BECO-LTR-97-059, Requests NRC Consent to Indirect Transfer of Control of Boston Edison Interest in License DPR-35 in Connection W/Creation of New Holding Company.W/Proxy Statement & Annual Rept to Sec on Form 10-K

Requests NRC Consent to Indirect Transfer of Control of Boston Edison Interest in License DPR-35 in Connection W/Creation of New Holding Company.W/Proxy Statement & Annual Rept to Sec on Form 10-K

ML20140H034
Person / Time
Site:	Pilgrim
Issue date:	06/09/1997
From:	Boulette E BOSTON EDISON CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
BECO-LTR-97-059, BECO-LTR-97-59, NUDOCS 9706170396
Download: ML20140H034 (184)

Text

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10 CFR 50.80 h

Boston Edison P;; grim Nuclear Power Station Rocky Hill Road Plymouth. Massachusetts 02360 E. T. Boulette, PhD Senior Vice President - Nuclear June 9,1997 BECo Ltr. # 97-059 United States Nuclear Regulatory Commission Attention: Document Control Desk Washington, D. C. 20555 Docket No. 50-293 License No. DPR-35 Request for Nuclear Regulatory Commission Consent to Indirect Transfer of Control ofInterest in the Pilgrim Nuclear Power Station Operating License in Connection with Creation of New Holding Comoany Boston Edison Company (" Boston Edison") hereby requests Nuclear Regulatory Commission ("NRC" or the " Commission") consent to the indirect transfer of control of Boston Edison's interest in Operating License No. DPR-35 for Pilgrim Nuclear Power Station (" Pilgrim") l l

pursuant to 10 CFR 50.80. Approval of the Commission is necessary in order to allow creation I of a new holding company structure for Boston Edison. Granting the request contained in this f i

submission will not in any way afTect Boston Edison's position or commitment as owner and / nil 1

operator of Pilgrim or its responsibilities under the Operating License or under federal regulations.

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I. BACKGROUND Boston Edison is an investor-owned regulated public utility incorporated in 1886 under the laws of the Commonwealth of Massachusetts. Boston Edison, with its wholly-owned utility subsidiary Harbor Electric Energy Company, is currently engaged principally in the generation, purchase, transmission, distribution and sale of electric energy. Boston Edison supplies electricity at retail in an area of 590 square miles in the Commonwealth of Massachusetts, including the City of Boston and 39 surrounding cities and towns. In addition, Boston Edison supplies electricity at wholesale to a number of municipal and other customers. Among the electric generating facilities l owned by Boston Edison is Pilgrim, a 670 MW nuclear powered electric generating facility which is owned and operated by Boston Edison pursuant to Operating License No. DPR-35 issued in  ;

1972 by the Atomic Energy Commission in Docket No. 50-293.

i Boston Edison's utility operations are subject to the regulation of the Department of l 1

Public Utilities of the Commonwealth of Ma.sachusetts (the "MDPU") under chapter 164 of the l General Laws of the Commonwealth of Massachusetts. The MDPU'sjurisdiction includes supervision over Boston Edison's retail rates for electricity and issuances of bonds, capital stock and certain other securities and investments by Boston Edison in other entities, including subsidiaries.

1 Boston Edison is also a "public utility" as defined in Section 201(e) of the Federal Power Act,16 U.S.C. 824(e). Boston Edison sells electric energy at wholesale to, and transmits electric energy in interstate commerce for, other electric utilities and municipal electric departments under rate schedules and tariffs on file with the Federal Energy Regulatory Commission ("FERC"). Boston Edison is currently an " exempt holding company" under the 2

. t Public Utility Holding Company Act and is, therefore, subject to limited regulation by the  ;

i Securities and Exchange Commission ("SEC").  :

l By virtue of the comprehensive regulatory authority exercised by these agencies over l

Boston Edison's rates for electricity, Boston Edison is an " electric utility" as defined in 10 CFR  :

i 4 50.2.  !

l In addition to the utility operations, which it conducts through itself and Harbor Electric l Energy Company , Boston Edison is also engaged, through its unregulated subsidiary, Boston Energy Technology Group ("BETG") and subsidiaries of BETG, in certain non-utility businesses, including energy conservation and utilization, constmetion management, and district cooling.

Recently, Boston Edison announced that BETG (through its subsidiaries) has entered into agreements to form two joint ventures in the areas of telecommunications and energy marketing.

To date, Boston Edison's investment in, and the results of operations of, BETG and its  !

l subsidiaries have not been material to the financial condition and results of operations of Boston Edison as a whole.

Subject to various approvals, including the approval of this Commission, the MDPU, the SEC, and the FERC, Boston Edison proposes to adopt a holding company structure under which it will become a wholly-owned subsidiary of a parent company, BEC Energy ("BEC"), a Massachusetts business trust. This proposal was approved by vote of Boston Edison shareholders at the Company's annual meeting held on May 15,1997. As part of the proposal, Boston Edison also contemplates transferring to BEC its ownership interest in BETG. The resulting corporate structure will more clearly separate Boston Edison's regulated utility activities from its non-utility enterprises consistent with federal and state initiatives for restructuring of the electric utility 3

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l industry.' The holding company structure will also provide increased fmancial, managerial, and organizational flexibility to better position Boston Edison to operate in the changing utility business environment and will increase the fmancing flexibility ofits non-utility businesses.

l Notwithstanding the formation of the holding company, Boston Edison will continue to hold the l Operating License for Pilgrim and will remain fully regulated as an electric utility by the MDPU and the FERC with respect to its rates and charges for electric service.

l As a result of this corporate restructuring, Boston Edison will become a wholly-owned i

subsidiary of BEC, a new holding company, and the present equity owners of Boston Edison will become the equity owners of BEC. Thus, Boston Edison will become indirectly, rather than directly, owned by its present equity owners. The new holding company structure will result in a change in the identity of the direct holder of Boston Edison's equity but no change in the beneficial owners of that equity, who will merely exchange their Boston Edison shares for shares in BEC. The holding company structure will not, in any way, affect the license responsibilities and authority of Boston Edison to operate and maintain Pilgrim, nor will it transfer ownership or control of Boston Edison's present interest in Pilgrim to any other person. Moreover, the restructuring will in no way affect Boston Edison's continued status as an " electric utility" under federal regulations, nor will it afTect Boston Edison's continued technical and financial qualifications for the operation of Pilgrim.

Other Regulatory Approvals.

In addition to Commission approval, the proposed restructuring as a holding company will also require the following regulatory approvals:

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' Sec, c.g., Order No. 888: Promoting Wholesale Competition Through Open Access Non-Discriminatory l Transmission Services By Public Utilities,75 F.E R.C.161,080 (1996); reaff'd and clanfled, Order No. 888-A, 78 I

F.E.R.C.161,220 (1997); Electne Industry Restructuring, MDPU 96-100 (December 30,1996).

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1. Massachusetts Department of Public Utilities. Because Boston Edison is an electric company under Massachusetts law (see, M.G.L. c.164, 1), it is required to obtain authorization from the MDPU with respect to the corporate restructuring under M.G.L. c.164, j96.

2. Eederal Enerav Regulatory Commission. Because Boston Edison is a "public utility" subject to FERC jurisdiction (see,16 U.S.C. 824) by reason ofits ownership of facilities used to sell power for resale, it must obtain FERC approval of the corporate restmeturing under 16 U.S.C.

Q824(b).

3. Securities and Exchange Commission. Because Boston Edison is an " exempt" holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"), it must obtain approval of the corporate restructuring from the SEC under Section 9(a)(2) of PUHCA. BEC will file with the SEC a claim of exemption under Section 3(a)(1) of PUHCA from the obligation to register as a holding company under PUHCA.

II. APPLICATION FOR CONSENT TO INDIRECT TRANSFER OF CONTROL Pursuant to 10 CFR 50.80, Boston Edison hereby requests that the Commission consent to the indirect transfer of control of Boston Edison's interest in Operating License No. DPR-35, which transfer of control will result from the implementation of the proposed corporate restructuring.

A. Reasons for Transfer of Control. As described above, management of Boston Edison is proposing a corporate restmeturing which involves formation of BEC, a holding company which will become the parent of Boston Edison and will itself be owned by the present stockholders of Boston Edison. This action received stockholder approval on May 15,1997 and is described more fully in the Proxy Statement / Prospectus dated March 26,1997, which has been filed by Boston Edison and BEC with the SEC, a copy of which is attached hereto as Exhibit A.

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The holding company structure is intended to provide clear separation between BECo's regulated and non-utility lines of business which is consistent with the directions of federal and state utility regulators. At the same time, the holding company structure will provide increased fmancial, managerial and organizational flexibility in order to better position Boston Edison to i

l operate m the changing electric utility industry and will permit BEC to take advantage of non-l utility business opportunities in a more timely manner. The holding company structure is a well- l l

l established form of organization for companies conducting multiple lines of business, panicularly 1

entities engaged in both regulated and unregulated activities. See " Reasons for the Restructuring" l l and " Benefits of HolMng Company Structure" at pps.13-15 of the Proxy Staternent/ Prospectus.

The transfer of direct equity ownership of Boston Edison to the new holding company involves a change oflegal ownership of Boston Edison and, therefore, a technical change in the direct control of Boston Edison and its interest in the Operating License, which transfer of control is subject to prior consent of the Commission. See 42 U.S.C. s2234 and 10 CFR 50.80(a).

Ilowever, this proposed corporate restructuring, in fact, has minimal effect on the underlying ownership of Boston Edison because the existing stockholders of Boston Edison will continue to i l

indirectly control Boston Edison which holds the Operating License.

I B. flupporting Information. Set forth below is the mpporting information required by the implementing regulation,10 CFR {50.80, for an application for consent to such an indirect I

transfer, namely information with respect to the identity and technical and fmancial qualifications of the proposed transferee as described in 10 CFR 50.33 and 50.34. Insofar as Pilgrim's i l Operating License was issued pursuant to Section 104(b) of the Atomic Energy Act,42 U.S.C.

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2134(b), this application is not subject to the requirements of 10 CFR 50.33a.

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1. 10 CFR 650.33 General Information: *

(a) Name of Licensee: Boston Edison Company will continue to be the Licensee under the Operating License.

(b) Address of Licensee: The business address of Boston Edison is 800 Boylston Street, l t

Boston, Massachusetts 02199.

(c) Description of Business: Boston Edison is an " electric company" under I

l Massachusetts law, engaged in the business of making, selling and distributing electricity, and l

regulated by the Massachusetts Department of Public Utilities and the Federal Energy Regulatory i

! Commission.

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(d) Coroorate Charler: e f

(i) Boston Edison is a corporation organized under the laws of Massachusetts with its principal place of business in Boston, Massachusetts.

l (ii) The names and addresses of the directors and principal officers of Boston l Edison, all of whom are United States citizens, are as follows:

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Name and Addren Title Thomas J. May Director, Chairman of the Boston Edison Company Board, President and 800 Boylston St. Chief Executive Officer Boston, MA 02199 Gary L. Countryman Director Liberty Mutual Insurance Company 175 Berkeley Street Boston, MA 02? 17 Thomas G. Dignan, Jr. Director Ropes & Gray One International Place - 40th Fir.

Boston, MA 02110-2624 Charles K. Gifford Director Bank Boston 100 Federal Street Mail Stop (01-25-05)

Boston, MA 02106-2016 Nelson S. Gifford Director Fleetwing Capital 75 Federal Street - Suite 1100 Boston, MA 02110-2509 Matina S. Horner Director Teachers Insurance and Annuity Association College Retirement Equities Fund 730 Third Avenue New York, NY 10017 Dr. Sherty H. Penney Director University ofMass at Boston Administration Building, Flr 3 l 100 Morrissey Boulevard j Boston, MA 02125-3393 8

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IIerbert Roth, Jr. Director Boston Edison Company 800 Boylston Street Boston, MA 02199 Stephen J. Sweeney Director Boston Edison Company 800 Boylston Street Boston, MA 02199 l

Alison Alden Sr. Vice President-Sales, Services and Boston Edison Company Human Resources  ;

800 Boylston Street l Boston, MA 02199

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E. Thomas Boulette Sr. Vice President-Nuclear Boston Edison Company 800 Boylston Street Boston, MA 02199 L. Carl Gustin Sr. Vice President-Corporate Relations l Boston Edison Company 800 Boylston Street Boston, MA 02199 John J. Ifiggins, Jr. Sr. Vice President Boston Edison Company 800 Boylston Street Boston, MA 02199 l

Douglas S. Horan Sr. Vice President and General Counsel Boston Edison Company 800 Boylston Street Boston, MA 02199 James J. Judge Sr. Vice President and Treasurer Boston Edison Company 800 Boylston Street l Boston, MA 02199 9

Ronald A. Ledgett Sr. Vice President-Fossil, Field Service Boston Edison Company and Electric Delivery 800 Boylston Street Boston, MA 02199 Robert J. Weafer, Jr. Vice President-Finance, Controller and Boston Edison Company Chief Accounting Officer 800 Boylston Street Boston, MA 02199 Leon J. Olivier Vice President-Nuclear Operations and Boston Edison Company Station Director 800 Boylston Street i Boston, MA 02199 Theodora S. Convisser Clerk of the Corporation Boston Edison Company 800 Boylston Street Boston, MA 02199 l

I (iii) Foreign Control: Boston Edison is not now owned, controlled or dominated i by an alien, foreign corporat' ion or foreign government. After the corporate restructuring, Boston Edison will become wholly-owned by the new holding company organized under Massachusetts law, which will be a Massachusetts business trust owned by Boston Edison's present stockholders and which will not be owned, controlled or dominated by an alien, a foreign corporation or foreign government.

(e) Ag.ency Status: Boston Edison is not acting as agent or representative of any person.

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(f) Applicable Regulatory Agencies:

The following regulatory agencies, in addition to the Commission, have jurisdiction over l

Boston Edison:

Massachusetts Department of Public Utilities 100 Cambridge Street, - 12th Fir.

Boston, MA 02202 Federal Energy Regulatory Cornmission 888 First Street, N.E.

Washington, D.C. 20426 Securities and Exchange Commission 450 Fifth Street, NW j

Washington, DC 20549 (g) Trade and news publications:

1 The following publications circulate in the general area of Pilgrim Nuclear Power Station:

The Boston Globe )

P. O. Box 2378  :

l Boston, MA 02107-2378 Patriot Ledger P. O. Box 9159 Quincy, MA 02169 Old Colony Memorial P. O. Box 959 j Plymouth, MA 02362 l

(h) Restricted Data:

This application does not contain any Restricted Data or other defense information, and it is not expected that any such information will become involved. To the extent such information were to be involved, Boston Edison agrees that it will appropriately safeguard such informtion and will not permit any individual to have access to Restricted Data until the Office of Personnel l

Management shall have made an investigation and reported to the Commission on the character, 11

• l 1 associations and loyalty of such individual, and the Commission shall have determined that permitting such person to have access to Restricted Data will not endanger the common defense and security of the United States.

2. 10 CFR150.33 Financial Information:

Boston Edison is an " electric company" under applicable Massachusetts law, M.G.L.c.164, 1, and a "public utility" under applicable federal law,16 U.S.C. 824(e). Boston Edison's retail rates for electric service are regulated by the MDPU under Massachusetts law, and its wholesale rates are regulated by FERC under federal law. Boston Edison is an " electric utility" as defined in the Commission's regulation at 10 CFR 50.2 and is, therefore, exempt from the requirements of 10 CFR 50.33(f).

Notwithstanding the exemption from the requirements of 10 CFR 50.33 (f), the following l

additional information is provided addressing the subject of fmancial qualifications.

l Operation Costs: A copy of Boston Edison's Annual Report to the SEC on Form 10-K for the year 1996 is attached as Exhibit B hereto. The " Management's Discussion and Analysis" and the financial statements as set forth at pps.15-51 in Exhibit B demonstrate that Boston Edison continues to have reasonable assurance of obtaining the funds necessary to cover the estimated operating costs of Pilgrim. The revenues and expenses of Boston Edison relative to the operation of Pilgrim will not be affected by the proposed corporate restmeturing.

Decommissioning Funding: In accordance with 10 CFR 50.33(k)(2) and 50.75(b),

i l Boston Edison submitted the " Pilgrim Nuclear Power Station Decommissioning Funding Report" i

to the Commission on July 26,1990. Boston Edison has continued to update decommissioning funding calculations as required by NRC regulations and has made all required payments into its 12

l Decommissioning Trust. Decommissioning funding for Pilgrim will not be affected by the proposed corporate restructuring.

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3. 10 CFR 650.34 Technical Information: -

The proposed restructuring into a holding company structure will result in no change in the current operation and management of Pilgrim. Boston Edison will continue as the owner and i

operator of Pilgrim. Dr. E. Thomas Beu!ette, Senior Vice President - Nuclear will continue as the senior manager for Pilgrim and will continue to report to Thomas J. May, Boston Edison's Chairman, President and Chief Executive Officer. There will be no change as a result of the l

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corporate restructuring in any key station personnel, operators, or management.  ;

Ill. CONCLUSION  !

Based upon the foregoing, Boston Edison respectfully requests that the Commission consent to the indirect transfer of control described herein. Approvals from the Massachusetts Department of Public Utilities and FERC are anticipated by September 1997. Boston Edison respectfully requests NRC action on this application by September 30,1997.

E. T Boulette, PhD JDK/dmc/holdcomp Exhibit A: Proxy Statement / Prospectus, dated March 26,1997 Exhibit B: Boston Edison's 1996 Annual Report to the SEC on Form 10-K i

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1 cc: Regional Administrator, Region I U.S. Nuclear Regulatory Commission 475 Allendale Road King of Prussia, PA 19406  !

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Mr. Alan B. Wang, Project Manager  !

Project Directorate I-3 l

Office of Nuclear Reactor Regulation Mail Stop: 14 B2 U.S. Nuclear Regulatory Commission ,

I White Flint North 11555 Rockville Pike Rockville, MD 20852 Senior Resident Inspector Pilgrim Nuclear Power Station George B. Dean, Esq., Massachusetts Attorney General's Office i William S. Stowe, Esq., Boston Edison Company 1

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Exhibit A Proxy Statement / Prospectus, dated March 26,1997 i

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& Boston Edison Executive Offices 800Boylston Street Boston, Massachusetts 02199 1 l

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April 2,1997

Dear Stockholder:

l You are cordially invited to attend the Annual Meeting of Stockholders of Boston Edison Company on Thursday, May 15,1997 at 11:00 a.m. at the Bank of Boston Auditorium, Lobby Level,100 Federal l Street, Boston, Massachusetts. A map is provided on the back page for your cor.veniene.

At the Meeting you will be asked to consider and vote on a proposal to form a holding company for i l Boston Edison, to be called BEC Energy. The management and Board of Directors of Boston Edison l consider this change to be in the best interests of the Company and its stockholders. The new structure will help the Company respond more effectively and efficiently to competitive changes occurring in the electric utility industry and to new business opportunities that may arise from these changes. It will clearly separate

! the Company's regulated and unregulated lines of business in a manner consistent with the electric industry restructuring principles outlined by the Massachusetts Department of Public Utilities. All other Massachusetts investor-owned electric utilities are already organized in this manner.

The attached series of questions and answers provides information on 'he proposed holding company, what it is and how it would affect the individual stockholder The enclosed Proxy Statement / Prospectus contains a more extensive discussion of the proposal.

The Board of Directors and management of Boston Edison unanimously recommend approval of the holding company structure and urge you to vote for the proposed restructuring. A two-thirds majority is required to approve the proposal, and your vote is critical to achieving a successful outcome.

At the Meeting, you will also be asked to vote on the election of four directors and the adoption of the

1997 Stock Incentive Plan. Your vote on the business at the Annual Meeting is important, regardless of the l number of shares that you own. Whether or not you plan to attend the Meeting, please sign, date and  ;

i return your proxy as soon as possible in the envelope provided. During the Annual Meeting, management i will report on operations and other matters affecting Boston Edison, and will respond to stockholders' j questions.

l Sincerely, l

, Thomas J. May Chairman of the Board, President and Chief Executive Officer l

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THE IlOLDING COMPANY AND llOW IT WOULD AFFECT YOU You may notice that this year's proxy statement looks different from those of prior years. This is because it contains an extensive discussion of a proposal to form a holding company structure for Boston Edison Company (" Boston Edison"). This proposal is briefly summarized belcw. Each answer is cross- l l

referenced to the page or pages of the Proxy Statement / Prospectus in which the topic is discussed in more '

detail.

WilAT IS BEING PROPOSED?

l The Board of Directors proposes to form a holding company, a structure which is commonly used throughout the utility industry, including in Massachusetts, where every investor-owned electric utility other than Boston Edison already utilizes such a structure. Boston Edison and its principal subsidiary, Boston Energy Technology Group ("BETG"), would become subsidiaries of the new holding company, BEC Energy. Boston Edison's other subsidiary, Ilarbor Electric Er'ergy Company ("HEEC"), a Massachu-setts electric company, would remain a subsidiary of Boston Edison. Current holders of Boston Edison's common stock would own common shares of BEC Energy instead of stock in Boston Edison itself. (Please see pages 11 to 13 of the Proxy Statement / Prospectus.)

l The charts below depict Boston Edison's current structure and the proposed holding company l structure:

Current Structure l

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Common and Cumulative i Preferred Shareholders I Boston Edison 1

I I I HEEC ad Subsidiaries Proposed Structure Common Shareholders Cumulative Preferred BEC Energy Shareholders (Holding Company)

I I I Boston Edison BETG and

, i Subsidiaries l HEEC J

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l Wily IS A IIOLDING COMPANY llEING F0101ED?

In recent years, many state utility commissions, including the Massachusetts Department of Utilities.

have initiated inquiries into restructuring the electric utility industry with a goal of promoting competition and extending to all customers the cption of choosing their own electricity suppliers. In particular, the Massachusetts Department of Public Utilities has identified the legal or functional separation of the electricity generation and distributien businesses as an essential element of ercating a competitive market l for electricity.

In December 1996 Boston Edison, the Massachusetts Attorney General and the Massachusetts 1 Division of Energy Resources anaounced that they had reached an agreement (the " Settlement Agree- )

ment") that, if approved by the Massachusetts Department of Public Utilities, would allow all retail l customers in Boston Edison's service area to choose their electricity suppliers beginning as early as January 1,1998. As part of the proposed settlement, Boston Edison would agree to sell all of its fossil electric generating plants. Accordingly, other than its Pilgrim Nuclear Power Station, Boston Edison would l no longer own any electricity generating facilities.

Assuming that the Settlement Agreement is approved by the Massachusetts Department of Public Utilities. Boston Edison's electric business would be thereafter limited primarily to distribution of electricity, and to a much lesser extent, transmission of electricity. Accordingly, Boston Edison has identified the need to increase its long-term growth potential through investment in related non-utility new businesses. At the same time, the move to a competitive electricity industry, together with a revolution in energy-related technology, has created significant new opportunities for energy service providers like Boston Edison in non-utility business ventures. Pursuit of these new opportunitics is a key element of Boston Edison's strategy for long term growth to benefit its stockholders and customers.

