Accrued liabilities: Taxes 10,031 4,314 Interest 4,553 4,810 Other accrued expenses (Note G) 34,734 21,519 Customer deposits 6,116 5,982 Dividends payable 4,058 3,587 -------- -------- Total current liabilities 122,427 117,610 -------- -------- Deferred federal income taxes 81,045 82,871 Unamortized investment tax credits 6,533 7,023 Other reserves and deferred credits 29,055 17,167 Commitments and contingencies (Note D) -------- -------- $664,120 $712,855 ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Statements of Cash Flows
Year ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating activities: Net income $ 32,253 $ 27,932 $ 22,954 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 22,759 22,957 27,899 Deferred federal income taxes and investment tax credits, net (2,701) (415) 4,177 Allowance for funds used during construction (85) (120) (263) Decrease (increase) in accounts receivable, net and unbilled revenues (7,844) 22 12,082 Decrease (increase) in fuel, materials, and supplies 671 135 1,945 Decrease (increase) in prepaid and other current assets 13,463 1,717 (32) Increase (decrease) in accounts payable (27,788) 10,827 (1,026) Increase (decrease) in other current liabilities 18,809 9,484 (10,335) Other, net 14,666 1,181 8,236 -------- -------- -------- Net cash provided by operating activities $ 64,203 $ 73,720 $ 65,637 -------- -------- -------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(22,196) $(30,965) $(52,574) Other investing activities (35) (294) (181) Proceeds from sale of generating assets 39,724 - - -------- -------- -------- Net cash provided by (used in) investing activities $ 17,493 $(31,259) $(52,755) -------- -------- -------- Financing activities: Capital contributions from parent $ 214 $ 25,500 $ - Dividends paid on common stock (73,045) (13,590) (7,361) Dividends paid on preferred stock (662) (2,301) (2,143) Changes in short-term debt 10,325 (2,675) (3,650) Long-term debt issues - 10,000 2,000 Long-term debt retirements (12,000) (32,500) (2,000) Preferred stock - retirements (5,517) (23,834) - Premium on reacquisition of preferred stock (1,176) (1,666) - -------- -------- -------- Net cash used in financing activities $(81,861) $(41,066) $(13,154) -------- -------- -------- Net increase (decrease) in cash and cash equivalents $ (165) $ 1,395 $ (272) Cash and cash equivalents at beginning of year 3,122 1,727 1,999 -------- -------- -------- Cash and cash equivalents at end of year $ 2,957 $ 3,122 $ 1,727 ======== ======== ======== Supplementary Information: Interest paid less amounts capitalized $ 17,079 $ 17,911 $ 18,620 -------- -------- -------- Federal income taxes paid $ 13,180 $ 13,825 $ 8,873 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
The Narragansett Electric Company Notes to Financial Statements Note A - Significant Accounting Policies 1. Nature of Operations: The 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 335,000 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. Under an all-requirements contract with its transmission affiliate, New England Power Company (NEP), the Company had previously purchased its electric energy requirements from NEP. The contract with NEP has been amended to terminate the all-requirements provision of the contract and allow NEP to recover its above-market generation commitments through a contract termination charge (CTC), which the Company collects from its customers. See Note C for a discussion of industry restructuring and the Company's and NEP's 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 Utility 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. 4. Allowance for Funds Used During Construction (AFDC): The Company capitalizes AFDC as part of construction costs. AFDC represents the composite interest 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 "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. 5. Depreciation: Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average transmission and distribution depreciable property was 3.1 percent in each of the years 1998, 1997, and 1996. 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 (FASB) released Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income (FAS 130), which was adopted by the Company in the first quarter of 1998. FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the year ended December 31, 1998. Also in 1997, the FASB released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which went into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. FAS 131 does not currently impact the Company's reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company has adopted FAS 132 in its financial statements for the year ended December 31, 1998. The adoption of FAS 130, FAS 131, and FAS 132 had no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Note B - Merger Agreements Merger Agreement with The National Grid Group plc On December 11, 1998, NEES, The National Grid Group plc (National Grid), and NGG Holdings LLC (Holdings), a directly and indirectly wholly owned subsidiary of National Grid, entered into an Agreement and Plan of Merger (Merger Agreement). Pursuant to the Merger Agreement, Holdings will merge with and into NEES (the Merger), with NEES becoming a wholly owned subsidiary of National Grid. The Company will remain a wholly owned subsidiary of NEES. The Merger is subject to approval by a majority vote of NEES shareholders as well as National Grid shareholder approval. In addition, the Merger is subject to a number of regulatory and other approvals and consents, including approvals by the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935 (1935 Act), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC), support or approval from the states in which NEES subsidiaries operate, and clearance under both the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act