The holding company structure is a well established form of organization for companies conducting multiple lines of business, particularly entities engaging in both regulated and unregulated activities. The holding company structure would provide increased financial, managerial and organizational flexibility in order to better position Boston Edison to operate in this changing electric utility industry. Moreover, the new structure would clearly separate the new holding company's regulated and unregulated lines of business in a manner consistent with the principles outlined by the Massachusetts Department of Public Utilities. (Please see pages 11 to 15 of the Proxy Statement / Prospectus.)

IN WilAT TYPES OF BUSINESSES WOULD IIEC ENERGY INVEST?

The primary focus of BEC Energy would be maintaining the strength of Boston Edison's core business of serving the electric utility needs of its customers. In addition. BEC Energy would work to develop new business opportunities in the telecommunications and energy marketing areas. Through BETG and its subsidiaries, Boston Edison recently signed agreements to enter into two joint ventures in such new, non-utility businesses. One is a joint venture with RCN Telecom Services. Inc., a subsidiary of C-TEC Corporation, to provide local and long-distance telephone service, video and high-speed Internet access and eventually property monitoring senices. The other is a joint venture with Williams Energy Senices Company a subsidiary of The Williams Companies. Inc., to market electricity natural gas and energv- ,

related services to customers in the six New England states. BEC Energy would endeavor to develop these businesses as well as identify other non-utility businesses which are related to and compatible with Boston Edison's core business. (Please see pages 13 to 14 of the Proxy Statement / Prospectus.)

IIOW WOULD MY OWNERSlHP OF BOSTON EDISON STOCK BE AITECTED llY THE NEW STRUCTURE?

Owners of Boston Edison's common stock automatically would become owners of BEC Energy's common shares on a share-for-share basis. It is npected that BEC Energy's common shares would be traded on the New York Stock Exchange and '.nc Boston Stod Exchange under the ticker symbol"BSE" (Please see page 19 of the Proxy Statement /"rospectus.)

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I llOW WOULD Tile IlOLDING COMPANY STRULTURE AFFECT COMMON AND CUMULATIVE i PREFERRED STOCK DIVIDENDS? )

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While future dividends on BEC Energy's common shares would depend primarijy upon the carmngs, i financial condition and capital requirements of its subsidiaries, the trustees of the proposed holding i company have no current intention to change the current Boston Edison dividend policy. It is expected z that such dividends of BEC Energy would be declared and paid on approximately the same schedule of i dates as that now followed by Boston Edison with respect to its common stock dividends. The cumulative l preferred stock would continue to be a security of Boston Edison, not the holding company, and holders of the cumulative preferred stock would continue to have priority as to Boston Edison dividends. (Please see pages 19 of the Proxy Statement / Prospectus.)

l WilAT WOULD llAPPEN TO DOSTON EDISON'S DIVIDEND REINVESTMENT AND COMMON i l

STOCK PURCIIASE PLAN?

t Boston Edison's Dividend Reinvestment and Common Stock Purchase Plan would be assumed by BEC Energy. Participants in the Plan automatically would become participants in the corresponding l holding company plan. (Please see page 25 of the Proxy Statement / Prospectus.)

WOULD STOCKilOLDERS NEED TO TURN IN TilEIR CURRENT STOCK CERTIFICATES?

It would not be necessary for holders of Boston Edison's common stock to exchange their stock  ;

certificates. Certificates for Boston Edison's common stock automatically would represent the same number of common shares of BEC Energy New certificates bearing the name BEC Energy would be issued in the future as outstanding certificates are presented for transfer. (Please see page 16 of the Proxy Statement / Prospectus.)

IlOW WOULD FORMATION OF A liOLDING COMPANY AFFECT PERSONAL FEDERAL INCOME TAXES?

It would not. There would be no gain or loss to you for federalincome tax purposes on the conversion of your shares of Boston Edison common stock into BEC Energy shares pursuant to the restructuring. For i capital gain purposes, the tax basis of the BEC Energy shares received in exchange for your shares of Boston Edison's common stock would be the same as the tax basis of your shares in Boston Edison, and the holding period of the BEC Energy shares would include the holding period of your shares of Boston ,

Edison's common stock, provided such stock is held as a capital asset at the time of the exchange. (Please i see pages 17 to 18 of the Proxy Statement / Prospectus.) ,

WIIAT EFFECT WOULD TilERE DE ON llOLDERS OF BOSTON EDISON'S CUMULATIVE PRE- l FERRED STOCK AND DEBT SECURITIES? j Boston Edison's cumulative preferred stock and debt securitics, consisting primarily of debentures, I commercial paper and bank credit lines, would not be changed in the reorganization and would remain as preferred stock and debt securities of Boston Edison. Boston Edison's depositary preferred shares, representing ownership of % of one share of Boston Edison's 8.25% and 7,75% Series of cumulative preferred stock, would continue to be traded on the New York Stock Exchange, (Please see pages 18 to 19 -

of the Proxy Statement / Prospectus.)

WIIO WOULD MANAGE HEC ENERGY AFTER Tile IlOLDING COMPANY STRUCTURE IS APPROVED BY Tile STOCKilOLDERS? l The Board of Directors and certain of the principal executive officers of Boston Edison would also  ;

serve as the trustees and executive officers of BEC Energy upon completion of the reorganization. (Please see pages 24 to 25 of the Proxy Statement / Prospectus.)  ;

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l Wily WOULD Tile NEW llOLDING COMPANY llE ORGANIZED AS A MASSACIIUSETTS IlUSI-NESS TRUST INSTEAD OF A CORPORATION?

BEC Energy would be formed as a Massachusetts business trust rather than a corporation due to the potential Massachusetts income tax savings to the trust and the lower filing fees payable by it in connection with its authorized capital stock. The parent holding companies of most other investor-owned Massachu-setts utility holding systems are also organized as business trusts. (Please see pages 21 to 23 of the Proxy i

Statement / Prospectus.)

llOW SOON WOULD Tile IIOLDING COMPANY STRUCTURE IIE FORMED IF IT IS APPROVED llY Tile STOCKilOLDERS? .

Management intends to form the holding company structure by the end of 1997. However, any delays in obtaining the required approvals from regulatory agencies (the Massachusetts Department of Public Utilities, the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the l Nuclear Reguhitory Commission) could impact that schedule. (Please see pages 20 to 21 of the Proxy Statement / Prospectus.)

WilAT VOTE IS REQUIRED TO APPROVE Tile liOLDING COMPANY PROPOSAL?

l In order for the holding company proposal to be approved under Massachusetts law, it must receive l the favorable vote, in person or by proxy, of the holders of two-thirds of the outstanding shares of Boston l Edison's common stock. (Please see page 16 of the Proxy Statement / Prospectus.)

i l CAN Tile IIROKER WilO IlOLDS MY SIIARES OF llOSTON EDISON COMMON STOCK VOTE l

TilEM ON MY llEllALF?

i Your broker may not vote your shares because the New York Stock Exchange has declared a vote to l form a holding company as "non-discretionary." Only you can vote your shares. Your vote on the business l at tiie Annual Meeting is important regardless of the number of shares that you own. Whether or not you l plan to attend, please sign, date and return your proxy card as soon as possible in the envelope provided so j that your shares can be voted in accordance with your instructions. (Please see pages 38 to 39 of the Proxy Statement / Prospectus.)

TIIE ENCLOSED PROXY STATEMENT / PROSPECTUS CONTAINS A TilOROUGil AND DETAILED DISCUSSION OF ItOSTON EDISON'S PROPOSAL TO FORM A IlOLDING COMPANY STRUCTURE.

& Boston Edison l ILOSTON EDISON COMPANY i

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& Boston Edison ~

HOSTON EDISON COMPANY l' 800 Hoylston Street Hoston, Massachusetts 02199 Notice of Annual Meeting of Stockholders to be held on May 15,1997 To the Holders of Common Stock:

The Annual Meeting of Stockholders of Boston Edison Company (" Boston Edison") will be held at the Bank of Doston Auditorium, Lobby Level,100 Federal Street, Boston, Massachusetts, on Thursday, May 15,1997 at 11:00 a.m., for the following purposes:

1. To elect four Class III <lirectors to serve until the Annual Meeting to be held in the year 2000. i I

2. Tb approve a proposal to adopt a holding company structure for Boston Edison, all as more fully described in the accompanying Proxy Statement / Prospectus.

3. To approve I oston Edison's 1997 Stock Incentive Plan and to authorize the issuance of up to 2,000.000 shares of Common Stock under the Plan.

4 To transact any other business which may properly come before the Annual Meeting or any adjournment thereof.  ;

Further information as to the matters to be considered and acted on at the Annual Meeting can be i found in the accompanying Proxy Statement / Prospectus.

Only the holders of common stock of 130ston Edison as of the close of business on March 17,1997, are entitled to notice of and to vote at the Annual Meeting or any adjournment thereof. {

Please sign, date and return the accompanying proxy in the enclosed addressed envelope, which j requires no postage if mailed in the United States. Your proxy may be revoked at any time before the vote is taken by delivering to the Clerk a written revocation or a proxy bearing a later date or by oral revocation in person to the Clerk at the Annual Meeting.

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i By Order of the Board of Directors, j Theodora S. Convisser Clerk Boston, Massachusetts March 26,1997 i

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& Boston Edison HOSTON EDISON COMPANY 800 Boylston Street Boston, Massachusetts 02199 (617) 424-2000 PROXY STATEMENT / PROSPECTUS This Proxy Statement / Prospectus, together with the accompanying proxy and 1996 Annual Report, is being furnished to stockholders of Boston Edison Company, a Massachusetts corporation (" Boston l Edison"),in connection with the solicitation of proxies by the Board of Directors of Boston Edison to be voted at the Annual Meeting of Stockholders to be held on Thursday, May 15,1997 for the purposes set forth in the foregoing Notice (the " Annual Meeting").

At the Annual Meeting, the stockholders will be asked to approve, among other thir.gs, the formation of a holding company structure for Boston Edison. The holding company structure will be created through an Agreement and Plan of Merger (the " Merger Agreement") among f,oston Edison, BEC Energy, a Massachusetts business trust formed by Boston Edison, and Boston Edison Mergeco Electric Company, Inc., a Massachusetts utility corporation formed by BEC Energy ("Mergeco"). At the time of the Merger (as defined below), Mergeco will be a wholly-owned subsidiary of BEC Energy. Pursuant to the Merger Agreement, Mergeco will merge with and into Boston Edison (the " Merger") and each outstanding share of the common stock of Boston Edison, $1.00 par value per share (" Boston Edison Common Stock"), will automatically be converted into one common share of BEC Energy, $1.00 par value per share (" HEC Energy Common Shares"). As a result of the Merger, Boston Edison will become a subsidiary of BEC ,

Energy and the holders of Boston Edison Common Stock will become holders of BEC Energy Common l Shares. The outstanding shares of Boston Edison Cumulative Preferred Stock, par value $100 per share

(" Boston Edison Cumulative Preferred Stock"), will be unchanged and will continue to be outstanding securities of Boston Edison. In connection with the implementation of the holding company structure, Boston Edison intends to transfer to BEC Energy its ownership interest in its principal subsidiary, Boston l Energy Technology Group, a Massachusetts corporation ("BETG"). See " Proposal No. 2: Plan of Restructuring-General."

If the restructuring is implemented, it will not be necessary for holders of Boston Edison Common Stock to surrender their existing stock certificates for BEC Energy share certificates. See " Proposal No. 2:

Plan of Restructuring-Exchange of Certificates Not Required."

This Proxy Statement / Prospectus also serves as the prospectus for BEC Energy under the Securitics Act of 1933, as amended (the " Securities Act"), with respect to the issuance of up to 48,514,973 common i shares of BEC Energy in connection with the restructuring. Further information concerning the shares offered hereby is contained in " Proposal No. 2: Plan of Restructuring-BEC Energy's Declaration of Trust l and Comparative Stockholders' Rights" and " Proposal No. 2: Plan of Restructuring-BEC Energy Common Shares."

j THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE l SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION l PASSED UPON THE ACCURACY OR ADEOUACY OF THIS PROXY STATEMENT /PROSPEC-TUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

l The principal executive offices of Boston Edison and BEC Energy are located at 800 Boylston Street, Boston, Massachusetts 02199, telephone number (617) 424-2000. This Proxy Statement / Prospectus and the

. accompanying proxy, solicited on behalf of the Board of Directors of Boston Edison, were first mailed to

! stockholders on or about April 2,1997.

The accompanying proxy, if properly executed and delivered by a stockholder entitled to vote, will be voted at the Annual Meeting as specified in the proxy, but may be revoked at any time before the vote is l

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taken by the signer delivering to the Clerk of Boston Edison a written revocation or a proxy bearing a later date or by oral revocation in person to the Clerk at the Annual Meeting. If choices are not specified on the accompanying proxy, the shares will be voted FOR the election of all of the nominees for director specified in Proposal No. I below and FOR Proposals No. 2 and No. 3.

All the costs of preparing, assembling and mailing the enclosed material and any additional material which may he sent in connection with the solicitation of the enclosed proxies will be paid by Boston Edison, and no part thereof will be paid directly or indirectly by any other person. Boston Edison has retained D.R j King & Co., Inc. to assist in the solicitation of proxies at a fee of $10.00(), plus usual and customary  !

expenses. Some employees may devote a part o' their time to the solicitation of proxies or for attendance at the Annual Meeting but no additional compensation will be paid to them for the time so employed and the cost of such additional solicitation will be nominal. Boston Edison will reimburse brokerage firms, banks, trustees and others for their actual out-of-pocket expenses in forwarding proxy material to the beneficial owners of Boston Edison Common Stock.

On March 17,1997, there were issued and outstanding 48,514.973 shares of Boston Edison Common Stock. Only holders of record of Boston Edison Common Stock at the close of business on that date shall be entitled to notice of and to vote at the Annual Meeting or any adjournments thereof, and those entitled to vote will have one vote for each share held. To the knowledge of management, no person owns beneficially more than 5 percent of the outstanding voting securities of Boston Edison.

The date of this Proxy Statement / Prospectus is March 26,1997.

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l TAllLE OF CONTENTS

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AVAILABLE INFORM ATION .... .... . .. .. .... .. . 1 l

l INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . ... ...... . 2

SUMMARY

OF PROXY STATEMENT / PROSPECTUS . . .... . . . .. . . 3 Proposal No.1: Election of Directors .. . .. . . . . . .. 3 Proposal No. 2: Plan of Restructuring . . . . . .. . .. .. .. ... .. .... ... 3 Proposed Restructuring. . ... . . . ... ..... ........... .... 3 Special Considerations Applicable to the Restructuring. . ... ... .... .. . .. .. 3 l

Reasons for the Restructuring . . . .. . .. .. . . ... ... ... . . 4 Certain Effects on Stockholders. . ... .. .. . .. . .. ..... .. . .... 4 Vote Required . .. . . .. . .. .. ..... .... . . .. . 5 Exchange of Certificates .. . .. ... . . . ... . .......... .... . 5 Stock Exchange Listing . ..... . . . .. .... .......... .... 5 Conditions to the Restructuring . . .. ... . . ..... . .. .. .... 5 Dividend Policy . ... . . ... . . . . . .. . . .. . 6 i Certain Federal income 'Thx Consequences . . . . .. ................ . 6 No Appraisal Rights . . . . .. .... ..... ... . .. ... ... . 6 Proposal No. 3: Adoption of the 1997 Stock Incentive Plan . . ......... .. ....... 6 PROPOSAL NO.1: ELECTION OF DIRECTORS . . . . . ... .. ... .. ... 7 Information about Nominees and incumbent Directors . .. . ..... ..... . . 7 Stock Ownership by Directors and Executive Officers. . .. . .. .... ... ... 9 Director Compensation . . . ... ... ....... ... . . . ... .... .. .. 10 PROPOSAL NO. 2: PLAN OF RESTRUCTURING . . ... ... . . . . 11 General . , . .. . ..... .. .. . . . ..... ....... .......... .... ... 11 Business of Boston Edison . .... . . .. .. . .. .. .. ..... .. 11 The Restructuring . . . . . .. . ... .. .. .. . .... ........ 12 Reasons for the Restructuring. . . .. . . . . ... ...... ......... .. ... 13 Benefits of Holding Company Structure . . . . .... . . ...... ... .. 14 Special Considerations Applicable to the Restructuring . .,.. ..... . .......... . 15 Recommendations of the Board . . .. .. .. . .. . .. ... . .......... .. 15 Vote Required . . ... ... . . . . .. . . ... . ... . .. .. .. 16 Exchange of Certificates Not Required . . . . . . . .. . . ... ... 16 Merger Agreement .... . . .. . .. .... . 16 Amendment or Termination of Plan of Merger . . . .. . .. .. . . . 17 Effectiveness of the Restructuring . .. . .. . .. . .. . . ... . .. .. . 17 Certain Federal Ineome Tax Consequences .. ... . . . .. .... ... 17 Treatment of Preferred Stock . . .. . . ... .. . . . .. 18 Treatment of Indebtedness . . . . . . ... .. ... .. .. . . .. .. 19 Dividend Policy . . .... .. . . . . .... . . .. 19 Stock Exchange Listing ... . . ... . . .... .. .. . ... .. 19 Regulatory Approval of the Restructuring . .. . ... .. . . . 20 Regulatory Matters . .. . . . . .. . . . 20 BEC Energy's Declaration of Trust and Comparative Stockholders' Rights .. . . 21 BEC Energy Common Shares . . . . . .. . .. 23 Trustees and Management of BEC Energy. .. .. . . 24 l No Appraisal Rights . . . . . . . . 25 l

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Dwidend Reinvestment and Common Stock Purchase Plan. . .. . . .. 25 Common Stock Plans . . . .. .......... . .... .. . . .. 25 Price Range of Boston Edison Common Stock. . . .. ... ...... . .. .. . 26 l Transfer Agent and Registrar . . .. ...... .. . .. . . .... .. . 26 i Financial Statements .. ... ..... ...... . . .......... .. . 26 I Legal Opinion . . .. ..... .... . . . .. . . .... . .. . . . 26 Experts . . ...... .. . .. ..... . ... . .. . . 26 l EXECUTIVE COMPENSATION . . ... . . ..... ..... .. .. . ... . ... 27 l Report of the Executive Personnel Committee . . . . . . . ....... . . . . ...... 27 l Compensation Committec Interlocks and Insider Participation . . ... ......... . . 29 Executive Compensation 'Tisbles . ... .. . . . ....... . . ........... ... 29 l Summary Compensation 'lable . . . . .. .. .... . .. . ........ 30 4 Long-Term incentive Plans-Awards in Last Fiscal Year . . . . .... . .. .. 30 l Pension Plan 'lable . . .. . . . .. .... ...... . .... . . . .... .... 31 Change of Control Agreements. . . ...... . . . .. . .. .. . .... 31 STOCK PERFORMANCE GRAPH ,. .. . .. . ... .. . . ... . 33 1

PROPOSAL NO. 3: ADOPTION OF 1997 STOCK INCENTIVE PLAN . .. . . .. .. 34 General . . . . ............. .. . .. . ....... .. . .. .... . 34 Federal Income Tax Consequences .. .. .. .... . . ........ . ... 37 Vote Required . ... . .... ....... . ..... ............. .... 38 Recommendation of the Board of Directors . ...... . ... .... . ...... . 38 OTHER MATTERS . . . . . . . ... . .. . . .. . . . . ... . . .. 38 l Voting Procedures . . .. . . . .. .... ... .. .. .. . .. .. .. 38 )

Adjournment of Meeting ... ... ... . . ..... ..... . . . 39 )

Independent Accountants . ... . . .... . . .. .. . .. . . . . 39 {

Other Business . . . . . . . ... . ..... .... . . . .... . ... . 39 Stockholder Proposals .. . . .. . . . . ........ .......... ... 39 Stockholder Nominations of Directors . . . . . ...... .... ... . . 39 l

APPENDIX A: AGREEMENT AND PLAN OF MERGER . . . ... . .... . . A-1 I

APPENDIX B: DECLARATION OF TRUST OF BEC ENERGY . .... .. . ..... B-1 APPENDIX C: 1997 STOCK INCENTIVE PLAN . . . . . . C1 l

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NO PERSON llAS IIEEN AUTilORIZED TO GIVE ANY INFORMATION OR TO MAEE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED llY REFERENCE IN Tills PROXY STATEMENT / PROSPECTUS, AND, IF GIVEN OR MADE. SUCII INFORMATION OR REPRESENTA-TION MUST NOT IIE RELIED UPON AS HAVING llEEN AUTilORIZED. Tills PROXY STATEMEST/

PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR Tile SOLICITATION OF AN OFFER TO PURCllASE, ANY OF Tile SECURITIES OFFERED llY TIIIS PROXT STATEMENT / PRO-SPECTUS, OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WilOM IT IS UNLAMTUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCII JURISDICTION. NEITilER THE DELWERY OF THIS PROXY STATEMENT / PROSPECTUS NOR Tile ISSUANCE OR SALE OF ANY SECURITIES IIEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT TilERE llAS BEEN NO CilANGE IN Tile INFORMATION SET FORTH IIEREIN OR INCORPORATED HEREIN IlY REFERENCE SINCE TIIE DATE IIEREOE AVAILAllLE INFORMATION Boston Edison is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the " Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Such reports, proxy statements and other information may be inspected and copied at the Public Reference Facilities maintained by the SEC at . Judiciary Plaza,450 Fifth Street, N.W., Room 1024. Washington. D.C. 20549 and at the SEC's regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and at Northwestern Atrium Center,500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained at prescribed rates from the Public Reference Facilities maintained by the SEC at Judiciary Plaza,450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In addition, material that Boston Edison files electronically with the SEC is available at the SEC's Web site (http://www.sec. gov),

vhich contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Certain securities of Boston Edison are listed on the New York Stock Exchange ("NYS2") and the Boston Stock Exchange ("BoSE"), where reports, proxy statements and other information concerning Boston Edison may also be inspected. Following completion of the Merger, both Boston Edison and BEC Energy will file such reports and other information as required under the Exchange Act and the rules of the NYSE and BoSE.

BEC Energy has filed with the SEC a registration statement on Form S-4 (together with all amendments and exhibits thereto, the " Registration Statement") under the Securities Act of 1933, as amended (the " Securities Act"), registering the BEC Energy Common Shares that will be issued in lieu of shares of Boston Edison Common Stock pursuant to the Merger described herein. See " Proposal No. 2:

Plan of Restructuring." This Proxy Statement / Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of l which are contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the SEC. Statements made in this Proxy Statement / Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the m,atter involved, and each such statement shall be deemed qualified in its entirety by such reference. Items and information omitted from this Proxy Statement / Prospectus but contained in the Registration Statement may be inspected and copied at the Public Reference Facilities maintained by the SEC at Judiciary Plaza 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.

Upon completion of the Merger,' the BEC Energy Common Shares will be listed on the NYSE and BoSE At the time of such listing, Boston Edison Common Stock will be withdrawn from listing and registration under Section 12 of the Exchange Act.

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INCORPORATION OF CERTAIN DOCUMENTS IlY REFERENCE

' TIIIS PROXY STATEMENT / PROSPECTUS INCORPORATES IlY REFERENCE CERTAIN DOCU.

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MENTS WillCll ARE NOT PRESENTED IIEREIN OR del.IVERED llEREWITil. COPIES OF ANY  ;

i SUCil DOCUMENTS, OTilER TilAN EXillillTS TO SUCil DOCUMENTS UNLESS TilEY ARE SPE. i CIFICALLY INCORPORATEI) IlY REFERENCE, ARE AVAILAI!LE WITIIOUT CIIARGE TO ANY PER. -

SON, INCLUDING ANY llENEFICIAL OWNER. TO WIIOM Tills PROXY STATEMENT / PROSPEC-  ;

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TUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO: TilEODORA S. CONVISSER, CLERK, ItOSTON EDISON COM PANY,800 IlOYLSTON STREET, HOSTON, MASSACilUSETTS 02199, TELEPilONE: (617) 424-2000. IN ORDER TO ENSURE TIMELY DELIVERY OF TIIE DOCUMENTS,

] ANY REQUEST SIIOULD llE MADE IlY MAY I,1997, j

The following documents filed with the SEC (File No.12301) pursuant to the Exchange Act are j incorporated by reference into this Proxy Statement / Prospectus:

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1. Isoston Edison's Annual Report on Form 10-K for the year ended December 31,1995, as amended by Form 10-K/A-1 which was filed with the SEC on June 28,1996:

2. Boston Edison's Quarterly Reports on Form 10-0 for the quarters ended March 31,1996, June 30, j 1996 and September 30.199N and l 3. Iloston Edison's Current Reports on Form 8-K dated September 30 and December 20,1996.  :

i Boston Edison expects to file its Annual Report on Form 10-K for the fiscal year onded December 31, 4

1996, with the SEC on or about March 27,1997. That document and all other documents filed by Boston i

} Edison pursuant to Sections 13(a),13(c),14 or 15(d) of the Exchange Act subsequent to the date of this i j Proxy Statement / Prospectus and prior to the termination of the offering made hereby shall be deemed to i be incorporated by reference herein and to be a part hereof from the date of filing such documents. Any j statement contained herein or in any document incorporated or deemed to be incorporated by reference j herein shall be deemed to be modified or superseded for purposes of this Proxy Statement / Prospectus to i the extent that a statement contained herein or in any subsequently filed document which also is or is j deemed to be incorporated by reference herein modifies or supe',ec<:s such statement. Any such j

statement so modified or superseded shall not be deemed, except e.s so modified or superseded, to j constitute a part of this Proxy Statement / Prospectus.

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i SUMM ARY OF l'RONY STATEMENT /PROSPEC1 US Reference is made w. and this summarv is quahfied in us entirety by. the more detailed information contained in, attached to or incorporated by reference in this Prmy Statement! Prospectus and the Appendices herew. Stockholders are wxed to read this Proxv Smtement/Prmpectus and the Appendices in their entirety.

I Proposal No.1: Electitm of Directors i I

Tile IlOARD OF DIRECTORS RECOMMENDS TilAT  ;

i- STOCK 110LDERS VOTE FOR Tile ELECTION OF ALL NOMINEES FOR DIRECTOR.  ;

I l Four persons hme been nominated for election as Class Ill directors of Boston Edison for a term

! expiring at the Annual Meeting to be held in the year 2000 and until their successors are duly chosen and l qualified. Only holders of record of Boston Edison Common Stock as of the close of business on March 17, l 1997 (the " Record Date") are entitled to vote at the Annual Meeting and any at'journments thereof.

! Directors will be elected by a plurality of the votes properly cast at the meetiig. If the proposed l restructuring is approved and consummated, the persons elected as directors of Boiton Edison also will become trustees of IIEC Energy. See " Proposal No. 2: Plan of Restructuring-Trus'.ees and Management of BEC Energy."

Proposal No. 2: Plan of Restructuring Tile HOARD OF DIRECFORS RECOMMENDS ,

TilAT STOCKilOLDERS VOTE FOR TIIE PROPOSED l RESTRUCTURING TO FORM A IIOLDING COMPANY. 1 1

Pwposed Restructwing ,

The Boston Edison Board of Directors has authorized, subject to stockholder and regulatory approval, a plan to restrticture the corporate organization of Boston Edison and its subsidiaries to form a holding company structure. The result of the restructuring will be to have Boston Edison become a separate subsidiary of a parent holding company, BEC Energy. The present holders of Boston Edison .

Common Stock will become holders of BEC Energy Common Shares.The formation of a holding company structure will be achieved by way of the merger with and into Boston Edison of Boston Edison Mergeco  ;

Electric Company, Inc. ("Mergeco"), a newly formed utility subsidiary of BEC Energy, with holders of Bostan Edison Common Stock exchanging their shares for BEC Energy Common Shares on a share-for-  ;

share basis and BEC Energy becoming the sole holder of Boston Edison Common Stock. Each series of Boston Edison Cumulative Preferred Stock and allindebtedness of Boston Edison will remain as securities  !

and obligations of Boston Edison and will not be affected by the Merger.

As part of the restructuring,it is contemplated that Boston Edison will transfer its ownership interest  !

in its principal subsidiary, Boston Energy Technology Group ("BETG"), to BEC Energy such that BETG ,

will become a wholly-owned subsidiary of BEC Energy and a sister corporation to Boston Edison. (These l proposed changes to the corporate structure of Boston Edison and its subsidiaries are generally referred to in this Proxy Statement / Prospectus as the " restructuring.")

Special Considerations Applicable to the Restructunng The restructuring proposal involves certain special factors that should be considered by stockholders.

See " Proposal No. 2: Plan of Restructuring-Special Considerations Applicable to the Restructuring."

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I Reasma for the Restmctunng in recent years, many state utility commissions, including the Massachusetts Department of Utilities (the " Massachusetts DPU"), have initiated inquiries into restructuring the electric utility industry with a goal of promoting competition and extending to all customers the option of choosing their own electricity r suppliers. In particular, the Massachusetts DPU has identified the legal or functional separation of the electricity generation and distribution businesses as an essential element of creating a competitive market for electricity.

In December 1996, Boston Edison, the Massachusetts Attorney General and the Massachusetts Division of Energy Resources announced that they had reached an agreement (the " Settlement Agree-ment") that, if approved by the Massachusetts DPU, would allow all retail customers in Boston Edison's service area to choose their electricity suppliers beginning as early as January 1,1998. As part of the proposed settlement, Boston Edison would agree to sell all of its fossil electric generating plants.

Accordingly, other than its Pilgrim Nuclear Power Station, Boston Edison would no longer own any clectricity generating facilities.

Assuming that the Settlement Agreement is approved by the Massachusetts DPU, Boston Edison's electric business would be thereafter limited primmily to distribution of electricity, and to a much lesser extent, transmission of electricity. Accordingly Boston Edison has identified the need to increase its long-tertu growth potential through investment in related non-utility new businesses. At the same time, the move to a competitive electricity industry, together with a revolution in energy-related technology, has created significant new opportunities for energy service providers like Boston Edison in non-utility business ventures. Pursuit of these new opportunitics is a key element of Boston Edison's strategy for long-term growth to benefit its stockholders and customers. ,

The holding company structure is a well established form of organization for companies conducting multiple lines of business, particularly entities engaging in both regulated and unregulated activities. The holding company structure would provide increased financial, managerial and organizational flexibility in order to better position Boston Edison to operate in this changing electric utility industry. Moreover, the new structure would clearly separate the new holding company's regulated and unregulated lines of business in a manner consistent with the principles outlined by the Massachusetts DPU, Although Boston Edison could continue to pursue non-utility business opportunities through BETG and other non-utility subsidiaries, management and the Board of Directors believe it is in the best interests of Boston Edison and its stockholders to conduct such non-utility activities through a holding company structure. See

" Proposal No. 2: Plan of Restructuring-Reasons for the Restructuring" and " Proposal No. 2: Plan of Restructuring-Benefits of Holding Company Structure."

Certain Effects on Stockholders BEC Energy has been formed as a Massachusetts business trust due to the potential Massachusetts l in;ome tax savings to the trust and the lower filing fees payable by it in connection with its authorized j capital stock. BEC Energy's shareholders will have rights and liabilities generally comparable to those of l stockholders of a corporation. Pursuant to certain decisions of the Massachusetts courts, shareholders who  ;

exercise too much control over the affairs of a Massachusetts business trust may be held personally liable l as partners for the obligations of a trust to the extent not satisfied by the trust. Even if, however, BEC Energy were held to be a partnership, the possibility of its shareholders incurring financial loss is remote because (a) BEC Energv's Declaration of Trust (as defined below) contains an express disclaimer of shareholder liability for the obligations of BEC Energy, requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by BEC Energy and provides that no peu,on has authority to enter into an agreement, obligation or instrument except in accordance with those requirements. (b) BEC Energy will seek adequate insurance against tort liability, (c) most of BEC Energy's operations will be conducted by incorporated subsidiaries such that the activities of UEC Energy will be 4

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limited to the ownership of securities rather than the operation of physical assets and (d) BEC Energy's l Declaration of Trust provides for indemnification out of the trust property for any shareholder held l personally liable for the obligations of BEC Energy. Use of a Massachusetts business trust as the parent holding company of a Massachusetts electric utility is a common practice.The parent holding companies of most other investor-owned Massachusetts utdity holding systems are also organized as business trusts. See

" Proposal No. 2: Plan of Restructuring-BEC Energy's Declaration of Trust and Comparative Stockhold-  :

ers' Rights." '

Vote Required Only holders of record of Boston Edison Common Stock as of the Record Date will be entitled to  !

• receive notice of and vote at the Annual Meeting and any adjournments thereof with respect to approval of the Merger Agreement and the restructuring. IIolders of Boston Edison Common Stock entitled to vote I will have one vote for each share held. In order for the holding company proposal to be approved under Massachusetts law,it must receive the favorable vote,in person or by proxy, of the holders of two. thirds of the outstanding shares of Boston Edison Common Stock. As of the Record Date, 48,514.973 shares of 1 Boston Edison Common Stock were issued and outstanding. Tb the knowledge of management, no person I owns beneficially more than 5 percent of the outstanding voting securities of Boston Edison. See " Proposal No. 2: Plan of Restructuring-Vote Required."

l Exchange of Certificates 1 If the new holding company structure is implemented, it will not be necessary for holders of Boston l Edison Common Stock to surrender their existing stock certificates for DEC Energy share certificates.

Certificates representing Boston Edison Common Stock will automatically represent the corresponding number of BEC Energy Common Shares upon consummation of the Merger. See " Proposal No. 2: Plan of i Restructuring-Exchange of Certificates Not Required."

Stock Exchange Listing Shares of Boston Edison Common Stock are currently traded on the New York Stock Exchange  ;

("NYSE") and the Boston Stock Exchange ("BoSE") under the stock symbol"BSE." Application will be made to list UEC Energy Common Shares on the NYSE and the BoSE. Sec " Proposal No. 2: Plan of Restructuring-Stock Exchange Listing" i Conditions to the Restmeturing The Merger Agreement provides that the consummation of the Merger and the restiueturing into a l

holding company is subject to approval of the Merger Agreement by the stockholders of Boston Edison, '

BEC Energy and Mergcco, as is set forth more fully below under " Proposal No. 2: Plan of Restructuring-Vote Required," and to the approval by the NYSE and the BoSE of BEC Energy Common Shares for listing upon official notice of issuance. If the stockholders of Boston Edison approve the Merger, Boston i Edison will then cause the shares of BEC Energy end Mergeco to be vot'e d in favor of the restructuring I into a holding company.

In addition, the decision to proceed with the Merger and restructuring is subject to, among other things, the receipt, on terms satisfactory to the Board of Directors of Boston Edison, of (i) authorization l from the Massachusetts DPU to form a holding company structure for Boston Edison, (ii) other required regulatory authorizations, including without limitation the approval of the Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory Commission ("NRC") and the SEC and (iii) such other consents and approvals as the Board may deem necessary or appropriate. Following the restructuring, BEC Energy is expected to qualify for an exemption under the Public Utility Holding Company Act of 1935 (the t 5 l

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" Holding Company Act"). See " Proposal No. 2: Plan of Restructuring-Regulatory Approval of the Restructuring" and " Proposal No. 2: Plan of Restructuring-Regulatory Matters."

Dividend Policy While future dividends on BEC Energy Common Shares will depend primarily upon the carnings, financial condition and capital requirements of its subsidiaries, it is contemplated that BEC Energy initially will make dividend payments on IIEC Energy Common Shares at the rate currently applicable to Boston Edison Common Stock. In addition, it is expected that such dividends of BEC Energy will be declared and paid on approximately the same schedule of dates as that now followed by Boston Edison with respect to Boston Edison Common Stock dividends. The most recent dividend declared by the Board of Directors of Boston Edison was $0.47 per share of Boston Edison Common Stock and was paid on February 3,1997.

See " Proposal No. 2: Plan of Restructuring-Dividend Policy."

Certain Federalincome Tax Consequences For Federal income tax purposes, no gain or loss will be recognized isy Boston Edison, BEC Energy, the holders of shares of Boston Edison Common Stock whose shares are exchanged for DEC Energy Common Shares or the holders of Cumulative Preferred Stock as a result of the Merger. See " Proposal No. 2: Plan of Restructuring-Certain Federal Income Tax Consequences."

No Appraisal Rights Under Massachusetts law governing the proposed Merger, neither a dissenting holder of Boston

. Edison Common Stock nor a holder of Boston Edison Cumulative Preferred Stock has a right to demand payment of the fair value of his or her shares if the Merger is consummated.

Proposal No. 3: Adoption of the 1997 Stock Incentive Plan TIIE BOARD OF DIRECTORS RECOMMENDS TilAT THE STOCKHOLDERS VOTE FOR ADOL"rION OF THE 1997 STOCK INCENTIVE PLAN The Board of Directors has adopted the 1997 Stock Incentive Plan, subject to approval of the stockholders, in order to attract and retain employees in a position to make contributions to the success of Boston Edison, to reward employees for such contributions, and to encourage employees to take into account the long-term interests of Boston Edison through stock-based awards. See " Proposal No. 3:

Adoption of the 1997 Stock Incentive Plan." t Proposal No. 3 requires the affirmative vote of a majority of the shares preseat and entitled to vote on the matter. See " Proposal No. 3: Adoption of the 1997 Stock Incentive Plan-Vote Required."

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PitOPOSAL NO.1: ELECTION OF DiltECTOllS Information about Nominees and incumbent Directors Pursuant to Boston Edison's Bylaws, the Board of Directors has fixed the number of directors at ten.

Boston Edison's Restated Articles of Organization provide for the classi:.eation of the Board of Directors into three classes serving staggered three-year terms. The four persons named below have been nominated by the Board of Directors for election as Class til directors for a term expiring at the Annual Meeting to be held in the year 2000 and until their successors are duly chosen and qualified. The remaining directors will continue to serve as set forth below, with the Class I directors having terms expiring in 1998 and the Class 11 dire-tors having terms expiring in 1999. If any of the nominees shall by reason of death, disability or resignation be unavailable as a candidate at the Annual Meeting, votes pursuant to the proxy will be cast for a substitute candidate as may be designated by the Board of Directors, or in the absence of such designation, in such other manner as the directors may in their discretion determine. Alternatively,in such a situation, the Board of Directors may take action to fix the number of directors for the ensuing year at the number of nominees named herein who are then able to serve.

Senator Paul E. Tsongas, a Class I director who served as a member of the Board of Directors since 1985, passed away on January 18,1997. William E Connell, a Class 11 director who has served on the Board of Directors since 1987, has announced his intention to retire from the Board at the upcoming Annual Meeting of Stockholders. Boston Edison is searching for a replacement to fill the current Class I vacancy.

The Board of Directors has adopted the following director retirement policy. Directors who are employees of Boston Edison, with the exception of the Chief Executive Officer, retire from the Board when they retire from employmer.t with Boston Edison. Directors who are not employees of Boston  ;

Edison or who have served as Chief Executive Officer retire from the Board at the annual meeting of stockholders following their seventieth birthday.

The Board of Directms, which held eight regular meetings during 1996, has an Executive Committee, an Audit, Finance an.) Risk Management Committee, an Executive Personnel Committee, a Nuclear Oscrsight Committee, a Capital Investment Committee and a Pricing Committee. During 1996, the Executive Committee, which is authorized to exercise in the intervals between Board meetings those powers of the Board which can be delegated and to act as a nominating committee, met four times. The Audit, Finance and Risk Management Committee, the responsibilities of which include recommendations as to the selection of independent auditors, review of the scope of the independent audit, annual financial statements, internal audit reports, and financial and accounting controls and procedures, and review of Boston Edison's financial requirements, insurance coverages, and legal compliance programs, met three times. The Executise Personnel Committee, which is responsible for reviewing officer and director compensation arrangements, executive officer personnel planning and performance, certain benefit pro-grams, and Boston Edison's human resources policies, met four times. The Nuclear Oversight Committee, which oversees Boston Edison's nuclear operations, met four times. The Capital Investment Committee, which provides external oversight of Boston Edison's plans for capital improvements and reviews invest-ments in related businesses, met three times. The Pricing Committee, which is authorized to approve the terms of Boston Edison's debt and equity offerings, did not meet in 1996. All directors attended at least 75r7c of the aggregate of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served.

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The names of the nominees as Class til directors and the incumbent Class I and Class 11 directors and certain information concerning them are shown in the following table:

Nominees as Class ill Directors-Terms Expiring in 2000 Nomineen l'rincipal Occupation (1) und Directorships Gary L Countryman Chairman of the Board and Chief Executive Officer, Liberty Mutual Age: 57 Insurance Company, and Chairman and Chief Executive Officer, Director since: 1986 Liberty Life Assurance Company of Boston Member: Executive, Directorships: Liberty Mutual Insurance Company, Liberty Mutual Fire Executive Personnel and Insurance Company, Liberty Life Assurance Company of Boston, Bank Capital Investment of Boston Corporation, The First National Bank of Boston, The Committees Neiman-Marcus Group, Inc.

Thomas G. Dignan, Jr. (2) Partner, Ropes & Gray (Law Firm)

Age: 56 Directorships: Various educational, cultural and civic organizations Director since: 1983 Member: Executive, Nuclear Oversight and Capital Investment Committees Herbert Roth, Jr.

Former Chairman of the Board (1978-1985) and Chief Executive Officer Age: 68 (1968 1985), LFE Corporation (Traffic and Industrial Precess Control Director since: 1978 Systems)

Member: Nuclear Directorships /Frusteeships: Landauer, Inc., Tech / Ops Sevcon, Inc.,

Oversight and Capital Phoenix Home Life Mutual Insurance Company, Phoenix Series Fund, investment Committees Phoenix Total Return Fund, Inc., Phoenix Multi-Portfolio Fund, The Big Edge Series Fund, Mark IV Industries Stephen J. Sweeney Former Chairman of the Board (1986-1992) and Chief Executive Officer Age: 68 (1984-1990), Boston Edison Company Director since 10M Directorships: Selecterm, Inc., Liberty Mutual Insurance Company, Member: Nuclear Liberty Mutual Fire insurance Company, Liberty Life Assurance Oversight and Capital Company of Boston, Uno Restaurant Corporation Investment Committees Incumbent Class I Directors-Terms Expiring in 1998 Director l'rincipal Occupation (1) and Directorships Nelson S. Gifford Principal, Fleetwing Capital (Venture Investments) (1992 to present);

, Age: 66 formerly Chairman (1986-1990) and Chief Executive Officer Director since: 1981 (1975-1990), Dennison Manufacturing Company (Stationery Products, Member: Audit, Finance Systems and Packaging) and Risk Management Directorships: John Hancock Mutual Life insurance Company, Reed and and Capital Investment Barton, J.M. Huber Corp., Nypro Inc., Partners Fund Committees l

Matina S. Horner Executive Vice President, Teachers insurance and Annuity Association /

Age: 57 College Retirement Equities Fund; formerly President (1972-1989).

Director since: 1988 Radcliffe College Member: Executive, Directorships: The Neiman-Marcus Group, Inc.

Audit, Finance and Risk Management and Pricing Committees Footnows on Ibge U 8

incumbent Class 11 Directors-Terms Expiring in 1999 IHrector l'rincipal Occupation t!) and Direclurships Charles K. Gifford Chief Executive Officer (since 1995), formerly Chairman (19951996) and Age: 54 President (1989-1995), Bank of Boston Corporation (Bank Holding Director since: 1990 Company), and Chairman and Chief Executive Officer (since 1995),

Member: Audit, Finance formerly President (1989-1996), The First National Bank of Boston and Risk Management, Directorships: Bank of Boston Corporation, The First National Bank of

- Executive Personnel and Boston, Massachusetts Mutual Life Insurance Company Pricing Committees Thomas J. May Chairman, President and Chief Executive Officer (since 1995), formerly Age: 49 Chairman and Chief Executive Officer (1994-1995), President and Director since: 1991 Chief Operating Officer (1993-1994), and Executive Vice President Member: Executive and (1990-1993), Boston Edison Company Pricing Committees Directorships: Bank of Boston Corporation, The First National Bank of Boston, New England Mutual Life Insurance Company Sherry II. Penney Chancellor (1988-1995 and 1996 to present), University of Massachusetts Age: 59 at Boston, formerly President (1995) (interim), University of Director since: 1990 Massachusetts Member: Audit, Finance Directorships: Various educational, civic and cultural organizations

. and Risk Management and Executive Personnel Committees

(!) Except as otherwise noted, cach nominee and incumbent director has held the position indicated for the last five years.

G) During 1996, Boston Edison paid legal fees to the firm of Ropes & Gray.

Stock Ownership by Directors and Executive Omcers The following table sets forth the number of shares of Boston Edison Common Stock beneficially owned as of January 31,1997 by each director and nominee, each of the executive officers named in the Summary Compensation Table, and the directors and executive officers of Boston Edison as a group. None of the individual or collective holdings listed below exceeds 1% of the outstanding Boston Edison Common Stock. Except as indicated below, all of the shares listed are held by the persons named with both sole voting power and sole investment power. No member of the group is the beneficial owner of Boston Edison's Cumulative Preferred Stock.

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- . , - _ . . -. -_. . .- ~. . .- -- - - - .

Numi,rr or Sharn or Name or licnencial Owner Itodun I'dnun Common Nuth lienenciall3 Owned E. Thomas Boulette .. ..... ... .. ... ... ..... 2,443(1)(2)

William E Connell . . . . . . . . .. . ................. .

1.886 Gary L Countryman . .... .. . .. .

. ..... . 1,686 Thomas G. Dignan. Jr. . . . . . . . .. .... . . .. 2,115 Charles K. Gifford . .. . ..... . .... ... ... 1,452 Nelson S. Gifford . . ... ... .. .. .. . . 3,545 L. Carl Gustin ... ... ..... . . .... .