of 1988. National Grid has obtained governmental clearance in the United Kingdom for the Merger. The Merger is expected to be completed by early 2000. Merger Agreement with Eastern Utilities Associates On February 1, 1999, NEES, Eastern Utilities Associates (EUA), and Research Drive LLC (Research Drive), a directly and indirectly wholly owned subsidiary of NEES, entered into an Agreement and Plan of Merger (EUA Agreement). Pursuant to the EUA Agreement, Research Drive will merge with and into EUA, with EUA becoming a wholly owned subsidiary of NEES. The acquisition of EUA is subject to approval by a two-thirds vote of EUA shareholders. In addition, the acquisition is subject to a number of regulatory and other approvals and consents, including approvals by the SEC, under the 1935 Act, FERC, and NRC, support or approval from the states in which EUA subsidiaries operate, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The EUA acquisition is expected to be completed by early 2000. Following the acquisition of EUA, the subsidiaries of NEES and EUA whose operations are similar are expected to be consolidated. Note C - Industry Restructuring Pursuant to legislation enacted in Rhode Island and settlement agreements approved by state and federal regulators, all customers were provided the right to purchase electricity from the power supplier of their choice effective January 1, 1998. Customers who do not choose a power supplier are able, for a period of time, to continue to purchase their electricity from the Company at a transition rate ("standard offer generation service") which, when combined with delivery charges, results in a total rate reduction of 8 percent compared with the rates that had been in effect prior to the introduction of customer choice. 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. On September 1, 1998, the Company and NEP, (collectively, the Sellers) completed the sale of substantially all of their nonnuclear generating business, all of which had a book value of approximately $1.1 billion, to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. Included in the sale was the Company's 10 percent share of Manchester Street Station. The Sellers received $1.59 billion for the sale, of which the Company received approximately $40 million equal to the net book value of its assets included in the sale. Effective September 1, 1998, USGen and TransCanada Power Marketing, Ltd. became the Company's principal suppliers for meeting standard offer generation service obligations. However, NEP remained obligated for standard offer service for new customer load in Rhode Island. The Rhode Island Settlement also provides that the costs of NEP's generating investments and related contractual commitments that were not recovered from the divestiture of those investments ("stranded costs") (the Company's share is 22 percent) are to be recovered from distribution customers through CTCs, 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 (nuclear and nonnuclear) and most regulatory assets will be fully recovered through the CTC by the end of 2000 and would earn a return on equity of 11 percent. NEP's obligation relating to the above-market cost of purchased power contracts and nuclear decommissioning costs are recovered through the CTC over a longer period of time, as such costs are actually incurred. NEP's CTC rate was originally set at 2.8 cents per kilowatthour (kWh), and subsequently reduced to approximately 1.5 cents or less per kWh upon completion of the sale of NEP's nonnuclear generating business as described above. 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 these charges because they are expected to be included in future customer charges. 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. Currently, there is much regulatory and other movement toward establishing performance-based rates. It is possible that the adoption of performance-based rates, future regulatory rules, or other circumstances could cause the application of FAS 71 to be discontinued. This discontinuation would result in a noncash write-off of previously established regulatory assets. In addition, reserves for depreciation may also have to be increased to comply with unregulated accounting practices. The components of regulatory assets are as follows:
At December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------ Regulatory assets (liabilities) included in current assets and liabilities: Rate adjustment mechanisms $(29,144) $ (9,794) -------- -------- Regulatory assets (liabilities) included in deferred charges and other reserves and deferred credits: Deferred FAS No. 109 costs 31,430 31,291 Unamortized losses on reacquired debt 10,963 12,438 Storm fund (4,477) (3,586) Other 7,331 5,225 -------- -------- 45,247 45,368 -------- -------- $ 16,103 $ 35,574 ======== ========
Note D - Commitments and Contingencies 1. Plant expenditures: The Company's utility plant expenditures are estimated to be $25 million in 1999. At December 31, 1998, 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 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 other insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. The Company believes that hazardous waste liabilities for all sites of which it is aware are not material to its financial position. Note E - Employee Benefits 1. Pension Plans: The Company participates with other subsidiaries of NEES in noncontributory, defined-benefit plans covering substantially all employees of the Company. The plans provide pension benefits based on the employee's compensation during the five years prior to retirement. Absent unusual circumstances, the Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum contribution required by federal law or greater than the maximum tax deductible amount.
Net pension cost for 1998, 1997, and 1996 included the following components: - ----------------------------------------------------------------------------------------- Year ended December 31 (thousands of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 2,020$ 2,092 $ 2,007 Plus (less): Interest cost on projected benefit obligation 9,135 9,027 8,954 Return on plan assets at expected long-term rate (10,688)(10,311) (9,787) Amortization of transition obligation (345) (351) (355) Amortization of prior service cost 217 245 249 Amortization of net (gain)/loss 124 56 271 Curtailment (gain)/loss (860) - - - ----------------------------------------------------------------------------------------- Benefit cost $ (397)$ 758 $ 1,339 - ----------------------------------------------------------------------------------------- Special termination benefits not included above $ 10,146$ - $ - - -----------------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------- (millions of dollars) 1998 1997 - --------------------------------------------------------------------------- Benefit obligation $843 $819 Unrecognized prior service costs (6) (8) Transition liability not yet recognized (amortized) (2) (4) Additional minimum liability 7 4 - --------------------------------------------------------------------------- 842 811 - --------------------------------------------------------------------------- Plan assets at fair value 837 834 Transition asset not yet recognized (amortized) (6) (8) Net (gain)/loss not yet recognized (amortized) (92) (52) - --------------------------------------------------------------------------- 739 774 - --------------------------------------------------------------------------- Accrued pension/(prepaid) payments recorded on books $103 $ 37 - ---------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations and plan assets:
- --------------------------------------------------------------------------- (millions of dollars) 1998 1997 - --------------------------------------------------------------------------- Changes in benefit obligation: Benefit obligation at January 1 $819 $807 Service cost 14 15 Interest cost 55 53 Actuarial (gain)/loss (5) 59 Benefits paid from plan assets (94) (47) Special termination benefits 64 - Curtailment (11) - Plan Amendments 1 - Dispositions (Yankee Atomic) - (68) - --------------------------------------------------------------------------- Benefit obligation at December 31 $843 $819 - --------------------------------------------------------------------------- Reconciliation of change in plan assets: Fair value of plan assets at January 1 $834 $812 Actual return on plan assets during year 93 130 Company contributions 4 8 Benefits paid from plan assets (94) (47) Dispositions (Yankee Atomic) - (69) - --------------------------------------------------------------------------- Fair value of plan assets at December 31 $837 $834 - ---------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 - ---------------------------------------------------------------------- Assumptions used to determine pension cost: Discount rate 6.75% 6.75% 7.25% 7.25% Average rate of increase in future compensation level 4.13% 4.13% 4.13% 4.13% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.50%
The plans' funded status at December 31, 1998 and 1997 were calculated using the assumed rates from 1999 and 1998, respectively, and the 1983 Group Annuity Mortality table. Plan assets are composed primarily of corporate equity, debt securities, and cash equivalents. 2. Postretirement Benefit Plans Other than Pensions (PBOPs): The Company provides health care and life insurance coverage to eligible retired employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The Company's total cost of PBOPs for 1998, 1997, and 1996 included the following components:
- ----------------------------------------------------------------------------------------- Year ended December 31 (thousands of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 962 $ 990 $ 1,030 Plus (less): Interest cost on projected benefit obligation 4,701 4,843 5,034 Return on plan assets at expected long-term rate (4,013) (3,513) (2,803) Amortization of transition obligation 3,696 3,862 3,862 Amortization of prior service cost 12 12 12 Amortization of net (gain)/loss (1,697) (1,617) (1,135) Curtailment (gain)/loss 7,075 - - - ----------------------------------------------------------------------------------------- Benefit cost $10,736 $ 4,577 $ 6,000 - ----------------------------------------------------------------------------------------- Special termination benefits not included above $ 784 $ - $ - - -----------------------------------------------------------------------------------------