4,598(2)

Douglas S. lloran . . .. ... .......... ... .. .. 2,514(1)(2)

Matina S. Horner . . . . .... . . . ... ....... .... 1,686 Ronald A. Ledgett ..... . . . . . . 4,332(1)(2)

Thomas J. May ... .. .. . . . . . .. 14,437(1)(2)

Sherry H. Penney ....... . ..... ... . .. . 1,736 Herbert Roth, Jr. . . . . . . .... . 6,000 Stephen J. Sweeney . . . ... .. .. ... . . 5,131(3)

All directors and executive officers as a group, including those named above (19 persons) . ... .. ... .. ... .. 44,143(1)(2)

(1) The following shares are held in Boston Edison's Deferred Compensation Trust due to deferrals by the following participants under Boston Edison's Deferred Compensation Plan: Dr. Boulette,887 shares; Mr. Horan,127 shares; Mr. Ledgett,2.157 shares; Mr. May,7,125 shares; all executive officers as a group,15,512 shares. Participants in the Plan may instruct the trustee to vote shares of Boston Edison Common Stock held in the trust in accordance with their allocable share of such deferrals, but have no dispositive power with respect to shares held in the trust.

(2) These totals include the following number of shares held in Boston Edison's 401(k) Plan:

Dr. Boulette,1,556 shares: Mr. Gustin,3.336 shares: Mr. Horan,1,922 sharcs; Mr. Ledgett,2,175 shares: Mr. May,6,140 shares; all executive officers as a group,24,572 shares.

(3) 3,629 of Mr. Sweeney's 5,131 shares are held in a charitable annuity remainder trust, of which he, as a co-trustee of the trust, shares dispositive and voting power with respect to the shares.

Director Compensation -

Each director who is not an employee of Boston Edison receives an annual Board retainer of $10,000 and 200 shares of Boston Edison Common Stock pursuant to Boston Edison's 1991 Director Stock Plan.

Each such director who is a member of the Executive Committee receives an additional annual Committee retainer of $4,000. With the exception of the Pricing Committee, the members of which receive no retainer, each of the chairmen of the other Board committees who is not an employee of Boston Edison receives an annual Committee retainer of S4,000 and the other non-employce members of those committees receive an annual Committee retainer of 52.750. Each director who is not an employee of Boston Edison receives

$1,000 for attendance in person at cach meeting of the Board or a committee and $500 for participating in such a meeting by telephone. Directors may elect to defer part or all of their directors' fees pursuant to Boston Edison's Deferred Fee Plan. Each director who is not otherwise eligible for any Boston Edison pension or retirement benefit is entitled to an annual amount equal to the cash component of the annual Board retainer plus twice the retainer received by a member of a committee other than the Executive Committee, for a period of years equal to his or her service on the Board of Directors, such payments to commence upon the director's date of death in office. resignation or retirement. Should a director die prior to full receipt of the benefit, his or her sursivors continue to receive the payments to which the director would have been entitled up to a maximum of ten years from the commencement of the benefit.

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. . , . . _ - - . - - - - .- - =-

i PROPOSAL, NO. 2: PIAN OF RESTRUCTURING General The management and Board of Directors of Boston Edison consider it to be in the best interests of Boston Edison and its stockholders to change into a holding company structure whereby Boston Edison will become a separate, wholly-owned subsidiary of a new parent company, The piesent holders of Boston Edison Common Stock will become shareholders of the new parent, and Boston Edison's principal subsidiary, BETG (and its subsidiaries), will become a subsidiary of BEC Energy. Boston Edison's other subsidiary, HEEC, a Massachusetts utility corporation, will remain a subsidiary of Boston Edison.

The holding company structure is a well established form of organization for companies conducting 1 multiple lines of businesses, particularly entities engaging in both regulated and unregulated activities. All I investor-owned Massachusetts electric utilities, other than Boston Edison, are currently organized in a )

holding company structure. The holding company structure is intended to provide increased financial. l managerial and organizational ficxibility in order to better position Boston Edison to operate in the l

changing electric utility industry. Specifically, the new structure would clearly separate BEC Energy's regulated and unregulated lines of business, enabling it to pursue non-utility business ventures in a manner consistent with the electric industry restructuring principles outlined by the Massachusetts Department of Public Utilities (the " Massachusetts DPU"). Although Boston Edison could continue to pursue non-utility business opportunities through BETG and other non-utility subsidiaries, management and the Board of Directors believe it is in the best interests of Boston Edison and its stockholders to conduct such non-utility activities through a holding company structure.

Business of Boston Edison Boston Edison was incorporated in 1886 under Massachusetts law as an investor-owned public utility.

Boston Edison, with its wholly-owned utility subsidiary llarbor Electric Energy Company, is currently engaged principally in the generation, purchase, transmission, distribution and sale of electric energy.

Boston Edison provides electricity at retail to an area of 590 square miles, including the City of Boston and 39 surrounding cities and towns. In 1996, Boston Edison served an average of 657,487 customers. Boston .

Edison also supplies electncity at wholesale for resale to other electric utilities and municipal electric departments.

Through BETG and its subsidiaries, Boston Edison is also engaged in certain non-utility businesses, including energy utilization and consen'ation, construction management and district energy. Recently, Boston Edison announced that BETG (through its subsidiaries) has entered into two joint ventures in new non-utility businesses. The first is a joint venture with RCN Telecom Services, Inc., a subsidiary of C-TEC Corporation, to provide local and long-distance telephone service, video and high-speed Internet access and eventually property monitoring services (the " Telecommunications Venture"). The second is a joint venture with Williams Energy Services Company, a subsidiary of The Williams Companics, Inc., to market electricity, natural gas and energy-related services to customers in the six New England states (the " Energy Marketing Venture"). To date. Boston Edison's investment in, and the results of operations of BETG and its subsidiaries, have not been material to the financial condition and results of operations of Boston Edison as a whole.

As a regulated electric utility, Boston Edison operates under the jurisdiction of the Massachusetts DPU, which jurisdiction includes supenision over retail rates for electricity, issuance of bonds. capital stock and certain other securities and investment by Boston Edison in other entities, including subsidiaries.

The FERC has jurisdiction over various phases of Boston Edison's business, including, among other things, regulation of the system of accounts, rates for power sold at wholesale for resale and facilities used for the transmission or sale of such power. Boston Edison is currently an " exempt holding company" under the

Holding Company Act, and is therefore subject to limited regulation of its utility business by the SEC.

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The current corporate structure of Boston Edison is as follows:

Current Structure Common and Cumulative Preferred Shareholders Boston Edison i

I l BETG and HEEC Subsidiaries The Restructuring

'Io carry out the restructuring, Boston Edison has formed BEC Energy, a Massachusetts business trust, and BEC Energy's wholly-owned subsidiary, Mergeco, a Massachusetts utility corporation, neither of which entitics has any present business or properties of its own. The outstanding BEC Energy Common Shares are presently owned by Boston Edison, while the authorized stock of Mergeco is presently subscribed for by BEC Energy and will be issued to BEC Energy upon approval of the Massachusetts DPU. Boston Edison, Mergeco and DEC Energy have entered into a Merger Agreement under which, l subject to stockholder approval as required by Massachesetts law, Boston Edison will become a subsidiary of BEC Energy through the merger of Mergeco with and into Boston Edison. In the Merger, the Boston Edison Common Stock will be exchanged shar: for chare for BEC Energy Common Shares. A copy of the Merger Agreement is attached to this Proxy Statement as Appendix A.

l Immediately following the Merger, Boston Edison will transfer the stock of DETG to BEC Energy.

After the restructuring, BEC Energy will engage in non-utility business activities through BETG and its

, subsidiaries. In the future, BEC Energy may establish additional subsidiaries to engage in new non-utility businesses. If the proposed restructuring is consummated, it is intended that advances to and other

investments in non-utility businesses will be made primarily by BEC Energy rather than by Boston Edison

and that the proceeds of financings by Boston Edison will be used entirely in the conduct of its electric utility business. IIEEC will remain a subsidiay of Boston Edison.

None of the other securities of Boston Edison, including its six outstanding series of Cumulative Preferred Stock (two of which are represented by Depositary Preferred Shares) and debt securities, l consisting primarily of debentures, commercial paper and bank lines of credit, will be altered by the l Merger. These securities will continue to be outstanding securities and obligations of Boston Edison.

Boston Edison's management and the Board of Directors believe that the restructuring will have no adverse affect on the holders of its Cumulative Preferred Stock and debt securities. See " Proposal No. 2:

Plan of Restructuring-Treatment of Preferred Stock" and " Proposal No. 2: Plan of Restructuring-Treatment of Indebtedness."

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! The reorganized corporate structure of BEC Energy immediately after the Merger and restructuring

- is expected to be as follows:

. Proposed Structure Common Shareholders Cumulative Preferred BEC Energy Shareholders (Holding Company).

l I I l

l Boston Edison BETG and

! i Subsidiaries HEEC Reasons for the Restructuring General. The holding company structure is intended to provide increased financial, managerial and organizational flexibility in order to better position Boston Edison to operate in the changing electric utility industry. The holding company structure will permit BEC Energy to take advantage of non-utility business opportunities in a more timely manner, in addition, the holding company structure will clearly separate BEC Energy's regulated and non-utility lines of business. The holding company structure is a well established form of organization for. companies conducting multiple lines of businesses, particularly entities engaging in both regulated and unregulated activities.

Industry Restnicruring. Traditionally, electric utilities have operated under a monopoly regulatory framework, under wFich consumers have been restricted to a single electricity provider, typically a vertically integrated electric utility engaged, like Boston Edison, in the generation, transmission, and distribution of electrict:y. However, since the 1970's, the electric energy business has become increasingly competitive. With the enactment of the Public Utility Regulatory Policies Act of 1978, a new independent i power producer industry commenced, competing with traditional electric utilities for opportunities to generate new electric power. In recent years many state utility commissions, including the Massachusetts DPU, initiated inquiries into restructuring the electric utility industry with a goal of promoting competition and extending to all customers the option of choosing their own electricity suppliers. In March 1996, the Massachusetts DPU opened a rule-making proceeding with a goal of establishing rules that would apply to all electric companies' restructuring plans and encouraged electric companies to enter into negotiated settlements consistent with the principles established in that proceeding. One of the principles established by the Massachusetts DPU was the legal or functional separation of the generation and distribution businesses. In December 1996, Boston Edison, the Massachusetts Attorney General and the Massachusetts Division of Energy Resources announced that they had reached an agreement (the " Settlement Agree-ment") that, if approved by the Massachusetts DPU, would allow all retail customers in Boston Edison's service area to choose their electricity suppliers beginning as early as January 1,1998. As part of the proposed settlement, Boston Edison would agree to sell all of its fossil electric generating plants.

Accordingly, other than its Pilgrim Nuclear Power Station, Boston Edison would no lor:ger own any electricity generating facilities. Boston Edison's retained electricity distribution business would contbue to be regulated by the Massachusetts DPU.

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Assuming that the Settlement Agreement is approved by the Massachusetts DPU, Boston Edison's electric business will be thereafter limited primarily to distribution of electricity, and to a much lesser extent, transmission of electricity. Accordingly, Boston Edison has identified the need to increase its long-term growth potential through investment in, related non utility new businesses. The move to a competitive electricity industry, together with a revolution in energy-related technology, has created significant new opportunities for energy service providers like Boston Edison to take advantage of non-utility business ventures which are related to, but separate from, traditional regulated businesses. Pursuit of these new opportunities will play an important role in maintaining the long-term financial viability necessary for Boston Edison to continue to provide reliable service to its customers, as well as enhance stockholder value. Boston Edison has already begun to take advantage of such opportunities as reflected by the proposed Telecommunications Venture and the Energy Marketing Venture.

Initially, Boston Edison's electric utility business is expected to constitute the predominant part of BEC Energy's earnings power for the foreseeable future. Boston Edison's operations will be conducted with the same assets (subject to the planned divestiture of fossil generation assets) and same management, and will continue to be subject to the jurisdiction of the Massachusetts DPU, the FERC, and the NRC.The primary focus of BEC Energy will be on the development of BETG's existing non-utility business activities, including the Telecommunications Venture and the Energy Marketing Venture. Although Boston Edison has not yet identified other significant investment opportunities for BEC Energy, it is expected that BEC Energy will develop or acquire other businesses which are related to energy and telecommunications-related services. These new investments will offer the opportunity for greater earnings growth and mitigate the limitations of Boston Edison being predominantly a regulated distribution / transmission utility.

Benefits of Iloiding Company Structure The holding company structure is a well established form of organization for companies conducting multiple lines of businesses, particularly entities engaging in both regulated and unregulated activities.

Many electric and gas utilities have been organized as holding companies for many years, and many other utilities have recently changed their organization to a holding company structure. While Boston Edison could continue to pursue non-utility business opportunities through BETG and other non utility subsidiar-ies of Boston Edison, management and the Board believe it is more desirable in the long-term to conduct such non-utility activities through a holding company structure. The benefits of a holding company structure may be summarized as follows:

Timely Response to Business Opponunirics. The holding company structure, by separating BETG and any other new non-utility businesses into corporations that will not be subsidiaries of Boston Edison, will enable BEC Energy to pursue non-utility business opportunities without the delays inherent in the regulatory process. For example, the holding company structure will enable BEC Energy to make investments in non utility businesses, and to issue securities for the purpose of financing such investments, without obtaining the approval of the Massachusetts DPU. This will allow BEC Energy to respond to competitive forces and pursue non utility businesses in a timely fashion. The ability of BEC Energy to )

engage in these activities in a timely manner without regulatory approval will make BEC Energy a more  !

attractive joint venture partner. I flexible Financing Opportunirics. The holding company corporate structure also will permit the use of i financing techniques that are more directly suited to the particular requirements, characteristics and risks  ;

of non-utility operations without effecting the capital structure or creditworthiness of Boston Edison. The j holding company structure will allow the design and implementation of capitalization ratios appropriate for the capital and business requirements of each industry in which BEC Energy is engaged. This is particularly important in view of the potentially large capital requirements of businesses such as the proposed Telecommunications Venture.

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Separanon. The holding company structure will clearly separate lloston Edison's electric utility business from the non-utiht) businesses of other BFC Energy subsidiaries. As a result, it will provide a better structure for regulaurs to assme that there is n cross-subsidization of cost or transfer of business risk from unregulated to regulated lines of business. In addition, the holding company structure will facilitate the analysis and valuation of the holding company's individuallines of business by the investment community. The holdmg company structure also will mitigate the potential impact on Boston Edison, its preferred stock and debt security holders and its customers of the risks of non-utility businesses, and will permit the capital structure of Boston Edison to be managed efficiently. l l

Special Considerations Applicahic to the Restructurmg Non-Utilirr Business Activitics May involve More Risk. The future performance of DEC Energy Common Shares cannot be predicted. Following consummation of the restructuring, BEC Energy will be able to make investments in non-utility businesses and issue securities for the purpose of financing such i investments without obtaining the prior approval of the Massachusetts DPU The restructuring, therefore, j will provide BEC Energy with more flexibility to pursue business opportunitics that might involve a higher j degree of risk than would be permitted for a regulated utility, but with the possibility of higher potential i returns commensurate with such risk. Pursuit of business opportunitics with greater risk could, in turn, have either a positive or an adverse effect on the value of a shareholder's investment, depending upon the return actually realized from such opportunities. Such business opportunities may encounter competitive .

and other business factors not previously experienced by Boston Edison to the same degree and may have different, and perhaps greater, investment risk than those involved in Boston Edison's regulated electric l cncrgy generation, distribution and transmission business. There can be no assurance that such businesses i will be successful or, if unsuccessful that they will not have a direct or indirect adverse effect on BEC Energy. Any losses incurred by such businesses will not be recoverable in Boston Edison's regulated rates.

As BEC Energy becomes increasingly engaged in non-utility business activities, such activitics will have an increasing impact on the market price of BEC Encrgy Common Shares.

Dividends On BEC Energy Common Shares B'illBe Dependent Upon Common Stock Dividends Paid By Boston Edison. For a period of time following the restructuring, the funds required by BEC Energy to I enable it to pay dividends on BEC Energy Common Shares are expected to be derived primarily from the l dividends paid by Boston Edison. Accordingly, the ability of BEC Energy to pay such dividends, as a practical matter, will be governed by the ability of B ston Edison to pay dividends on its common stock.

The ability of Boston Edison to pay dividends on its common stock will continue to be subject to the preferential dividend rights of the holders of the outstanding Boston Edison Cumulative Preferred Stock.

In addition, although it has no present intention to do so,it is expected that Boston Edison may need to )

issue additional preferred stock in the future to meet its capital needs. Such additional preferred stock will also have preferential dividend rights. The trustees of BEC Energy have no current intention to change the present Boston Edison dividend policy. 1 l

Recommendations of the Board l 1

The management and Board of Directors of Boston Edison recommend the approval of the restruc-turing as proposed in the accompanying Notice of Annual Meeting. The Board of Directors and management believe that the restructuring is in the best interest of Boston Edison and its stockholders. In making its decision to recommend the restructuring to the stockholders, the Board of Directors considered l many factors. including the factors set forth above under " Proposal No. 2: Plan of Restructuring-Reasons for the Restructuring" and " Proposal No. 2: Plan of Restructuring-Benefits of Holding Company  ;

Structure." I l

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Vote Required in order for the restructuring into a holding company to be approved under Massachusetts law, it must receive favorable votes,in person or by proxy. of the holders of two-thirds of the outstanding shares of Boston Edison Common Stock. See "Other Matters-Voting Procedures." ,

The persons named in the accompanying proxy intend to vote such proxy in favor of the restructuring unless a contrary choice is indicated thereon.

Exchange of Certificates Not Required if the proposed restructuring is consummated. it will not be necessary for holders of Boston Edison Common Stock to exchange their existing stock certificates for BEC Energy share certificates. Holders of Boston Edison Common Stock will automatically become holders of BEC Energy Common Shares, and their stock certificates will automatically represent BEC Energy Common Shares. After the restructuring, whenever presently outstanding certificates are presented for transfer, new certificates bearing the name BEC Energy will be issued. Certificates also presented for transfer to a name other than that in which the surrendered certificate is registered must be properly endorsed, with the signature guaranteed, and accompanied by evidence of payment of any applicable stock transfer taxes.

I Merger Agreement The Merger Agreement has been unanimously approved by the Boards of Directors of Boston Edison.

BEC Energy and Mergeco, and these companies have executed the Merger Agreement, subject to the approval and adoption thereof by vote of Boston Edison's stockholders as required by Massachusetts law and described herein. The Merger Agreement provides that:

(1) each outstanding share of Boston Edison Common Stock, $1.00 par value per share, will be converted into one DEC Energy Common Share, $1.00 par value; (2) each outstanding share of Boston Edison Cumulative Preferred Stock, $100.00 par value per share, will continue as one issued and outstanding share of Boston Edison Cumulative Preferred Stock, $100.00 par value per share, with the same preferences. designations, relative rights, privileges and powers, and subject to the same restrictions, limitations and qualifications as were applicable to such stock prior to the Merger; (3) each outstanding share of Mergeco Common Stock, $1.00 par value per share, will be ,

converted into one new share of Boston Edison Common Stock, $1.00 par value per share, all of which  ;

will then be owned by BEC Energy; and  !

1 (4) the BEC Energy Common Shares presently held by Boston Edison will be canceled.

As a result of the Merger, Boston Edison, which will be the surviving corporation, will become a subsidiary of BEC Energy, and all of the BEC Energy Common Shares outstanding immediately after the Merger will be owned by the holders of Bostoi. Edison Common Stock outstanding at the effective time of the Merger.

If and when the Merger becomes effective, holders of Boston Edison Common Stock will automati-cally become holders of BEC Energy Common Shares. Like the Cumulative Preferred Stock, the outstanding debt securities of Boston Edison and the terms thereof will not be altered in the Merger. Such debt securities will remain outstanding and will continue to be obligations of Boston Edison as the survivor of the Merger.

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l Amendment or Termination of Plan of Merger By mutual consent of their respective Boards of Directors or trustecs, Boston Edison BEC Energy and Mergeco may amend, modify or supplement the Merger Agreement in such manner as may be agreed upon by them in writing at any time before or after approval of the Merger Agreement by the stockholders of Boston Edison; provided, however, that no such amendment, modification or supplement shall, in the sole judgment of the Board of Directors of Boston Edison, materially and adversely affect the rights of the holders of Boston Edison Common Stock.

The Merger Agreement provides that it may be terminated, and the Merger and other transactions incident to the restructuring plan abandoned, at any time, whether before or after approval of the Merger Agreement by the stockholders of Boston Edison, by action of the Board of Directors of Boston Edison if the Board determines for any reason that the consummation of the restructuring would for any reason be inadvisable or not in the best imerests of Boston Edison or its stockholders. The Board of Directors of Boston Edison expects to terminate and abandon the restructuring if Boston Edison has not received, within a reasonable period after stockholder approval, approval of the Merger by the Massachusetts DPU as required by Massachusetts law or other regulatory agencies with jurisdiction over the transaction (see

" Proposal No. 2: Plan of Restructuring-Regulatmy Approval of the Restructuring") or approval for listing of BEC Energy Common Shares on the NYSE and BoSE (see " Proposal No. 2: Plan of Restructur-ing-Stock Exchange Listing"). Boston Edison is unable to predict under what other circumstances the restructuring would be terminated and abandoned.

Effectiveness of the Restructuring The Merger Agreement contemplates that the Merger will become effective, and all other steps in the restructuring plan will be completed, as soon as practical after the required stockholder and regulatory approvals and listing authorization for BEC Energy Common Shares have been received, unless the Board of Directors of Boston Edison theretofore has elected to abandon such plan.

Certain Federal Income Tax Consequences General. The following general discussion summarizes certain federal income tax considerations relating to the Merger. This summary is provided for general information only, and does not discuss all aspects of income taxation that may be relevant to a particular holder of Boston Edison Common Stock in light of the holder's personal tax circumstances or to certain types of holders of Boston Edison Common Stock subject to special treatment under the income tax laws of any jurisdiction including persons who are not United States persons, dealers in securities, tax-exempt entitics, and stockholders who do not hold Boston Edison Common Stock as " capital assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the " Internal Revenue Code").

The legal conclusions set forth in this summary reflect the opinion of Ropes & Gray. No ruling has been requested from the Internal Revenue Service. Each holder of Boston Edison Common Stock should l consult such holder's own tax advisor as to the specific tax consequences of the Merger to such holder, l including the application and effect of foreign, state or locai income and other tax laws.

The following discussion is based on existing statutes, ensting and proposed regulations and existing administrative interpretations and court decisions. Future legislation, regulations, administration interpre-tations, or court decisions could significantly change such authoritics either prospectively or retroactively, and could affect the legal conclusions set forth in the following discussions.

For federalincome tax purposes, the Merger is intended to qualify as a tax-free exchange pursuant to Section 351 of the Internal Revenue Code.

17

._ _ __ m _ . -___ . _. _ _ . __

7ia Imphcutions to the Holdcrs. For federal income tax purposes, no gain or loss will be recognized by the holders of Boston Edison Common Stock on their exchange of Boston Edison Common Stock for BEC Energy Common Shares pursuant to the Merger. For federalincome tax purposes, the tax basis of the BEC Energy Common Shares received by each such holder pursuant to the Merger will be the same as the holder's basis in the Boston Edison Common Stock surrendered in the Merger, and the holding period of such BEC Energy Common Shares will include the period during which such holder held the Boston Edison Common Stock surrendered in the Merger, provided that such Boston Edison Common Stock was held as a capital asset on the date of the exchange. In addition, for federal or Massachusetts income tax pu* poses, the Merger will not give rise to the recognition of gain or loss on shares of Cumulative Preferred Stock to any holder of such stock, nor will the Merger affect such holder's holding period in such stock.

Tur Implications to BEC Encigv. For federal income tax purposes, no gain or loss will be recognized by BEC Energy.

Othcr Tax Aspects. Apart from the federalincome tax consequences of the Merger discussed herein, no attempt has been made to determine the tax consequences to a holder of Boston Edison Common Stock or Boston Edison Cumulative Preferred Stock under the laws of any country, state or jurisdiction.

Iloiders of Boston Edison Common Stock may be subject to special federal income tax treatment or to other taxes, such as state or local income taxes that may be imposed by various jurisdictions, and also may be subject to intangible property, estate and inheritance taxes in their state of domicile. Each holder of Boston Edison Common Stock should consult the holder's own tax advisors to determine the particular tax consequences of the Merger to the holder.

TIIE FEDERAL INCOME TAX DISCUSSION SET FORTil ABOVE IS INTENDED TO PROVIDE ONLY A GENERAL

SUMMARY

AND DOES NOT ADDRESS TAX CONSEQUENCES WillCII MAY VARY WITil, OR ARE CONTINGENT UPON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, TIIIS DISCUSSION DOES NOT ADDRESS ANY FOREIGN, FEDERAL, STATE OR LOCAL TAX CONSE-QUENCES OF Tile DISPOSITION OF STOCK IN BOSTON EDISON BEFORE OR IN BEC ENERGY AFTER TIIE MERGER. ACCORDINGLY, EACil IIOLDER OF SUCll STOCK IS STRONGlX URGED TO CONSULT WITil SUCII IlOLDER'S TAX ADVISORS TO DETERMINE TIIE PARTICULAR TAX CONSEQUENCES OF TIIE MERGER OR SUCll DISPOSITION TO SUCII 110LDER.

Treatment of Preferred Stock l

The proposed restructuring will not result in any change in Boston Edison's outstanding series of

{

Cumulative Preferred Stock, consisting of the 4.257c Series, the 4.78% Series, the 7.27% Series, the 8.00%  !

Series, the 8.25% Series and the 7.75% Series. Each of the 8.25% Series and 7.75% Series of Cumulative '

Preferred Stock are represented by Depositary Preferred Shares, each representing a 1/4 interest in a share l of Cumulative Preferred Stock of such series. The decision by management and the Board of Directors to '

have the Cumulative Preferred Stock continue as securities of Boston Edison is based upon, among other factors, a desire not to alter or potentially alter the nature of the investment represented by such series of stock, namely investment in a regulated utility, as well as the need of Boston Edison not to foreclose future issuances of preferred or preference stock to help meet its capital requirements. There will be no change in  !

the preferences, designations, relative rights, privileges and powers of the Cumulative Preferred Stock, and l the shares will be subject to the same restrictions, limitations and qualifications as were applicable thereto prior to the restructuring.

Since Boston Edison's electric utility operations will continue to constitute the principal part of the I consolidated assets and earnings power of BEC Energy, it is believed that the Cumulative Preferred Stock i will retain its current investment ratings as well as its qualification for legal investment for certain '

investors. It is anticipated that the current listing of the Depositary Preferred Shares representing the 8.259c Series and 7.757c Series of Cumulative Preferred Stock on the New York Stock Exchange will l

18

l l

continue after the Merger. After the restructuring is consummated. Boston Edison will continue to be a l

reporting company under the Exchange Act.

Due to the comparatively small assets of BETG (i.e., the capital stock of its unregulated subsidiaries),

the consolidated assets and liabilities of Boston Edison immediately before the Merger and restructuring (subject to the proposed divestiture of its fossil generation assets) will be substantially the same as the l consolidated assets and liabilities of Boston Edison immediately after the Merger and restructuring.

'Deatment of Indebtedness All of Boston Edison's indebtedness outstanding immediately prior to the Merger, which is expected to consist of multiple series of debentures, as well as commercial paper and bank credit facilities, will l

continue to be outstanding indebtedness of Boston Edison after the Merger. Such indebtedness will neither be assumed nor guaranteed by BEC Energy in connection with the restructuring. The decision to have the indebtedness of Boston Edison continue as obligations of Boston Edison is based upon a desire not to alter, or potentially alter, the nature of the investment represented by such obligations, namely a direct investment in a regulated utility. ,

Dividend Policy 1 l

While future dividends on BEC Energy Common Shares will depend primarily upon the carnings, financial condition and capital requirements of its subsidiaries, it is contemplated that BEC Energy initially will make dividend payments on BEC Energy Common Shares at the rate currently applicable to Boston Edison Common Stock. In addition,it is expected that such dividends of BEC Energy will be declared and paid on approximately the same schedule of dates as that now followed by Boston Edison with respect to Boston Edison Common Stock dividends. The most recent dividend declared by the Board of Directors of Boston Edison was $0.47 per share of Boston Edison Common Stock and was paid on February 3,1997.

Subject to the availability of earnings and the needs of its electric utility business, Boston Edison intends to make regular cash payments to BEC Energy in the form of dividends on Boston Edison Common Stock in amounts which, to the extent not otherwise provided by BEC Energy's other subsidiar-

ies,if any, would be sufficient for BEC Energy to pay cash dividends on BEC Energy Common Shares as referred to above, for operating expenses of BEC Energy and for such other purposes as the Board of Directors of BEC Energy may determine. Boston Edison does not contemplate any material loans or advances to BEC Energy in the near future and would not be free to make such loans or advances without prior approval of the Massachusetts DPU, Boston Edison is not party to any agreement or subject to any l' laws or regulations which materially restrict the payment of dividends by it to DEC Energy. However, under Boston Edison's principal bank credit agreement, common equity cannot be less than 30% of total capitalization.

Dividends on the Boston Edison Cumulative Preferred Stock will continue to be paid at the times and at the rates provided for in the various series of such stock, depending upon the carnings, financial condition and other factors affecting Boston Edison.

Stock Exchange Listing DEC Energy will apply to list BEC Energy Common Shares on the NYSE and the BoSE. It is l expected that such listings will become effective on the effective date of the Merger, subject to the rules of l such exchanges. At the time of the listing of BEC Energy Common Shares, Boston Edison Common Stock will be delisted from trading on these stock exchanges (all outstanding shares will be held by BEC Energy).

The Boston Edison Depositary Preferred Shares representing 1/4 of one share of Boston Edison's Cumulative Preferred Stock,8.25% Series and 7.75 Series, are currently listed on the NYSE, and it is 1 contemplated that they will continue to be so listed after the restructuring.

19 l --

Regulatory Approval of the Restructuring The proposed Merger of Boston Edison and Mergeco must be approved by the Massachusetts DPU before the restructuring can become effective. Under applicable state law, the application for approval by the Massachusetts DPU cannot be filed until after the holders of Boston Edison Common Stock have approved the Merger. Upon filing of the application, the Massachusetts DPU, after notice and a public hearing, must determine that the Merger and the terms thereof are consistent with the public interest.

BEC Energy also intends to apply to the SEC under the Holding Company Act for approval of the restructuring. See " Proposal No. 2: Plan of Restructuring-Regulatoy Matters." The proposed restructur-ing also must be approved by the FERC and the NRC before the Merger can be consummated. BEC Energy and Boston Edison intend to file applications for approval with those agencies in the near future.

Regulatoy Matters After the restructuring, Boston Edison and HEEC will continue to operate electric utility businesses and will remain subject to regulation by the Massachusetts DPU and, with respect to certain transactions, the FERC and, with respect to Boston Edison's ownership and license of the Pilgrim Nuclear Power Station, the NRC. BEC Energy, however, will not be subject to regulation by these regulatory agencies, except that BEC Energy will be required to file an annual statement of ownership of Boston Edison with the Massachusetts DPU, which may exam %c the books, accounts, contracts, records and memoranda of BEC Energy and may require it to furn.sh reports and information with respect to its relations and dealings with Boston Edison and HEEC. le addition, the reasonableness of any payment, charge, contract, purchase, sale, obligation or other arragement between Boston Edison or HEEC and BEC Encrgy or any subsidiary of BEC Energy may come into question in retail ratemaking and finance proceedings before the Massachusetts DPU. In that event, Boston Edison and HEEC will have the burden of establishing and proving such reasonableness. The Massachusetts DPU also has the power to terminate any such contract relating to services rendered to Boston Edison or HEEC if it appears that the amount of compensation called for in the contract is excessive, even if no bad faith is found.

, Boston Edison is currently an exempt public utility holding company under the Holding Company Act.

After the restructuring is completed, BEC Energy and Boston Edison each will be public utility holding companies under the Holding Company Act. Nevertheless, upon the filing of an appropriate exemption statement pursuant to Rule U-2 under Section 3(a)(1) of the Holding Company Act (and subject to the filing of annual exemption statements thereafter), BEC Energy, Boston Edison and each of their subsidiary companies as such will be entitled to an exemption from regulation as a " registered holding company" under the Holding Company Act. The basis of the exemption is that Boston Edison and HEEC, BEC Energy's only public utility subsidiaries, are organized in the same state as BEC Energy (i.e. Massachu-setts), and are predominantly intrastate in character and carry on their business substantially in their state of incorporation. The exemption will be available as long as the utility business of Boston Edison and HEEC, and of any other public utility subsidiary from which BEC Energy derives a material portion of its income, are organized in Massachusetts and remain predominantly intrastate in character. BETG and its subsidiaries and affiliates in which it holds an interest are not public utilitics, as defined by the Holding Company Act, and therefore do not affect the availability of the exemption.

The exemption from the provisions of the Holding Company Act may be revoked on a finding by the SEC that such exemption may be detrimental to the public interests or the interest of investors or consumers. The prior approval of the SEC under the Holding Company Act would be required if BEC energy or Boston Edison proposed the acquisition or creation, directly or indirectly, of additional utility subsidiaries. Moreover, there also may be limits on the extent to which BEC Energy and any non-utility subsidiaries can diversify without raising questions about BEC Energy's exempt status. Current SEC policies regarding the scope of permissible non-utility activities are subject to change. Neither BEC Energy nor Boston Edison has any present intention of becoming a registered holding company subject to regulation by the SEC under the Holding Company Act.

20

I In June 1995, the SEC Division of Investment Management issued a report recommending significant revisions to, or limited repeal of, the lloiding Company Act. BEC Energy and Boston Edison, however, i cannot predict whether Congress will take any such action. Pending such action, the SEC indicated that it would revise its rules and interpretations to modernize and simplify holding company regulation. At this time, however, BEC Energy and Boston Edison cannot predict the likelihood, timing or impact of such actions.

Following the restructuring, both BEC Energy and Boston Edison will be subject to the reporting requirements of the Exchange Act by virtue of having classes of securities registered thereunder.

BEC Energy's Declaration of Wust and Comparative Stockholders' Rights BEC Energy has been organized under Chapter 182 of the Massachusetts General Laws as an unincorporated voluntary association with transferable shares of beneficial interest, commonly referred to as a " Massachusetts business trust." BEC Energy was organized as a Massachusetts business trust, rather than a corporation, because of the potential Massachusetts income tax sa'/ings to the trust and the lower filing fees payable by it in cosmection with its authorized capital stock. While a publicly traded parent holding company formed as a Massachusetts business trust would be taxed as a corporation for federal tax purposes,it would not be treated as a corporation for Massachusetts tax purposes and therefore would not be subject to tax with respect to its income or net worth under the Massachusetts corporate excise, or subject to the utility franchisc tax on income. Although Massachusetts business trusts are generally subject to the Massachusetts personal income tax, the personal income tax does not apply at the entity level to a Massachusetts business trust that qualifies as a " holding company" under Massachusetts law (the Board of Directors currently intends to operate BEC Energy so that it will so qualify). Instead, dividends paid by such a trust would generally be subject to tax. This entity-level tax treatment contrasts with the Massachu setts tax treatment of a parent corporate holding company, which would be subject to a tax on 5% of dividends received from subsidiaries and on 100% of any other income (in each case after apportionment, which in the case of a holding company for Boston Edison, would likely be, at least initially, at or near 100% in Massachusetts). The rate of tax on income applicable to corporations is 9.5% Corporate holding companies are also subject to a "act worth" tax at the rate of $2.60 per $1,000, but net worth is computed, in general, after deducting investment in 80% or more owned subsidiary corporadom. Management believes that the extent of potential savings associated with organizing BEC Energy as a Massachusetts business trust could be significant since they depend, in large part, upon the amount and nature of any dividends received by BEC Energy from Boston Edison. As previously described, at least initially, dividends from Boston Edison will be BEC Energy's primary source of income for the payment of dividends to its shareholders. The lower filing fees arise from the fact that under Massachusetts law, the fee for filing articles of organization of a corporation is one tenth of one percent of the total amount of its authorized capital stock with par value, and such fee is subject to change by the Massachusetts Secretary of State. There are no fees payable by a business trust based upon its authorized capital stock.

The following summary should be read in the context of, and is qualified by reference to, BEC Energy's full Amended and Restated Declaration of Trust (the " Declaration of Trust"), a copy of which substantially in the form it will be in as of the effective date of the Merger is attached as Appendix B to this Proxy Statement / Prospectus and incorporated herein by reference.

The rights of holders of Boston Edison Common Stock are governed by Chapter 164 of the Massachusetts General Laws governing electric and gas utilities, and by Boston Edison's Restated Articles of Incorporation and Bylaws. If the Merger is consummated, the rights of the present holders of Boston Edison Common Stock thercafter will be determined by BEC Energy's Declaration of Trust and Bylaws.

Except as noted below, the rights of holders of BEC Energy Common Shares will be virtually the same as the present rights of the holders of Boston Edison Common Stock.

21

l Pursuant to certain decisions of the Massachusetts courts, shareholders who exercise too much control over the affairs of a Massachusetts business trust may be held personally liable as partners for the obligations of a trust to the extent not satisfied by the trust, with respect to tort claims, contract claims (where shareholder liability is not negated as described below). claims for taxes and certain statutory liabilities. Even if. however, DEC Energy were held to be a partnership, the possibility of its shareholders incurring financial loss is remote because (a) BEC Energv's Declaration of Trust contains an express disclaimer of shareholder liability for the obligations of BEC Energy, requires that notice of such disclaimer be given in cach agreement, obligation or instrument entered into or executed by BEC E and provides that no person has authority to enter into an agreement, obligation or instrument except in accordance with those requirements, (b) BEC Energy will seek adequate insurance against tort liability, (c) most of IlEC Energy's operations will be conducted by incorporated subsidiaries such that the activities of BEC Energy will be limited to the ownership of securities rather than the operation of physical assets and (d) BEC Energy's Declaration of Trust provides for indemnification out of the trust property fm any shareholder held personally liable for the obligations of BEC Energy.

BEC Energy's Declaration of Trust provides that the property and affairs of BEC Energy will be held and managed by its trustees who will have all of the powers and authority necessary and convenient to carry out HEC Energy's business. The trustees may appoint officers and agents to carry out UEC Energy's business. See "Pmposal No. 2: Plan of Restructuring-Trustees and Mam gement of BEC Energy." The powers and responsibilities of the trustees and officers of BEC Energy will be comparable to those of directors and officers of a corporation with no material differences. The trustees will be selected by a plurality of the vote of the holders of BEC Energy Common Shares properly cast at an annual meeting.

I BEC Energy's Declaration of Trust will contain the same " fair price" and " classified board" provisions that were adopted by Boston Edison's stockholders (see " Proposal No. 2: Plan of Restructuring-BEC Energy Common Shares" below) and the same indemnification and limitations on directors' liability provisions (applicabic to the trustees) that were adopted by Boston Edison's stockholders to enhance Boston Edison's ability to attract and retain qualified directors and officers.

Under Chapter 164, Boston Edison may be merged with another utility subject to Chapter 164 upon a two-thirds vote of cach class of stock outstanding and entitled to vote on the matter, and the approval of i the Massachusetts DPU. Subject to the " fair price" provisions in the Declaration of Trust, BEC Energy, l like a Massachusetts business corporation, may be merged with another trust or corporation, or terminated

)

and liquidated, upon a two-thirds vote of the shares outstanding and entitled to vote thereon (except that a i change of form into another trust or into a corporation may be done on approval of a majority of the common sharcholders).

Under Chapter 164. stockholders of an electric utility company have no appraisal rights. BEC Energy's 3cciaration of Trust provides that shareholders of BEC Energy who dissent from a merger or similar transaction (other than a transaction to change form into another trust or a corporation) will have substantially the same rights of appraisal, subject to the same procedures, as would a stockholder of a Massachusetts business corporation.

! Under Chapter 164, the Restated Articles of Organization of Boston Edison may be amended upon a I

majority vote of the common stockholders. except with respect to certain provisions requiring a two-thirds vote of Boston Edison's common stockholders. The BEC Energy Declaration of Trust may be amended by a written instrument signed by a majority of the trustees then in office if such amendment has been authorized by a majority vote of BEC Energy's common shareholders, provided that amendments which,in i

the judgment of the trustees, are of a fundamental character must be approved by a vote of the holders of a majority of the outstanding BEC Energy Common Shares. In addition, the " classified board" and " fair price" provisions can only be amended upon a vote of 80% of the outstanding DEC Energy Common Shares unless such amendment is authorized or recommended by 80% or more of the trustecs. Certain other provisions cannot be changed without a two-thirds vote as provided in the Declaration of Trust.

.v.

l

. .__ = . . . _ _ _ . - - . - .

Amendments for the purpose of changing the name of HEC Energy or of supplying any ambiguity or curing. correcting or supplementing any defective or inconsistent provision contained in the Declaration of Trust shall not require authorization by vote of the shareholders.

Under Massachusetts law, the authority to adopt, amend or repeal the bylaws of a Massachusetts corporation is in the stockholders; provided that if authorized by the Articles of Organization, the bylaws may provide that the directors may also make, amend or repeal the bylaws. Boston Edison's Bylaws provide such authority to the Board of Directors. HEC Energy's Declaration of Trust authorizes the trustees to adopt flylaws in order to fix the fiscal year; regulate the affairs of the trustees. including provisions for the nomination thereof; provide for such committecs as the trustees shall deem appropriate, including an executive committee which shall be vested with all of the powers and authoritics of the trustees when the trustees are not in session; provide for the appointment of a chairman of the trustecs, a president, one or more vice presidents, a treasurer, a clerk and such other officers as the trustees may deem appropriate, and the manner of their appointment and remeval, and their respective powers and duties; provide for the manner in which documents shall be executed, including share certificates; provide for the appointment of transfer agents or officers and registrars, and contain such further provisions relating to the ahme matters or otherwise, incidental or in addition to but not inconsistent with the provisions of the Declaration of Trust, as the trustees shall deem appropriate. The Bylaws may only be amended by the trustees.

Under Massachusetts law and Boston Edison's Bylaws, the Board of Directors can act without a meeting only by unanimous written consent. Under BEC Energy's Declaration of Trust, the trustees may act without a meeting by a consent signed by a majority of the trustecs.

As with a Massachusetts business corporation, DEC Energy's Declaration of Trust provides that no action may be brought by a shareholder on behalf of BEC Energy unless a prior demand regarding such matter has been made on the trustees and the shareholders.

DEC Energy's Declaration of Trust, like the Restated Articles of Incorporation of Boston Edison, contains certain provisions that may be viewed as having an anti-takeover effect, including provisions establishing classes of trustees and requiring a super-majority vote of the disinterested shareholders to approve certain business transactions with a shareholder owning more than 5% of the outstanding UEC Energy Common Shares. BEC Energy is also subject to Chapter 110P of the Massachusetts General Laws, which,in general, provides that for three years after an acquiror has purchased 5% or more of the stock of a company, the acquiror may not complete the acquisition through merger, sell or pledge the assets of the company, or engage in other self-dealing transactions. The BEC Energy Declaration of Trust will also contain a provision (substantially the same as provisions of Massachusetts law currently applicable to Boston Edison) allowing the trustees to consider various constituencies and community and societal considerations, as well as the long term and short-term interests of the company, in determining what he or she reasonably believes to be in the best interests of the company.

BEC Energy Common Shares BEC Energy will issue shares of beneficial interest, referred to in this Proxy Statement as "BEC Energy Common Shares." and may in the future issue other equity and debt securitics. The initial authorized capital stock of BEC Energy will be 100.000.000 common sharcs, par value 51.00 per share, and 10,000.000 preferred shares. par value $1.00 per share. The authorized capital shares may be issued from time to time by the trustees without the necessity of obtaining further consent of the shareholders or any approvals from the Massachusetts DPU. BEC Energy capital shares may be issued for money. services or property, or as a distribution to shareholders. and upon such terms as the trustees may in their absolute discretion determine. Upon consummation of the Merger, the outstanding BEC Energy Common Shares will be the same as the number of outstanding shares of Boston Edison Common Stock immediately prior to the Merger and no BEC Energy preferred shares will be outstanding.

23

BEC Energy preferred shares may be issued by the trustees in one or more clawes or series within a l

class and shall have such designations, preferences. voting rights, voting powers, full or limited, or no i

soting rights, participating, optional or other special rights, and such preferences, relative rights, qualifica.

tions, limitations or testrictions, all as may be determined by the trustees. Authorization of preferred shares in addition to the 10.000,000 shares initially authorized in the I)eclaration of Trust requires the vote of the holders of two-thirds of the shares outstanding and entitled to vote thereon. Under current provisions of the llolding Company Act, and the rules and regulations thereunder, issuance of BEC Energy preferred shares may be restricted.

l The holders of the BEC Energy Common Shares, subject to any prior rights or preferences of BEC Energy preferred shares outstanding at the time, will be entitled to such dividends thereon as the trustees in their discretion lawfully declare (see " Proposal No. 2: Plan of Restructuring-Dividend Policy" above) and will be vested with all voting rights. Each BEC Energy Common Share will be entitled to one vote. The BEC Energy Common Shares will not have cumulative volmg rights in the election of trustees. In the event of voluntary or involuntmy liquidation or dissolution, the holders of the BEC Energy Common 3 hares.

subject to any prior rights or preferences of BEC Energy preferred shares outstanding at the time, will share ratably in the assets of HEC Energy. BEC Energy will have no right to call the BEC Energy Common Shares for redemption. The holders of the BEC Energy Common Shares will have no preemptive ri@ts to subscribe to additional shares issued by BEC Energy.