The following table sets forth the Company's benefits earned and the plans' funded status:
- ----------------------------------------------------------------------------- At December 31 (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Benefit obligation $ 74 $ 69 Unrecognized prior service costs - - Transition liability not yet recognized (amortized) (47) (58) - ----------------------------------------------------------------------------- 27 11 - ----------------------------------------------------------------------------- Plan assets at fair value 53 50 Net (gain)/loss not yet recognized (amortized) (32) (33) - ----------------------------------------------------------------------------- 21 17 - ----------------------------------------------------------------------------- Accrued pension/(prepaid) payments recorded on books $ 6 $ (6) - -----------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations and plan assets:
- ----------------------------------------------------------------------------- (millions of dollars) 1998 1997 - ----------------------------------------------------------------------------- Changes in benefit obligation: Benefit obligation at January 1 $ 69 $ 75 Service cost 1 1 Interest cost 5 5 Actuarial (gain)/loss 2 (9) Benefits paid from plan assets (4) (3) Special termination benefits 1 - Curtailment - - - ----------------------------------------------------------------------------- Benefit obligation at December 31 $ 74 $ 69 - ----------------------------------------------------------------------------- Reconciliation of change in plan assets: Fair value of plan assets at January 1 $ 50 $ 42 Actual return on plan assets during year 7 8 Company contributions - 3 Benefits paid from plan assets (4) (3) - ----------------------------------------------------------------------------- Fair value of plan assets at December 31 $ 53 $ 50 - -----------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 - ---------------------------------------------------------------------- Assumptions used to determine postretirement benefit cost: Discount rate 6.75% 6.75% 7.25% 7.25% Expected long-term rate of return on assets 8.25% 8.25% 8.25% 8.25% Health care cost rate - 1996 to 1999 5.25% 5.25% 8.00% 8.00% Health care cost rate - 2000 to 2004 5.25% 5.25% 6.25% 6.25% Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 5.25%
The plans' funded status at December 31, 1998 and 1997 were calculated using the assumed rates in effect for 1999 and 1998, respectively. The assumptions used in the health care cost trends have a significant effect on the amounts reported. A one percentage point change in the assumed rates would increase the accumulated postretirement benefit obligation (APBO) as of December 31, 1998 by approximately $9 million or decrease the APBO by approximately $8 million, and change the net periodic cost for 1998 by approximately $1 million. The Company generally funds the annual tax-deductible contributions. Plan assets are invested in equity and debt securities and cash equivalents. 3. Early Retirement and Special Severance Programs: In 1998, the Company offered a voluntary early retirement program to all employees who were at least 55 years old with 10 years of service. This program was part of an organizational review with the goal of streamlining operations and reducing the work force to reflect the sale of the nonnuclear generating business. The early retirement offer was accepted by 141 employees. A special severance program was also utilized in 1998 for employees affected by the organizational restructuring, but who were not eligible for, or did not accept, the early retirement offer. The cost of these programs is being reimbursed by NEP. 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 federal income taxes consist of the following components:
Year ended December 31, (In thousands) 1998 1997 1996 ---- ---- ---- Income taxes charged (credited) to operations: Current income taxes $19,530 $14,648 $ 7,499 Deferred income taxes (2,863) 93 4,950 Investment tax credits, net (490) (494) (498) ------- ------- ------- Total income taxes charged to operations 16,177 14,247 11,951 ------- ------- ------- Income taxes charged (credited) to "Other income": Current income taxes (218) (464) (581) Deferred income taxes 652 (14) (275) ------- ------- ------- Total income taxes charged (credited) to "Other income" 434 (478) (856) ------- ------- ------- Total federal income taxes $16,611 $13,769 $11,095 ======= ======= =======
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 Rhode Island Public Utilities Commission (RIPUC), the Company has adopted comprehensive interperiod tax allocation (normalization) for most temporary book/tax differences. Total federal income taxes differ from the amounts computed by applying the federal statutory tax rates to income before taxes. The reasons for the differences are as follows:
Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Computed tax at statutory rate $17,102 $14,595 $11,917 Increases (reductions) in tax resulting from: Book versus tax depreciation not normalized 707 741 778 Costs associated with utility plant retirements deducted for tax purposes (769) (1,046) (1,341) Amortization of investment tax credits (490) (494) (498) All other differences 61 (27) 239 ------- ------- ------- Total federal income taxes $16,611 $13,769 $11,095 ======= ======= =======
The following table identifies the major components of total deferred income taxes:
At December 31, (In millions) 1998 1997 ---- ---- Deferred tax asset: Plant related $ 2 $ 2 Investment tax credits 3 3 All other 17 13 ----- ----- 22 18 ----- ----- Deferred tax liability: Plant related (75) (72) All other (28) (29) ----- ----- (103) (101) ----- ----- Net deferred tax liability $ (81) $ (83) ===== =====
Note G - Short-Term Borrowings and Other Current Liabilities At December 31, 1998, the Company had $27 million of short-term debt outstanding representing 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, 1998, the Company had lines of credit with banks totaling $41 million. There were no borrowings under these lines of credit at December 31, 1998. Fees are paid in lieu of compensating balances on most lines of credit. The components of other accrued expenses are as follows:
At December 31, (In thousands) 1998 1997 - ---------------------------------------------------------------- Rate adjustment mechanisms $30,680 $12,970 Accrued wages and benefits 3,776 8,050 Other 278 499 ------- ------- $34,734 $21,519 ======= =======
Note H - Cumulative Preferred Stock A summary of cumulative preferred stock at December 31, 1998 and 1997 is as follows (in thousands of dollars except for share data):
Shares Dividends Call Outstanding Amount Declared Price - ------------------------------------------------------------------------------ 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------ $50 Par value 4.50% Series 49,209 49,730 $2,460 $ 2,487 $111 $ 365 $55.000 4.64% Series 57,057 61,217 2,853 3,061 137 320 $52.125 6.95% Series 38,500 145,050 1,925 7,252 319 1,270 (a) - ------------------------------------------------------------------------------ Total 144,766 255,997 $7,238 $12,800 $567 $1,955 - ------------------------------------------------------------------------------ (a) Callable on or after August 1, 2003 at $51.74.
The annual dividend requirement for total cumulative preferred stock was $377,000 and $758,000 at the end of 1998 and 1997, respectively. In 1998, the Company redeemed preferred stock with an aggregate par value of $5.6 million. Total premiums of $1.2 million in connection with the preferred stock redemption were charged to retained earnings. Note I - Long-term Debt A summary of long-term debt is as follows:
At December 31, (In thousands) Series Rate % Maturity 1998 1997 - ---------------------------------------------------------------------------- First Mortgage Bonds: V(95-1) 7.810 February 16, 1998 $ - $5,000 V(94-2) 6.960 May 3, 1999 2,000 2,000 V(94-3) 6.910 May 4, 1999 1,000 1,000 U(92-6) 6.630 August 12, 1999 5,000 5,000 U(92-5) 6.980 July 17, 2000 5,000 5,000 U(92-8) 6.340 September 18, 2000 10,000 10,000 U(92-4) 7.830 June 17, 2002 15,000 15,000 U(93-1) 7.080 January 13, 2003 7,500 7,500 U(93-2) 6.560 April 15, 2003 5,000 5,000 U(93-4) 6.350 July 1, 2003 5,000 5,000 V(94-4) 7.420 June 15, 2004 5,000 5,000 V(94-6) 8.330 November 8, 2004 10,000 10,000 U(93-3) 6.650 June 30, 2008 5,000 5,000 S 9.125 May 1, 2021 20,200 22,200 T 8.875 August 1, 2021 17,000 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 3,000 W(97-2) 7.390 October 1, 2027 7,000 7,000 Unamortized discounts and premiums (998) (1,155) -------- -------- Total long-term debt $176,702 $188,545 ======== ======== Long-term debt due in one year 8,000 5,000 -------- -------- $168,702 $183,545 ======== ========