BEC Energy has no agreement, understanding or plan for the issuance of any BEC Energy Common Shares, except in connection with the proposed Merger and except in connection with BEC Energy's Dividend Reinvestment and Common Shares Purchase Plan (and, if approved by the stockholders and when assumed by BEC Energy, the 1997 Stock Incentive Plan), or any BEC Energy preferred shares. HEC Energy may issue and sell BEC Energy Common Shares in connection with the acquisition of stock or assets of other companies, to finance expenditures, additions and improvements to the property of Boston Edison, BETG or any of its subsidiaries, which have not been financed with other permanent securities and for other corporate purposes, or to repay or refinance outstanding inebtedness. Dividend requirements and any redemption, sinking fund or conversion provisions pertaining > BEC Energy preferred shares. if authorized and issued, may have an adverse effect on the availability o' carnings for distribution to holders of the BEC Energy Common Shares and for use with respect to other corporate purposes. See also

" Proposal No. 2: Plan of Restructuring-Dividend Reinvestment and Cornman Stock Purchase Plan" below for information concerning BEC Energy's intention to issue additional BEC Energy Common Shares pursuant to such plan.

Trustees and Management of BEC Energy The Class Ill directors of 130sion Edison elected at its 1997 Annual Meetings of Stockholders, together with the continuing Class I and Class II directors elected at the 1995 and 1996 Annual Meetings of Stockholders. respectively will be the trustees of BEC Energy upon the completion of the restructuring plan. In approving the restructuring, stockholders will be considered to have ratified the election of such persons as trustees of BEC Energy. Subject to their continuing qualification for office, such persons will continue as both trustees of BEC Energy and directors of Boston Edison.

l i

24

l

! i

?

The of ficers of BEC Energy, each of whom presently holds a comparable ottice in Boston Edison, are as follows:

Name omcc 1

Thomas J. May . .. . Chairman of the Board, President and Chief I

Executive Officer Douglas S. Iloran . . . . . . Senior Vice President and General Counsel ]

James J. Judge . .. . . Senior Vice President and Treasurer l i Theodora S. Convisser .. . . . Clerk i Following the restructuring, the present members of Boston Edison's Board of Directors will continue i to serve as directors of Boston Edison, and the present officers of Boston Edison will, at least initially, continue to hold their present offices and enjoy substantially the same remuneration and employee benefits now afforded. In the future, BEC Energy may have trustees and officers who are not directors or officers of Boston Edison.

Initially, BEC Energy does not expect to have any employees of its own and does not expect to render services to Boston Edison or any other subsidiary, although it may do so in the future. For the immediate

, future, Boston Edison will be reimbursed by BEC Energy for the time expended by Boston Edison's

( officers and employees on the affairs of BEC Energy and its other subsidiaries and for the use of Boston l Edison's facilities by BEC Energy, and the offices of BEC Energy will be located at the principal office of Boston Edison.

No Appraisal Rights Under Massachusetts law governing the proposed Merger, neither a dissenting holder of Boston Edison Common Stock nor the holders of Boston Edison Cumulative Preferred Stock has a right to demand payment of the fair value of his or her shares if the Merger is consummated.

Dividend Reinvestment and Common Stock Purchase Plan

Following the effectiveness of the restructuring, BEC Energy will assume Boston Edison's existing I

Dividend Reinvestment and Common Stock Purchase Plan. Participants in such plan will continue to be l able to make initial purchases of BEC Energy Common Shares, reinvest their dividends on BEC Energy i Common Shares and Boston Edison Preferred Stock to purchase additional BEC Energy Common Shares and to make optional paymen'ts to acquire additional BEC Energy Common Shares.

Common Stock Plans 1 Boston Edison currently maintains two stock-related director /cmployee benefit plans, namely the 1991 l Director's Stock Plan and the Performance Share Plan. If approved by the stockholders at the Annual Meeting, the 1997 Stock Incentive Plan will replace the Performance Share Plan. See " Proposal No. 3:

l Adoption of the 1997 Stock Incentive Plan." In addition, Boston Edison also maintains three qualified retirement plans, the Negotiated Savings Plan for Production and Maintenance Employees, the Negotiated Savings Plan for Office Technical & Professional Employees and the Boston Edison Savings Plan, cach of

, which contains a company match and a company stock fund investment option. Currently, an independent l plan agent or trustee (with respect to the qualified plans) purchases any necessary shares in connection with the existing plans in the open market. Upon consummation of the restructuring, BEC Energy will adopt or assume the plans and thereafter BEC Energy Co.nmon Shares (in lieu of Boston Edison Common Stock) will be issued or purchased by the respect ve independent plan agents, or trustees, whenever stock is required to be issued or purchased in the open market in connection with these plans.

Stockholder approval of the restructuring also will constitute stockholder approval or ratification of the adoption or assumption of these plans providing for the future use of BEC Energy Common Shares in lieu of Boston Edison Common Stock thereunder.

25 1

i

i Price Range of Boston Edison Common Stock The reported range of the high and low sale prices of the Boston Edison Common Stock, as reported in the consolidated reporting system for issues listed on the New York Stock Exchange, was as follows:

linghin- ,

i 1995: First Quarter . .... . . ............... ...... .. ... .. . .... 25 % 23 % l Second Ouarter . . . . ............ ... . . ................. .. 27 23 %

Third Quarter . . . . . ..... . . ............ .............. ...... 27% 24 % ,

Fourth Quarter .. .. .. ... ............... . ........... 29 % 26%

1996: First Ouarter . . . . .... . . .... ... ... ......... ............ . 30% 26% - .)

j. Second Quarter .... ... . ... ...... . . . ...... ....... 27% 23 % l l Third Quarter . . . . . . .

. .. .. .................... ...... ... 25 % 21%  ;

Fourth Quarter . . .. .. ....... . . ...... .. .... ............ 27 21%  ;

1997: First Quarter through March 17th . . . .. . .... ................... .... 27 % 26% ,

l The reported last sale price of Lloston Edison Common Stock on the New York Stock Exchange on l

March 17.1997 was $26.50. ,

, Transfer Agent and Registrar l The First National Bank of Boston, the Transfer Agent and Registrar of the Boston Edison Common l Stock, will serve in the same capacitics for the BEC Energy Common Shares.

Financial Statements e

i No consolidated financial statements of BEC Energy and its subsidiary are presented herein since '

BEC Energy presently has no assets or liabilities other than the stock of Mergeco, and any pro forma -l consolidated financial statements of BEC Energy would reflect no change from the financial statements of .

Boston Edison prior to impl mentation of the restructuring plan.

Legal Opinion - ,

The validity of the DEC Enugy Common Shares to be issued upon consummation of the Merger is  ;

being passed upon by Ropes & Gray, One International Place, Boston, Massachusetts 02110-2624. Thomas G. Dignan, Jr., a partner of Ropes & Gray, is a director of Boston Edison.

Experts The consolidated balance sheets of Boston Edison as of December 31,1995 and December 31, 1994, and the consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31,1995, incorporated by reference in this Proxy Statement /

Prospectus, have been incorporated herein in reliance on the report of Coopers & Lybrand, L.LP., i independent accountants, given on the authority of that firm as experts in accounting and auditing.

l 26 l

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EXECUTIVE COMPENSATION lleport of the Executi e Personnel Committec Under the rules established by the SEC, Boston Edison is required to provide certain data and information in regard to the compensation and benefits provided to its executive officers, including Boston Edison's Chief Executive Officer and the four other most highly compensated executive officers (the

" Named Executive Officers").The disclosure requirements for the Named Executive Officers include the use of tables summarizing total compensation and a report explaining the rationale and considerations that led to fundamental executive compensation decisions affecting those individuals for the prior year. In fulfillment of this requirement, the Executive Personnel Committee, at the direction of the Board of Directors, has prepared the following report for inclusion in this Proxy Statement / Prospectus.

7he &ccutive Personnel Committee Boston Edison's executive compensation program is administered by the Executive Personnel Com-mittee, a committee of the Board of Directors composed of the four non-employee directors listed as signatories to this report. Except as discussed below, none of these non-employee directors has any interlocking or other relationship with Boston Edison that would require disclosure by the SEC. All decisions of the Executive Personnel Committee regarding the compensation of the Named Executive Officers are subject to the approval of the non-employee directors of Boston Edison, none of whom are cligible to participate in the incentive plans described below.

Compensation Philosophy The executive compensation philosophy of Boston Edison is to provide competitive levels of compen-sation that advance Boston Edison's annual and long term performance objectives, reward corporate performance, and assist Boston Edison in attracting, retaining and motivating highly qualified executives.

The framework for the Committee's executive compensation program is to establish base salaries which are competitive with all electric utilitics, and to incentivize excellent performance by providing executives with the opportunity to earn additional remuneration under the annual and long-term incentive plans. The incentive plan goals are designed to improve the effectiveness and enhance the efficiency of Boston Edison's operations and to create value for stockholders.

1 Components of Compensation Compensation paid to the Named Executive Officers, as reflected in the following tables, consists of three primary elements: base salary, amounts paid under Boston Edison's Executive Annual Incentive l Compensation Plan, and shares of Boston Edison's Common Stock awarded under Boston Edison's Performance Share Plan. Boston Edison compares its compensation levels against all other investor-owned l

electric utility companies. Boston Edison's strategy is to establish base salaries and potential total compensation (base salary, annual and long term incentives) at the 60th percentile when compared to all electric utilities.

i During 1996, the Committee thoroughly reviewed data collected by nationally recognized compensa-l tion experts as well as by Boston Edison's Human Resources Group to determine whether Boston Edison was meeting its compensation strategy. The review evaluated base salary and annual and long-term incentives for nearly all electric utility companies. The data demonstrated that Boston Edison was in l

conformance with its compensation strategy, except as it relates to the long-term plan, to the satisfaction of the Committee. Recommendations to modify the long-term plan were reviewed and approved by the Committee, and are discussed below in the section describing long-term compensation.

Executive officer compensation in 1996 was not impacted by Section 162(m) of the Internal Revenue Code because compensation levels were below the $1 million threshold established by the statute. The l

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Committee intends to consider the impact of Section 162(m) when establishing compensation levels future to the extent it may become applicable. Boston Edison does not expect Section 162(m) to r the loss of any deductions in 1997.

Annual Incentive Boston Edison's annual incentive payments, reported in the fourth column of the Summar sation Table below, are based on both corporate and business unit performance objectives which are derived from the corporate operating plan and which are approved by the Committee. Corpora performana objectives include a comparison of target to actual carnings per share from operations.

Business unit performance objectives include predetermined levels for operating and capital budg well as key operating goals. The annual incentive plan award for Mr. May is based solely on Boston Edison's achieving the carnings per share objective. In 1996, earnings per share were $2.61, and Boston Edison was able to significantly reduce its stranded asset exposure by over $20 million, which exceeded the plan targets. The annual incentive plan awards for Messrs. Ledgett, Boulette, Gustin and Horan were based 50% on earnings per share and 50% on business unit performance objectives to achieve certain business unit budget and operating plan targets. All four officers exceeded the specified business unit performance levels.

Long-Tenn Compensation The purpose of the Performance Share Plan is to enhance corporate focus on Boston Edison's business direction beyond the annual operating plan and to promote achievement of long-term objectiv which create value for the stockholder. Performance is measured by the relative total return to the stockholder, which is defined as total dividends paid plus stock appreciation throughout the three-year performance period based on a comparison of Boston Edison's Common Stock performance to that of the Goldman Sachs Electric Utility Database, a group of approximately 80 companies. To reach target award, Boston Edison must be within the top 40% of the industy as measured by the Goldman Sachs Electric I Utility Database; for the threshold award, Boston Edison must be in the top 50%; and for the maximum award, Boston Edison must be in the top 10%. Boston Edison achieved the 36th percentile of this group.

Threshold was not attained, and no share awards were made for 1996.

The Committee has determined that the Performance Share Plan as presently constituted does not accomplish the goals that were set for it. The Committee worked with its external compensation consultant Towers Perrin to devise a more effective vehicle which will take into account the long-term interests of Boston Edison by giving participants a strong incentive to maximize stockholder value through the use of equity-related compensation. This effort resulted in the 1997 Stock Incentive Plan which is presented to the stockholders for approval in this Proxy Statement. The Committee is continuing to consider with its consultant the most appropriate form of awards under the stock incentive plan, and has therefore not made any awards applicable to the current period at this time.

If the 1997 Stock Incentive Plan is approved by the stockholders at the Annual Meeting, all new long-term incentive awards will be made under that plan. At the time that the Committee grants awards under the 1997 Stock Incentive Plan, it will determine whether existing awards under the Performance Share Plan will terminate or continue.

Other Plans At various tirnes in the past, Boston Edison has adopted certain broad-based employee benefit plans in which officers are permitted to participate on the same terms as non-executive employees who meet applicable eligibility criteria. Such plans include retirement, life, and health insurance plans, as well as a 401 (k) savings plan which includes a company matching contribution equal to the first six percent of pay contributed by the employee up to a maximum deductible 401(k) contribution allowed by the Internal 28 I

I Revenue Code in addition. Boston Edison has a deferred compensation plan in which officers and senior j

managers may elect to participate. In 1946, the Committee reviewed and accepted a recommendation from management and Towers Perrin to replace the Key Executive Benefit Plan with a new Supplemental  !

Executive Retirement Plan. The Supplemental Executive Retirement Plan is better integrated with the pension plan. The Supplemental Executive Retirement plan pays eligible participants supplementary retirement income up to 609c' of final average cash compensation depending upon each participant's years ]

of service, reduced by 50% of the participant's social security benefit and further reduced by benefits the '

participant receives under Boston Edison's pension plan.

Mn May's 1996 Compensation l The Executive Personnel Committee makes decisions regarding the compensation of the Chief j Executive Officer using the same philosophy and criteria as set forth above. As with other officers, Boston ]

Edison compares compensation levels for the Chief Executive Officer to all other investor-owned electric i utility companies.

Each year Boston Edison approves the adjustment of salary ranges for the Chief Executive Officer and other corporate officers based on studies conducted by external executive compensation consultants and Boston Edison's lluman Resources Group. The 1996 studies found Boston Edison's executive compensation levels to be less than the approved 60th percentile position to market. Mr. May received a ,

12% increase to his base salary in 1996. Ilis salary will next be reviewed by the Committee in April 1997. l Mr. May's annual incentive award, shown in the fourth oc.h mn of the Summary Compensation Table below, was in conformance with the provisions of the Annual Incentive Plan as described above, and was j j based on Boston Edison's surpassing its operating plan targets. As discussed above, the threshold j performance measures of the Performance Share Plan were not achieved. .

Compensation Committee Interlocks and Insider Participation Charles K. Gifford, who is a member of Boston Edison's Executive Personnel Committee, is Chief Executive Officer of Bank of Boston Corporation and Chairman and Chief Executive Officer of The First National Bank of Boston. Thomas J. May, Boston Edison's Chairman, President and Chief Executive Officer, serves on the boards of directors of Bank of Boston Corporation and The First National Bank of Boston.

By the Executive Personnel Committee, William E Connell (Chairman)

Gary L. Countryman Charles K. Gifford Sherry 11. Penney Executive Compensation Tables The following information is given regarding annual and long-term compensation carned by the Chief Executive Officer and the four other most highly compensated executive officers of Boston Edison with respect to the years 1994,1995 and 1996.

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Summary Compensation Table long. Term Compensation Awards Payouts Other All Annual Compensallon Annual Restricted Other Compen- Stock Options / LTIP Compen.

Name and Principal Position Year Salary lionus sation(1) Award (s) SARs Payouts sation(2)

Thomas J. May . . . . . . . . . .1996 $463,625 $324,750 - - - -

$ 9,000 Chairman, President and Chief 1995 415,083 292,500 27,084 9,000 Executive Officer 1994 362,500 214,500 - - -

59,950 24,421 Ronald A. Ledgett . . . . . . . . . . 1996 193,667 119,300 - - - -

9,000 Senior Vice President 1995 181,133 75,000 - - -

11,210 9,000 1994 172,667 43,050 - - - 24,750 15,248 E. Thomas Bouletie .. ...... 1996 189,250 100,000 - - - - 9,000 Senior Vice President 1995 178,375 63,938 - - - 10,899 9,000 1994 166,073 40,968 - - - 10,959 9,542 L Carl Gustin . ..... . . 1996 182,507 67,262 - - - - 9,000 Senior Vice President 1995 176,839 64,988 - - - 11,353 9,000 1994 170,675 42,794 - - -

25,075 9.559 Douglas S. Horan . . . .. 1996 175,833 83,750 - - - - 9,000 Senior Vice President 1995 155,250 43,500 - - - 4,400 9,000 1994 137,150 31,290 - - - 6,300 8,229 (1) None of the named executive officers received amounts of other annual compensation in 1994,1995, or 1996, which would require disclosure pursuant to SEC rules.

(2) Amounts in this column for 1996 represent Boston Edison's matching contribution under its 401(k) plan.

Long-Term Incentive Plans-Awards in Last Fiscal Year The following table sets forth Performance Share awards potentially payable in 1999 based on performance during the three-year period from January 1,1996 through December 31,1998.

Number of Performance or Shares Units Other Period Estimated Future or Other tlntil Maturation ""

Name Rights or 1%)out Threshold (!) Target (1) Maximum (l)

Thomas J. May .. .. .. . 7,339 1996-1998 3,669 7,339 11,008 Ronald A. Ledgett . . . . ... 1,879 1996-1998 940 1,879 2,819 E. Thomas Boulette . . .. 1,871 1996-1998 936 1,871 2,807 L. Carl Gustin . . . .. 1.824 1996-1998 912 1,824 2,736 Douglas S. Horan . . . . . . . .. 1,729 1996-1998 864 1,729 2,593 (1) The first of these columns shows the number of shares to be awarded if target performance is achieved, and the last three columns if threshold, target and maximum performance are achieved. In addition, to these amounts, dividends attributable to each share are credited throughout the perform-ance period and deemed reinvested quarterly. The Performance Share Plan has a stockholder performance measure with the target performance level set at the 60th percentile of the Goldman l Sachs Database at the end of the performance period. At the end of the period, the achievement i

percentage is applied to the total number of shares-the amount as shown above plus shares added through dividend reinvestment-to determine the number of shares actually earned and distributed.

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1 See " Executive Compensation-Report of the Executive Personnel Committee-Long Term Compensation."

During 1997, Boston Edison entered into retention agreements with each of Mr. Ledgett and Mr. lloran that provide for the payment to such executives of $75,000 and $50,000, respectively, if such executive remains in the employ of Boston Edison on December 31,1998.

Pecsion Plan Table The following table shows the estimated annual retirement benefits payable to executive officers under the qualified pension plan and the Supplemental Executive Retirement Plan, assuming retirement at age 65. The Supplemental Executive Retirement Plan is a non-qualified pension plan providing a maximum benefit of 60'7c of compensation after attainment of 20 years of credited service and age 60. The Supplemental Executive Retirement Plan provides the incremental benefits in excess of the benefits paid under the qualified plan necessary to reach the benefit shown in the table. Each of the officers named in ,

the Summary Compensation 'Ihble participates in the Supplemental Executive Retirement Plan. The benefits presented are based on a straight life annuity and do not take into account a reduction in benefits of up to 50'7o of the participant's primary Social Security benefit.

PENSION PLAN TAllLE Yearn ur Credacd Senice Atcrage Annual Compensadon 10 15 20

$200,000 . . ..... .... ......... . $ 60,000 $ 90,000 $120,000

$300,000 . . . . . . .... . . . . 90,000 135,000 180,000

$400,000 .. . .. . . ......... . 120.000 180,000 240,000

$500.000 ... ... . .. . . . .. . 150,000 225,000 300,000

$600,000 . . . . . . . . . . . .. . . .. . . 180,000 270,000 360,000

$700,000 . . .... ............ . . ... . 210.000 315.000 420.000

$800,000 . ....... ..... ... .. ..... 240,000 360,000 480,000 For purposes of the retirement plans, Messrs. May, Ledgett, Boulette, Gustin and floran currently have 21,15,5,16 and 19 years of credited service, respectively.

Final average compensation for purposes of calculating the benefits under the Supplemental Execu-tive Retirement Plan is the highest average annual compensation of the participant during any consecutive 36 month period. Compensation taken into account in calculating the benefits described above includes salary and annual bonus, including any amounts deferred under the terms of the Deferred Compensation Plan.

Mr. May can elect, and Mr. Ledgett receives, an alternative supplemental retirement benefit equal to 33% of final base salary annually for 15 years, which at the current level would provide income in excess of the amounts shown in the tab!c above of approximately $9,000 and $31,000, respectively.

Change of Control Agreements Boston Edison has Change in Control Agreements (the "COC Agreements") with certain key employees, including those named in the summary compensation table, which provide severance benefits in the event of certain terminations of employment following a " Change in Control"(as defined below). If, following a Change in Control, the employce's employment were to be terminated other than for cause (as defined) or the employee were to terminate his or her employment for reasons specified in the COC Agreements, the employee would receive severance pay in an amount equal to two times (three times in ,

the case of Mr. May) the sum of his or her annual base salary (at the rate in effect immediately prior to the l 31 l

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L date of termination or immediately before the Change of Control whichever is higher) plus his or her actual bonus paid in respect of the tnost recently completed fiscal year or his or her target bonus for the fiscal year in which the termination occurs (whichever is higher). In addition, the COC Agreements provide for a pro rated bonus pa> ment for the year in which the termination occurs, the immediate vesting i of bonus awards, immediate payment of deferred compensation amounts upon such termination and payments equal to the benef!. the employee would have received under Boston Edisoni retirement plan F assuming the executive was vested and remained employed for an additional two (three) years. For two years (three years in the case of Mr. May) following any such termination of employment, the employee would be entitled to continue to participate in all welfare plans provided by Boston Edison. The COC Agreements further provide for a " gross-up" payment under which, if amounts paid under such agree-ments would be subject to a federal excise tax on " excess parachute payments," Boston Edison will pay the employee an additional amount of cash, so that, after payment of all such taxes by the employee, the employee will have received the amount he would have received in the absence of any such tax. A change of control under the agreement generally includes the following events: (i) a person or group becomes the beneficial owner of more than 30% of the voting power of Lloston Edison's securities; (ii) continuing directors cease to be a majority of the board, (iii) a consolidation, merger or other reorganization or salc <

or other disposition of all or substantially all of the assets of Boston Edison (other than certain defined transactions), or (iv) approval by the stockholders of a complete liquidation or dissolution of Boston Edison. The Merger establishing BEC Energy as the parent entity for Boston Edison will not constitute a ,

Change il Control for purposes of the COC Agreements.

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STOCK PERFORMANCE GRAPil The SEC requires that Boston Edison include in this Proxy Statement a line-graph presentation comparing cumulative five-year stockholder returns with the S&P 500 Stock index and either a nationally recognized industry standard or an index of peer companies selected by lloston Edison. The lloard of Directors has approved the use of the Edison Electric Industry 100 Index (eel 100 Index), a recognized industry index of approximately 100 electric utility companies. Pursuant to the SEC's regulations, the graph below depicts the investment cf $100 at the commencement of the measurement period, with dividends reinvested.

$250 Boston Edison

--+-- eel 100 lndex

- u - S&P 500 Index

$200 -v"

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$150 /

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$100 $ ' , , , ,

1992 1993 1994 1995 1996 Index: 1992 1993 1994 1995 1996 Boston Edison $119 $136 $117 $155 $152 eel 100 index 108 120 106 138 140 S&P 500 108 118 120 165 203 Annual Total Retum: 1992 1993 1994 1995 1996 Boston Edison 18.8% 14.5% (13.8%) 32.2 % (2.1%)

eel 100 index 7.6% 11.1 % (11.6%) 31.0 % 1.2% ,

S&P 500 7.6% 10.0% 1.3% 37.6% 23.0 % 1 33

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l PROPOSAL. NO. 3: ADOITION OF 1997 STOCK INCENTIVE PIAN On January 23,1997, the Board of Directors approved, and is submitting for stockholder approval, the Boston Edison Company 1997 Stock Incentive Plan (the " Stock Incentive Plan" or the " Plan"). The Board of Directors adopted the Plan, subject to stockholder approval, in order to attract and retain key j employees in a position to make contributions to the success of Boston Edison, to reward employees for i

such contributions, and to encourage employees to take into account the long-term interests of Boston  !

Edison through stock-based awards. If approved. the Stock Incentive Plan will replace the Performance I Sharc Plan. A copy of the Plan appears as Appendix C to this Proxy Statement / Prospectus.

General l

l The Plan permits a variety of stock and stock-based awards, including: the granting of stock options and stock appreciation rights; the award of restricted shares; the award of dividend equivalents: the granting of rights to receive cash or shares on a deferred basis or based on performance; the awarding of cash payments sufhcient to offset the ordinary income taxes of participants resulting from transactions under the Plan; the making of loans to participants in connection with awards; and the granting of other stock-based awards, all as more fully described below. By providing equity-related compensation, the Board believes that the participants will have a strong incentive to emphasize stockholder value.

The Plan is administered by the Executive Personnel Committee (excluding any member who would not be considered (1) an "outside director" for purposes of Section 162(m) of the Internal Revenue Code and the regulations thereunder or (ii) a non-employee director within the meaning of Rule 16b-3(b)(3) of the Exchange Act) (the " Committee"). The Committee has full authority, consistent with the Plan, to select who will receive awards, to determine the types of awards to be granted and the times of grant, to determine the number of shares to be covered by any award, to determine the terms and conditions of any award, to adopt, amend and rescind rules and regulations for the administration of the Plan, to interpret the Plan and to decide any questions and settle all controsersies and disputes which may arise in connection with the Plan.

Persons eligible to participate in the Plan are those key employees of Boston Edison and its subsidiaries who, in the opinion of the Committee, are in a position to make a contribution to the success of Boston Edison or its subsidiaries and whose number and identities will be determined in the future by the Committee.

The Plan limits the terms of awards to ten years and prohibits the granting of awards more than ten years after the effective date of the Plan. As of March 26,1997, no awards had been made under the Plan.

Subject to adjustment for stock-splits and similar events, there are 2.000.000 shares available for future grant under the Plan. Awards and shares which are forfeited. reacquired by Boston Edison, satisfied by a cash payment by Boston Edison or otherwise satisfied or terminated without the issuance of Boston Edison Common Stock are not counted. The Plan authorizes the Committee to issue awards in substitution for awards held by employees of companies and businesses acquired by Boston Edison on such terms and conditions as it deems appropriate.

The number of shares for which stock options and stock appreciation rights may be granted to any one parti-ipant in any calendar year is limited to 100.000 shares: and in no event may the total compensation awardul to any one participant in any one calendar year under ali restricted stock awards and all awards intended to qualify as " performance-based compensation" under Section 162(m) of the Internal Revenue Code ext. cd the equivalent of 25,000 shares.

Stock ( >ptions. The Plan permits the granting of both non-transferable (unless otherwise determined l by the Con mittee) incentive stock options under Section 422 of the Internal Revenue Code ("1503") and l stock opticas that do not so qualify ("NSOs"). The option exercise price of each option shall be determined t.y the Committee but,in the case of ISOs, shall not be less than 100G (1109 in the case of an 34 f

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ISO granted to a 10% stockholdern of the f air market value of the shares on the date of grant. At March 17,1997, the closing price of Boston Edison Common Stock as reported on the New York Stock l Exchange Composite Tape was $26.50.

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l The term of each option may not exceed ten years (five years m the case of an ISO granted to a 109 l stockholder) from the date the option was granted or such earlier date as may be specified by the Committee at the time the option is granted. Options may be made exercisabic in installments, and the  !

exercisability of options may be accelerated by the Committee, in the event of termination of employment  !

by reason of death or total and permanent disability, each option held by an employee will become fully acrcisable and will remain exercisable for two years in the case of death and one year in the case of daability (subject to the limitation relating to maximum exercise period), all except as otherwise deter-m ned by the Committee.

Except as otherwise determined by the Committee,in the event of termination of employment other than by reason of death or total and permanent disability, all options held by an employee that are not then exercisable shall terminate. Options that are exercisable on the date of termination shall continue to be exercisable for a period of three months, subject to the stated term of the option, unless the employee has admitted to, or been convicted of, any act of fraud, theft or dishonesty arising in the course of, or in connection with, his employment with Boston Edison and its subsidiaries, in which case the entire option shall terminate immediately, all except as otherwise determined by the Committee.

Stock Appreciation Rights. The Committee may also grant non-transferable (unless otherwise deter-mined by the Committec) stock appreciation rights ("SARs"), alone or in conjunction with options, entitling the holder upon exercise to receive an amount in any combination of cash or shares of Boston Edison Common Stock, not greater in value than the increase since the date of grant in the value of the shares covered by such right. SARs are subject to such terms and conditions as may be determined by the Committee. SARs may be granted separately from or in tandem with the grant of options. In addition, the Committee may determine,if so requested by an option holder, that Boston Edison will pay the optionec, in cancellation of an option not accompanied by a related SAR, any combination of cash, or shares of Boston Edison Common Stock, equal to the difference between the fair market value of the Boston Edison Common Stock to have been purchased upon exercise and the aggregate consideration to have been paid upon exercise. The provisions described above relating to the exercisability of NSOs upon termination of employment as a result of death, disability or otheraise also apply to SARs. ,

Restricted Stock. The Committee may also grant restricted stock awards subject to such conditions and restrictions, including vesting, as the Committee may determine at the time of grant. The Committee i may at any time waive such restrictions, including through accelerated vesting. Unless otherwise deter-mined by the Committee, shares of restricted stock are non-transferable, and if the employment of a participant who holds shares of restricted stock terminates for any reason (other than death or total and permanent disability) prior to the lapse or waiver of the restrictions, Boston Edison may require the forfeiture or repurchase of the shares in exchange for the amount, if any, which the participant paid for them. Except as otherwise determined by the Committee,if an employee's employment terminates because of death or total and permanent disability, all restrictions on restricted stock held by him or her shall lapse.

Prior to the lapse of restrictions on shares of restricted stock the participant will have all rights of a stockholder with respect to the shares, including voting and dividend rights, subject only to the conditions and restrictions generally applicable to restricted stock under the Plan or specifically set forth in the award agreement.

In determining the vesting schedule for each award of restricted stock, the Committee may impose whatever conditions to vesting as it determines to be appropriate. In order for an award of restricted stock to qualify as " performance-based compensation" under hection 162(m) of the Internal Revenue Code, the Committee must provide that vesting of the restricted stock awards is subject to one or more of the following performance goals: (1) carnings per share, (2) individual performance objectives, (3) net income, 35

i (4) pro forma net income, (5) return on designated awets, (6) return on revenues or (7) satisfaction of  !

company-wide or department based objectives. The Committee will pre-establish in writing one or more of the performance goals no later than ninety (90) days after the commencement of the period to which the l

performance relates (or any such other time as is required to satisfy the conditions of Section 162(m) of the Internal Revenue Code and the regulations thereunder).

Deferred Stock. The Committee may make deferred stock awards under the Plan. These are non-transferable (unless otherwise determined by the Committee) awards entitling the recipient to receive shares of Boston Edison Common Stock without any payment in one or more installments at a future date or dates, as determined by the Committee. Receipt of deferred stock may be conditioned on such matters as the Committee shall determine including continued employment or attainment of performance goals.

Except as otherwise determined by the Committee, all such rights terminate upon the termination of the participant's employment for any reason (including death). In order to qualify as " performance-based compensation" under Section 162(m) of the Internal Revenue Code, the same procedures for establishing and measuring performance goals described for restricted stock above must be used.

Perfonnance Units. The Committee may award non-transferable (unicss otherwise determined by the Committee) performance units entitling the recipient to receive shares of Boston Edison Common Stock or cash in such combinations as the Committee may determine upon the achievement of specified performance goals over a fixed or determinable period and such other conditions as the Committee may determine. Except as otherwise determined by the Committee, rights under a performance unit award shall terminate upon a participant's termination of employment fer any reason (including death).

Performance units may be awarded independently or in connection with stock options or other awards under the Plan. Unless otherwise determined by the Committee, exercise of performance unit awards issued in tandem with another award reduces the number of shares subject to the other award on such basis as is specified in the award agreement. In order to qualify as " performance-based compensation" under Se-in 162(m) of the Internal Revenue Code, the same procedures for establishing and measuring performance goals described for restricted stock above must be used.

Dividend Equivalent Awards. The Committee may award dividend equivalent awards entitling the participant to receive cash, shares of Boston Edison Common Stock, or other property equal in value to dividends paid with respect to a specified number of shares of Boston Edison Common Stock. Dividend equivalents may be awarded on a free-standing basis or in connection with another award, and may be paid currently or on a deferred basis. The Committee may provide at the date of grant or thereafter that the dividend equivalent award shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional shares of Boston Edison Common Stock, or other investment vehicles as the Committee may specify, provided that dividend equivalent awards (other than free-standing dividend equivalent awards) shall be subject to all conditions and restrictions of the underlying awards to which they relate. Except as otherwise determined by the Committee, all such rights terminate upon the termination of the participant's employment for any reason (including death). In order to qualify as " performance-based compensation" under Section 162(m) of the Internal Revenue Code, the same procedures for establishing and measuring performance goals described for restricted stock above must be used.

Other Stock-Based Awards. The Committee may grant other types of awards of, or based on, Boston Edison Common Stock. Such awards may include debt securities convertible into or exchangeable for shares of Boston Edison Common Stock upon such conditions including attainment of performance goals, as the Committee may determine. In order to qualify as " performance-based compensation" under Section <-

162(m) of the Internal Revenue Code, the same procedures for establishing and measuring performance goals described for restricted stock above must be used.

Supplemental Loans and Grants. The Committee may authorize loans in connection with awards granted or exercised under the Plan. Each loan shall be subject to such terms and conditions and shall bear 36 d

such rates of interest,if any, as the Committee shall determine. Ilowever, the amount of any loan may not exceed the total exercise or purchase price plus an amount equal to the cash payment which could have been paid to the borrower in respect to taxes as described in the next paragraph.

The Committee may at any time grant to a participant the right to receive a cash payment in connection with taxable events (including the lapse of restrictions) under grants or awards. The amount of such payment may not exceed the amount which would be required in order to pay in full the federal, state and local income tax due as a result of income recognized by the recipient in respect of such grant or award plus such cash payments based on the maximum marginal federal, state and local tax rates (or such lower rate as the Committee may determinc)in effect at the times such taxable income is recognized.

Change of Control Provisions. The Plan provides that in the event of a " Change of Control", all awards outstanding but not then exercisable will become immediately exercisable, and restrictions and conditions on all awards outstanding will automaticaSy lapse or be deemed waived. A " Change of Control" under the Plan generally includes the following eveats: (i) a person or group becomes the beneficial owner of more than 307c of the voting power of Boston Sdison's securitics; (ii) a change of control required to be reported under certain provisions of the Exchwge Act; (iii) a consolidation, merger or other reorganiza-tion (other than such a consolidation, muger or other reorganization that (a) would result in the voting power immediately before to continue to represent more than 507c of the voting power thereafter, or (b) in which no person or group would acquire more than 20% of the voting po'ver), or a sale of all or substantially all assets or a plan of liquidation; and (iv) continuing directors cease to be a majority of the board.

Adjustments for Stock Dividends, Mergers, etc. The Committee is required to make appropriate adjustments in connection with awards to reflect stock dividenos, stock splits and similar events. In the event of a merger, liquidation or similar event,in which Boston Edison is not the sutviving corporation, all awards will terminate, but prior to such event, all awards outstanding but not th;n exercisable will become immediately exercisable and all restrictions and conditions on all awards outstanding will lapse; provided that so long as no Change in Control is involved, the Committee may arrange for substitute awards from the successor corporation.

Effect, Discontinuance, Amendment and Termination. The Committee may at any time discontinue granting awards under the Plan. The Committee may at any time or times amend the Plan or any outs:anding award for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other p'irpose which may at any time be permitted by law, or may at any time terminate the Plan as to any further grants of awards, provided that no such amendment shall, without the approval of the stockholders, increase the maximum number of shares available under the Plan, change the group of employees eligible to receive awards, reduce the price at which ISOs may be granted, extend the time in which awards may be granted or change the amendment provisions of the Plan. However, no such action shall adversely affect any rights under outstanding awards without the holder's consent.

Federal Income Tax Consequences Tbc following discussion summarizes certain federal income tax consequences asmciated with stock l option awards under the Plan. The summary does not purport to cover federal employment tax or other

! federal tax consequences that may be associated with the Plan, nor does it cover state, local or non-U.S.

l taxes.

l Incentire Options. In general, no taxable income is realized by the optionee upon the grant or I

exercise of an ISO. However, the exercise of an ISO may result in alternative minimum tax liability for the optionce. With certain exceptions, a disposition of shares purchased under an ISO within two years from the date of grant or within one year after the date of exercise produces ordinary income to the optionee l

(and a deduction to Boston Edison) equal to the excess of the vaiue of the shares at the time of exercise

, over the option price. Any additional gain recognized in the disposition is treated as capital gain and any 37

Iow sustained will be capital loss (and no additional deduction will be allowed to Boston Edison for Federal income tax purposes).  ;

Non-Statutorr Options. No income is realized by an optionee at the time a NSO is granted. Generally, I (a) at exercise ordinay income is realized by the optionec in an amount equal to the difference between the option price and the fair market value of the shares on the date of exercise, and Lloston Edison receives I a tax deduction for the same amount (subject to satisfaction of applicable withholding requirements), and (b) upon a later sale or exchange, appreciation or depreciation after the date of exercise is treated as either short term or long-term capital pain or loss depending on how long the shares have been held.

Generally, an ISO that is exercised more than three months following termination of employment (other than termination by reason of death) is treated as a non statutory option. ISOs are also treated as non-statutory options to the extent they first become exercisable in any one calendar year as to shares of Boston Edison Common Stock having a value (determined at the time the options were granted) in excess ,

of $100,000. I Payments in Respect of a Change of Control. Under the so-called " golden parachute" provisions of the Internal Revenue Code, the vesting or accelerated exercisability of awards in connection with a change in control of Boston Edison may be required to be valued and taken into account in determining whether participants have received compensatory payments, contingent on the change in control, in excess of certain limits. If these limits are exceeded, a substantial portion of amounts payable to the participant, including income recognized by reason of the grant, vesting or exercise of awards under the Plan, may be subject to an additional 20% federal tax and may be non-deductible to Boston Edison.

Section 162(m). Section 162(m) of the Internal Revenue Code limits to $1 million the deduction a public corporation may claim in any year for compensation to any of certain key officers. There are a number of exceptions to this deduction limitation, including an exception for qualifying " performance-based compensation." It is intended that stock options granted under the Plan will be eligible for this performance-based exception.

Vote Required Only holders of record of Boston Edison Common Stock as of the Record Date will be entitled to receive notice of and vote at the Annual Meeting and any adjournments thereof with respect to approval of the Plan. Approval of the Plan requires the affirmative vote of a majority of the shares present and entitled to vote on the matter. See "Other Matters-Voting Procedures."

The persons named in the accompanying proxy intend to vote such proxy in favor of the Plan unless a

ontrary choice is indicated thereon.

Recommendation of the Board of Directors The Board of Directors has approved the 1997 Stock Incentive Plan and recommends that the stockholders vote FOR Proposal 3. Proxies solicited by the Board of Directors will be so voted unless stockholders specify otherwise.

OTilER MATTERS Voting Procedures Consistent with state law and under Boston Edison's Bylaws, a majority of the shares entitled to be cast on a particular matter, present in person or represented by proxy, constitutes a quorum as to such matter. Votes cast by proxy or in person at the Annual Meeting will be counted by persons appointed by Boston Edison to act as election inspectors for the meeting.

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Directors will be elected by a plurahty of the votes properly cast at the meeting. Proposal No. 2 requires the affirmative vote of two-thirds of the outstanding Hoston Edison Common Stock. Proposal No.

3 requires the affirmative vote of a majority of the shares present and entitled to vote on the matter. The election inspectors will count the total number of votes cast "for" approval of Proposals No. 2 and No. 3 for purposes of determining whether sufficient affirmative votes have been cast. The election inspectors will count shares represented by proxies that withhold authority to vote for a nominee for election as a director or that reflect abst.cntions and " broker non-votes"(i.e., shares represented at the meeting held by brokers or nominees as to which (i) instructions have not been received from the beneficial ownera or persons entitled to vote and (ii) the broker or nominee does not have the discretionary voting power on a particular matter; only as shares that are present and entitled to vote on the matter for purposes of determining the pr:sence cf a quorum. Neither abstentions nor broker non-vo:cs have any effect on the outcome of voting oc the elecuon of directors. For purposes of Proposal No. 2, abstentions and broker non-votes have the effect of votes cast against the proposal. For purposes of Proposal No. 3, abstentions are considered in determining the number of votes required to obtain a majority of the shares present and entitled to vote and will have the same effect as votes cast against the proposal.

Adjournment of Meeting if sufficient votes in favor of any of the proposals set forth in the Notice of Annual Meeting are not received by the time scheduled for the meeting, the persons named as proxies may propose one or more adjournments of the meeting to permit further solicitation of proxies with respect to any such proposals.

Any adjournment will require the affirmative vote of a majority of the votes cast on the question in person or by proxy at the session of the meeting to be adjourned. The persons named as proxies will vote in favor of such adjournment those proxies which they are entitled to vote in favor of such proposals. They will vote against any such adjournment those proxies required to be voted against any of such proposals. Boston Edison will pay the costs of any additional solicitation and of any adjourned session.

Independent Accountants Representatives of Coopers & Lybrand, LL.P., Boston Edison's independent accountants, will be present at the Annual Meeting and will have the opportunity to make a statement if they desire to do so.

The representatives will be available to respond to appropriate questions by Boston Edison's stockholders.

Other Business The management has no reason to believe that any other business will be presented at the Annual Meeting, but if any other business shall be presented, votes pursuant to the proxy will be cast thereon in accordance with the discretion of the persons named in the accompanying proxy.

Stockholder Proposals

! Any proposal to be presented at the annual meeting of stockholders to be held in May 1998 must be ,

received at Boston Edison's principal executive offices no later than December 3,1997. l l

Stockholder Nominations of Directors The Board of Dm s mrs will consider nominations of candidates for election as directors from i

stockholders which , submitted in accordance with the procedures set forth in Section 3.1 of Boston Edison's Bylaws, in general, these procedures require that stockholder nominations must be submitted to the Clerk of Boston Edison in writing not less than 45 days prior to the anniversary of the date of the immediately preceding annual meeting and must contain certain specified information concerning the person to be nominated and the stockholder submitting the nomination and the consent of the nominee to j i

serve as director if so elected. )

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The greater part of the stock of Boston Edison is widely distributed in small lots. it is important, therefore,in order to secure representation at the Annual Meeting of the number of shares necessary to take action, that all stockholders who cannot be present in person, however small their holdings, fill in, sign and return the enclosed proxy without delay to The First National llank of Ilosion, P.O. Box 9381, Boston, Massachusetts 02105. A stamped envelope is enclosed for this purpose.

STOCKilOLDERS ARE CORDIAllX INVITED TO ATTEND Tile ANNUAL MEETING. IF YOU PLAN TO ATTEND, PLEASE SO INDICATE ON TIIE ENCLOSED PROXY CARD.

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APPENI)lX A i AGitEEMENT ANI) PIAN OF MEltGElt i

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l AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (" Agreement") dated as of March 25,1997, by and among Boston Edison Company, a Massachusetts electric utility corporation (" Boston Edison"), Boston Edison Mergeco Electric Company, Inc., a Massachusetts utility corporation ("Mergeco"), and BEC Energy, a Massachusetts business trust ("Iloidco").

WITNESSETil:

WHEREAS, Boston Edison has an authorized capitalization consisting of (i) 100,000,000 shares of  !

common stock, par value $1.00 per share (" Boston Edison Common Stock"), of which 48,514,973 shares l are issued and outstanding and 1,429,424 shares have been reserved for issuance pursuant to Boston Edison's Dividend Reinvestment and Common Stock Purchase Plan; (ii) 2,890,000 shares of cumulative preferred stock, par value $100.00 per share (" Boston Edison Preferred Stock"),2,130,000 shares of which (consisting of shares of six separate series) are issued and outstanding; and (iii) 8.000,000 shares of preference stock, par value $1.00 per share (" Boston Edison Preference Stock"), of which no shares cre issued and outstanding; the number of shares of issued and outstanding Boston Edison Common Stock l being subject to increase to the extent that shares reserved for issuance are issued prior to the Effect;ve Time (as defined below) of the Merger: )

WIIEREAS, Mergeco has an authorized capitalization consisting of 200.000 shares of common stock, par value $ LOO per share ("Mergeco Common Stock"), of which 100 shares have been subscribed for by Holdco and, once the issuance thereof has been approved by the Massachusetts Department of Public  !

Utilities as required by law, will be issued to and owned beneficially and of record by lioldco; WHEREAS, Holdco has an authorized capitalization consisting of (i) 100,000,000 shares of beneficial interest, par value $1.00 per share ("Holdeo Common Shares", each a "Holdco Common Share"), of which .