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 $8,000,000 in 1999, $15,000,000 in 2000, $15,000,000 in 2002, $17,500,000 in 2003, and $121,500,000 thereafter, to retire maturing mortgage bonds. At December 31, 1998, the Company's long-term debt had a carrying value of approximately $178,000,000 and had a fair value of approximately $195,000,000. 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, 1998 was 58 percent of total capitalization, and accordingly, none of the Company's retained earnings at December 31, 1998 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 1998, 1997, or 1996. Taxes, other than federal income taxes, charged to operating expenses are set forth by class as follows:
Year ended December 31, (In thousands) 1998 1997 1996 ---- ---- ---- Municipal property taxes $19,325 $18,061 $16,546 State gross earnings tax 16,646 18,676 18,764 Federal and state payroll and other taxes 2,944 2,629 3,220 ------- ------- ------- $38,915 $39,366 $38,530 ======= ======= =======
New England Power Service Company, an affiliated service company operating pursuant to the provisions of Section 13 of the 1935 Act, furnished services to the Company at the cost of such services. These costs amounted to $27,968,000, $23,341,000, and $27,336,000, including capitalized construction costs of $1,667,000, $1,946,000, and $6,426,000 for each of the years 1998, 1997, and 1996, respectively. The Narragansett Electric Company Selected Financial Information
Year ended December 31, (In millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ Operating revenue $476 $520 $504 $499 $482 Net income $ 32 $ 28 $ 23 $ 24 $ 15 Total assets $664 $713 $707 $700 $647 Capitalization: Common equity $249 $292 $257 $245 $208 Cumulative preferred stock 7 13 36 36 37 Long-term debt 169 183 179 211 189 - ------------------------------------------------------------------------------ Total capitalization $425 $488 $472 $492 $434 Preferred dividends declared $ 1 $ 2 $ 2 $ 2 $ 2 Common dividends declared $ 74 $ 15 $ 9 $ 5 $ 3
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------- 1998 Operating revenue $119,976 $117,295 $128,787 $109,596 Operating income $ 14,805 $ 8,765 $ 14,101 $ 12,236 Net income $ 9,399 $ 4,335 $ 11,510 $ 7,009 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
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, 1998 will be available on or about April 1, 1999, at no charge by contacting: Merrill IR Edge, 33 Boston Post Road, Suite 270, Marlborough, MA 01752, Telephone: 508-786- 1907, Fax: 508-786-1915, E-mail: iredge@merrillcorp.com. EX-24 32 NARRA POWER OF ATTORNEY EXHIBIT (24) POWER OF ATTORNEY ----------------- Each of the undersigned directors of The Narragansett Electric Company (the "Company"), individually as a director of the Company, hereby constitutes and appoints John G. Cochrane, Robert K. Wulff, and Geraldine M. Zipser, individually, as attorney-in-fact to execute on behalf of the undersigned the Company's annual report on Form 10-K for the year ended December 31, 1998, 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, 1999. s/Michael F. Ryan _________________________ _________________________ Richard W. Frost Michael F. Ryan s/Cheryl A. LaFleur s/Richard P. Sergel _________________________ _________________________ Cheryl A. LaFleur Richard P. Sergel s/Robert L. McCabe s/Ronald L. Thomas _________________________ _________________________ Robert L. McCabe Ronald L. Thomas s/Lawrence J. Reilly _________________________ Lawrence J. Reilly EX-27 33 NARRA FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF THE NARRAGANSETT ELECTRIC COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3 0000069659 THE NARRAGANSETT ELECTRIC COMPANY 1,000 DEC-31-1998 DEC-31-1998 12-MOS PER-BOOK 525,488 0 83,004 55,628 0 664,120 56,624 105,794 86,465 249,120 0 7,238 168,702 26,675 0 0 8,000 0 0 0 204,385 664,120 475,654 16,177 409,570 425,747 49,907 801 50,708 18,455 32,253 567 31,686 73,612 14,925 64,203 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. Total common stockholders equity includes the unrealized gain on securities. -----END PRIVACY-ENHANCED MESSAGE-----