100 shares are issued and outstanding and owned beneficially and of record by Boston Edison; and (ii) 10.000,000 preferred shares, par value $1.00 per share, of which no shares are issued and outstanding; and WHEREAS, the Boards of Directors of the respective parties hereto deem it advisable and in the best interests of Boston Edison and its stockholders to merge Mergeco with and into Boston Edison (the l

" Merger")in accordance with Section 96 of Chapter 164 of the Massachusetts General Laws and pursuant I to this Agreement and the Articles of Merger attached hereto as ANNEX 1 and incorporated herein (the ]

" Articles"), whereby the holders of shares of Boston Edison Common Stock will exchange their shares for Holdco Common Shares; NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties hereto agree that Mergeco shall be merged with into Boston

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Edison, which shall be the corporation surviving the Merger, and that the terms and conditions of the Merger, the mode of carrying it into effect, and the manner of converting and exchanging shares shall be as j follows: 1 ARTICLE I I THE MERGER i

(a) Subject to and in accordance with the provisions of this Agreement, the Articles shall be executed and acknowledged by each of Boston Edison and Mergeco and thereafter delivered to the Secretary of State of The Commonwealth of Massachusetts for filing, as provided in Section 102A of Chapter 164 of the Massachusetts General Laws. The Merger shall become effective at such time as the Articles are filed as required by law with the Secretary of State of The Commonwealth of Massachusetts or such date, not more than thirty days after such filing, as may be specified in the Articles (the " Effective Time"). At the Effective Time, the separate existence of Mergeco shall cease and Mergeco shall be merged with and into Boston Edison (Merpeco and Boston Edison being sometimes referred to collectively herein as the A-2 l

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" Constituent Corporations" and Boston Edison, the corporation designated in the Articles as the suniving corporation being sometimes referred to herein as the "Suniving Corporation"):

(b) Prior to and after the Effective Time, lloidco, Boston Edison and Mergeco, respectively, shall take all such actions as may be necessary or appropriate in order to effectuate the Merger. In this connection, lloldco shall issue the lioldco Common Shares which the holders of Boston Edison Common Stock are entitled to receive as provided in Article 11 hereof. In the event that at any time after the Effective Time any further action is necessary or desirable to ca'rry out the purposes of this Agreement and to vest the Surviving Corporation with full title to all properties, assets, rights,* approvals, immunities and franchises of either of the Constituent Corporations, the officers and directors of each of the Constituent Corporations as of the Effective Time shall take all such further action.

ARTICLE II TERMS OF CONVERSION AND EXCIIANGE OF SIIARES At the Effective Time:

(a) Each share of Boston Edison Common Stock issued and outstanding immediately prior to the Merger thereupon shall be changed and converted into one lioldco Common Share, which thereupon shall be issued, fully paid and nonassessable:

(b) The shares of Boston Edison Preferred Stock issued and outstanding immediately prior to the Merger shall not be converted or otherwise affected by the Merger, and each such share shall continue to be issued and outstanding and to be one fully paid and nonassessable share of the particular series of preferred stock of the Suniving Corporation; (c) The shares of Boston Edison Preference Stock issued and outstanding immediately prior to the Merger, if any, shall not be converted or otherwise affected by the Merger, and each such share shall continue'to be issued and outstanding and to be one fully paid and nonassessable share of the particular series of preference stock of the Surviving Corporation:

(d) Each share of Mergeco Common Stock issued and outstanding immediately prior to the Merger shall be converted into one share of common stock of the Suniving Corporation, which thereupon shall be issued, fully paid and nonassessable; and (e) Each Holdco Common Share issued and outstanding immediately prior to the Merger shall be canceled.

ARTICLE Ill ARTICLES OF ORGANIZATION AND BYLAWS From and after the Effective Time, and until thereafter amended as provided by law, the Restated Articles of Organization of Boston Edison as in effect immediately prior to the Merger shall be and continue to be the Restated Articles of Organization of the Surviving Corporation. The purposes of the Suniving Corporation, the total number of shares and par value of each class of stock which the Suniving Corporation is authorized to issue and a description of each class of stock authorized at the Effective Time, with the preferences, voting powers, qualificatior's, special or relative rights or privileges as to each class and any series thereof then established, are as s'.ated in such Restated Articles of Organization, which are attached hereto as Annex 11 and incorporated i crcin. From and after the Effective Time, the Bylaws of Boston Edison shall be and continue to be the Bylaws of the Surviving Corporation until amended in accordance with law.

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l I ARTICLE IV DIRECTORS AND OFFICERS I i

The persons who are directors and officers of Boston Edison immediately prior to the Merger shall '

continue as directors and officers, respectively, of the Surviving Corporation and shall continue to hold  ;

office as provided in the bylaws of the Surviving Corporation. If, at or following the Effective Time, a  !

vacancy shall exist in the Board of Directors or in the position of any officer of the Surviving Corporation, such vacancy may be filled in the manner provided in the Bylaws of the Surviving Corporation.

• l r ARTICLE V '

STOCK CERTIFICATES Following the Effective Time, cach holder of an outstanding certificate or certificates theretofore representing shares of Boston Edison Common Stock may, but shall not be required to, surrender the

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l same to lloideo for cancellation or transfer, and cach such holder or transferee will be entitled to receive i

certificates representing the same number of lloldco Common Shares as shares of Boston Edison  :

Common Stock previously represented by the surrendered stock certificates. Until so surrendered or '

presented for transfer, each outstanding certificate which, prior to the Effective Time, represented Boston Edison Common Stock shall be deemed and treated for all corporate purposes to represent the ownership of the same number of lioldco Common Shares as though such surrender or transfer and exchange had taken place, The stock transfer books for the Boston Edison Common Stock shall be deemed to be closed at the Effective Time and no transfer of outstanding shares of Boston Edison Common Stock outstanding l prior to the Effective Time shall be made thercafter on such books. t ARTICLE VI CONDITIONS OF Tile MERGER Consummation of the Merger is subject to the satisfaction of the following conditions:

(a) The Merger shall have received the approval of the holders of each class of common stock i

! outstanding and entitled to vote thereupon of each of the Constituent Corporations as required by Section j l 96 of Chapter 164 of the Massachusetts General Laws, i l

l (b) The issuance of Mergeco Common Stock and the Merger shall have been approved by the '

Massachusetts Department of Public Utilities as required by Chapter 164 of the Massachusetts General Laws and all other governmental agencies whose approval is necessary, appropriate or desirable.

(c) The Holdco Common Shares to be issued and to be reserved for issuance puisuant to the Merger shall have been approved for listing, upon official notice of issuance, by the New York Stock Exchange and the Boston Stock Exchange.

(d) Ropes & Gray shall have delivered an opinion, satisfactory to the Board of Directors of Boston Edison, with respect to the tax consequences of the Merger.

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! ARTICLE VII

! AMENDMENT AND TERMINATION The parties hereto by mutual consent of their respective Boards of Directors may amend, modify or supplement this Agreement in such manner as may be agreed upon by them in writing, at any time before l or after approval of this Agreement by the stockholders of Boston Edison: PROVIDED, HOWEVER, that no such amendment, modification or supplement shall,in the sole judgment of the Board of Directors of Boston Edison, materially and adversely affect the rights of the stockholders of Boston Edison.

This Agreement may be terminated and the Merger and other transactions herein provided for abandoned at any time, whether befote or after approval of this Agreement by the stockholders of Boston 4

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l, Edison, by action of the Board of Directors of Boston Edison if said Board of Directors determines for any reason that the consummation of the transactions provided for herein would for any reason be inadvisable ,

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or not in the best interests of Boston Edison or its stockholders.

ARTICLE VIII EFFECTIVE TIME OF TIIE MERGER Subject to the prior satisfaction of the conditions of the Merger set forth in Article VI hereof and the authority to terminate this Agreement as set forth in Article VII hereof, the Constituent Corporations and Holdco shall do all such acts and things as shall be necessary or desirable in order to make the Effective Time occur as soon thereafter as practicable.

ARTICLE IX ASSUMPTION OF BOSTON EDISON'S STOCK PLANS IIoldco shall take all required action to assume Boston Edison's obligations under the following plans:

(i) the Dividend Reinvestment and Common Stock Purchase Plan, (ii) the Director Stock Plan, (iii) the >

Performance Share Plan,(iv) the Negotiated Savings Plan for Production and Maintenance Employees,(v) the Negotiated Savings Plan for Office, Technical & Professional Employees and (vi) the Boston Edison ,

Savings Plan.

ARTICLE X MISCELLANEOUS This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument.

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IN WITNESS WiiEREOF, Boston Edison, Mergeco and lioldco, pursuant to approval and authori-zation duly given by resolutions adopted by their respective Boards of Directors, have each caused this Agreement and Plan of Merger to be executed as of the date first written above by its President or one of its Vice Presidents and Treasurer or Assistant Treasurer and its corporate or common seal to be affixed hereto and attested by its Clerk.

ATTEST: BOSTON EDISON COMPANY  !

/s/ TiiEODORA S. CONVISSER By: /s/ TilOMAS J. MAY Theodora S. Convisser Name: Thomas J. May Clerk

Title:

Chairman, President and Chief Executive Officer

[ BOSTON EDISON COMPANY SEAL) .9y: /s/ JAMES J. JUDGE Name: James J. Judge

Title:

Senior Vice President and Treasurer ATTEST: BOSTON EDISON MERGECO ELECTRIC COMPANY, INC.

/s/ TIIEODORA S. CONVISSER By: /s/ TilOMAS J. MAY Theodora S. Convisser Name: Thomas J. May Clerk

Title:

Chairman, President and Chief Executive Officer

[ BOSTON EDISON MERGECO ELECTRIC By: /s/ JAMES J. JUDGE COMPANY, INC. SEAL]

Name: James J. Judge

Title:

Senior Vice President and Treasurer ATTEST: BEC ENERGY

/s/ TilEODORA S. CONVISSER By: /s/ TilOMAS J. MAY Theodora S. Convisser Name: Thomas J. May Clerk

Title:

Chairman, President and Chief Executive Officer

[BEC ENERGY SEAL) By: /s/ JAMES J. JUDGE Name: James J. Judge

Title:

Senior Vice President and Treasurer l

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_ _ _. .. .. _ _ _ _ . . _ . . . _ . . . . . . . _ _. m _ . _ ___. . _ _ _ _ ,_ _ ___

l ANNEX 1 l to Agreement and Plan of Merger l

ARTICLES OF MERGER of BOSTON EDISON COMPANY (A Massachusetts Utility Corporation) I j and l IlOSTON EDISON MERGECO ELECTRIC COMPANY,INC. ,

l (A Massachusetts Utility Corporation) l and )

BEC ENERGY (A Massachusetts ilusiness Trust)

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! Pursuant to the provisions of Section 102A of Chapter 164 of the Massachusetts General Laws, the '

undersigned corporations adopt the following Articles of Merge- for the purpose of mergi.ng Boston i Edison Mergcco Electric Company, Inc. with and into Boston Edison Company, which shall be the l Surviving Corporation:

l 1. Attached hereto and incorporated herein by reference is the Agreement and Plan of Merger dated as of March 25,1997, of the undersigned corporations. The Surviving Corporation will furnish a copy of said agreement to any of its stockholders, or to any person who was a stockholder of a Constituent Corporation, upon written request and without charge. The Effective Time as defined therein is 5:00 P.M., l Boston time on ,1997. ,

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' 2. The undersigned president or vice president and clerk or assistant clerk of each undersigned corporation hereby state under the penaltics of perjury that the attached Agreement and Plan of Merger l has been duly executed on behalf of such corporation and has been approved by the stockholders of such corporation and by the Department of Public Utilities of The Commonwealth of Massachusetts in the manner required by Section 96 of Chapter 164 of the Massachusetts General Laws.

3. The post office address of the initial principal office of the Surviving Corporation is 800 Boylston Street, Boston, Massachusetts 02199

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i 4, The name, residence and post office address of each of the initial directors and the chairman, president, treasurer and clerk of the Surviving Corporation are as follows:

Name Title Residence Post Ofrwe Address Thomas J. May Chairman of the Board c/o 800 Boylston Street Chief Executive Officer . Boston, MA 02199 l and President William E Connell Director c/o 800 Boylston Street Boston, MA 02199 1 Gary L. Countryman Director c/o 800 Boytston Street l

Boston, MA 02199 Thomas G. Dignan, Jr. Director c/o 800 Boylston Street I Boston, MA 02199 Charles K. Gifford Director c/o 800 Boylston Street '

Boston, MA 02199 Nelson S. Gifford Director c/o 800 Boylston Street Boston, MA 02199 Matina S. Horner Director c/o 800 Boyi. ion Street Boston, MA 02199 Sherry H. Penney - Director c/o 800 Boylston Street

Boston, MA 02199 l lierbert Roth, Jr. Director c/o 800 Boylston Street  :

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Boston, MA 02199 i Stephen J. Sweeney Director c/o 800 Boylston Street Boston, MA 02199 James J. Judge Senior Vice President c/o 800.Boylston Street

! and Treasurer Boston, MA 02199 ,

Theodora S. Convisser Clerk c/o 800 Boylston Street .

l Boston. MA 02199 .

l 5. The fiscal year of the Surviving Corporation initially adopted shall end on the last day of the month i of December in each year, '

l 6. The date and time initially fixed in the Bylaws for the annual meeting of the stockholders of the -

l_ Surviving Corporation is 11:00 a.m. on the last Tuesday in April of each year. .

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IN WITNESS WilEREOF, Boston Edison Company, Boston Edison Merpeco Electric Company, Inc.

and DEC Energy, pursuant .to approval and authorization duly given by resolutions adopted by their respective Boards of Directors, have cach caused these Articles of Merger to be executed by its president or one of its vice presidents and its clerk or one of its assistant clerks.

Dated:

BOSTON EpisON COMPANY By:

Name: Thomas J. May

Title:

Chairman, President and Chief Executive Officer By:

Name: Theodora S. Convisser

Title:

Clerk

. BOSTON EDISON MERGEco ELECTRIC COMPANY, INC, By:

Name: Thomas J. May

Title:

Chairman, President and Chief Executive Officer By:

Name: Theodora S. Convisser

Title:

Clerk BEC ENERGY By:

Name: Thomas J. May

Title:

Chairman, President and Chief Executive Officer By:

Name: Theodora S. Convisser

Title:

Clerk l A-9 l

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APPENDIX 11 AMENDED AND RESTATED 1

DECLARATION OF TRUST OF BEC ENERGY Dated March 25,1997 i

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AMENDED AND RESTATED DECLARATION OF TRUST OF llEC ENERGY This AMENDED AND RESTATED DECLARATION OF TRUST made at Doston in the County of Suffolk, The Commonwealth of Massachusetts, this 25th day of March,1997 by Thomas J. May of

[ Address Omitted), James J. Judge of [ Address Omitted] and Theodora S. Convisser of [ Address Omitted),

hereby amends and restates in its entirety the Amended and Restated Declaration of Trust dated the 14th day of March,1997, as heretofore amended.

WilEREAS it is desired to create under and in accordance with the provisions of this instrument a voluntary business association with transferable shares for the acquisition of property and the conduct of business as hereinafter set forth; NOW, THEREFORE, this DECLARATION OF TRUST WITNESSETil that said Thomas J. May, James J. Judge and Theodora S. Convisser, for themselves, their heirs, exceutors, administrators, succes-sors and assigns, do hereby declare that they and their successors from time to time, as Trustees hereunder, will hold, manage and dispose of the trust estate, as hereinafter defined in trust in the manner and with and subject to the powers and provisions hereinafter contained concerning the same, for the benefit of the Shareholders (as hereinafter defined) according to the number and kind of shares held by them respectively.

NAME: PURPOSE

1. Name; Purpose. The Trustees as trustees hereunder, though not in their individual capacities, shall be designated BEC Energy and are hereinafter referred to as the " Company." So far as may be practicable, all things relating to the trust hereby created shall be done under such name. The purpose of

- the Company shall be to engage, either directly or through direct or indirect subsidiaries, joint ventures, partnerships, limited liability companies or other combinations or associations, in any manufacturing, mercantile, selling, management, service or other business, operation or activity related to energy genera-tion, transmission or distribution, utilization, conservation or transportation, construction, telecommunica-tions, or any other manufacturing. mercantile, selling, management, service or other business, operation or activity, whether or not related to the foregoing enumerated areas, that a corporation organized under the Business Corporation Law of The Commonwealth of Massachusetts could carry on.

DEFINITIONS

2. Definitions. Except where the context otherwise requires, the following terms when used herein shall mean the following:

(a) " Trustee" or " Trustees" means the person which is the trustee hereunder for the time being, if there is only one, or if more than one, the persons who are the trustees hereunder for the time being, whether, in each case, original, additional or successor; (b) " Trust estate" means the property at any time received by the Trustees or otherwise acquired and held on behalf of the Company as hereinafter provided:

(c) " Shareholder" or " Shareholders" means the person or persons, natural or corporate, at the time registered as the holder or holders of the shares of the Company and, except to the extent limited B-2

. _ . . . .=. - .-. . -

by any subscription or by any subscription certificate or part-paid shares accepted or issued, include

the person or persons, natural or corporate, at the time registered as the holder or holders of such subscription certificates and part-paid shares; and (d) ' Share" or " shares" means the transferable share or shares of beneficial interest provided for l in Article 29 and includes any subscription certificate or part paid share issued except to the extent limited in such subscription certificate or part paid share.

1 RIGIITS OF TIllRD l'ERSONS l 3. Limitations on Liability. The Trust estate shall be directly liable for the payment and satisfaction of all obligations and liabilities incurred in the carrying on of the business of the Company. No Trustee

, shall be held to any liability whatever for the payment of any sum of money, or thr damages or otherwise l under any contract, obligation or undertaking made, entered into or issued by the Company or by any Trustee, officer. agent or representative thereof, or in tort or otherwisc, and no such contract, obligation or undertaking shall be enforceable against the Trustees, the Shareholders, or the officers, agents or other representatives of the Company or any of them in their, his or her individual capacitics or capacity and all such contracts, obligations and undertakings shall be enforceable only agninst the Company; and every l person, firm, association, trust and corporation shall leak only to the Trast estate for the payment or satisfaction of any liability, damages, claim or demand. In every agreement .nd obligation entered into and in every writing by or on behalf of the Company, reference shall be made to this declaration of trust, and the substance of such parts of the prece' ding sentence of this Article 3 as are applicable shall be set forth; and neither the Trustees nor any officer, agent or representative of the Company shall have any power or

! authority to enter into any agreement or obligation on behalf of the Cornpany except in accordance with the provisions of this Article 3. Failure to comply with the provisions of this Article shall, however,in no event render any Trustee, Shareholder, officer, or agent personally liable to the Company or its Shareholders.

4. Nonassessability of Shareholders. No Trustee, officer, agent or representative of the Company

, shall be entitled to look to the Shareholders personally for indemnity against any liability incurred by them j in the execution of this trust or to call upon the Shareholders for the payment of any sum of money or any l assessment whatever, except when and to the extent that shares in the Company are by their express terms issued part-paid and assessable.

j 5. Reliance of Third Persons. The receipts of the Company for moneys or things paid or delivered to it shall be effective discharges to the person, firm, association, trust or corporation paying or delivering the I same and from allliability to see to the application thereof. No purchaser or person, firm, association, trust l l or corporation dealing with the Company or with the Trustees, officers, agents or representatives of the

Company shall be bound to ascertain or inquire whether any consent, resolution or other authorization of the Trustees or Shareholders, as is herein required or provided for, has been obtained or passed or as to the existence or occurrence of any event or purpose in or for which a sale, lease, mortgage, pledge or charge is herein authorized or directed, or otherwise as to the purpose or regularity of any of the acts of i

the Trustees or the officers, agents or representatives of the Company purporting to be done in pursuance of the trust or powers herein contained, or as to the regularity of the removal, resignation or appointment of any Trustcc or any officer, agent or representative; and a transfer of the Trust estate, or any part thereof, executed by the Trustees in whom the same shall be vested at the time of any such removal, resignation or appointment (including any retiring Trustec who shall be willing to act and shall act in executing such l transfer but not otherwise including any such retiring Trustec) for the purpose of vesting the same in a

) successor Trustee or providing evidence of such vesting independently of such removal, resignation or i

appointment, shall, as to the property comprised in such transfer, be conclusive evidence in favor of any such purchaser or other person, firm, association, trust or corporation dealing with the Company of the B-3 l

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validity of such transfer and of the matters therein recited relating to ,uch removal, resignation or appointment or the occasion thereof or the occasion of such transfer.

PLACE OF I!USINESS; TRUST ESTATE

6. Place oj !fusiness. The principal place of business of the Company shall be 800 Boylston Street, Boston, MA 02199, or at such other place in Massachusetts as the Trustees shall from time to time determine.

7, 7 hist E3tatc; Comcr.sm into Personal Estate. All property at any time and from time to time subject to this trust shall, subject to the provisions of Articles 8(c) and 8(g), be transferred to and vested in such of the Trustees as are residente of Massachusetts. Notwithstanding any other provisions hereof, all real estate at any time forming part of the Tr ust estate shall be held upon trust for sale and conversion into personal estate at such time or times and m such manner and upon such terms as the Trustee shall approve, but the Trustees shall have power, until the termination of this trust, to postpone such conversion so long as they in their uncontrolled discretion shall thirA fit, and for the purpose of determining the nature of the interest of the Shareholders therein, all such real utate shall at all times be considered as personal estate; and the real estate and personal property comprised in the Trust estate shall constitute a single fund. For the purpose of such sale and comersion of real estate the Trustees shall have full power to sell or exchange the same and to execute and deliver proper deeds and inetruments of conveyance thereof.

TlIE TRUSTEES

8. Powcrs of 7h<stecs. Subject to the provisions and conditicas contained herein, the Trustees shall have power from time to time,in addition to the specific powers and authorities herein expressly granted, to take any action which they deem to be necessary or convenien; to carry out the business of the Company, including without limitation of the generality of the foregoing, the powers hereinafter specified:

(a) Hold hn'estments. To purchase, subscribe for or ott erwise acquire stocks, shares, bonds or other securities, property or obligations of any corporation, wherever incorporated, or of any trust, association or other entity, or of any nation, state, municipality or other governmen-tal or public agency, division or body or certificates or other evidences of interest in any real or ,

personal property, and to be a member of any company, syndicate or joint undertaking, or the beneficiary of any trust, and all whether or not any such company be camestic or foreign, and whether or not the purposes of or character of business carried on or assets held by any such company, syndicate or joint undertaking, or comprised of any such real or personal property, be similar to the purposes of or business carried on or assets held by the Comp my, and whether or not any such securitics, membership or beneficial interest might be consdered speculative, hazardous, nonproductive or wasting or would ordinarily be considered a proper or prudent investment or activity for a trustee and, whether or not any contingent or other lability may arise or exist in respect thereof and irrespective of the proportion of the Trust estate imested in one or more of said securities, properties or companics, and to exercise all the rights and p-ivileges of an owner thereof and, without limiting the generality of the foregoing, to acquire, ny exchange, ,

purchase or otherwise, the shares and dividend and profit rights in, and the bond. and other l securities and obligations of, the Company; (b) Assume Obligations. To assume any obligations or liabilities of any corporation, ,

wherever incorporated, or of any trust, association or other entity, and to discharge or hquidate I such obligations or liabilities; (c) Borrom To borrow money for the purposes of the Company, and to issue, whether for i borrowed money or for other consideration, bonds or other securities or obligations therefor if l desired, which may mature at any time or times, and may be convertible or after the issuance l 1

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l thereof may be made con crtible, with or without additional consideration for such conversion i

right,into other securities of the Company or into other securitics, all for such periods and upon such terms as the Trustees may determine, and to secure the payment thereof if desired by l mortgage, pledge, assignment, transfer or conveyance of or charge on the whole or any part of the l Trust estate then owned or thereafter acquired, which bonds or other securities or obligations

' may be signed on behalf of the Company by the chairman, the president or a vice president and

by the treasurer or an assistant treasurer, or by facsimiles of such signatures if the bonds or other securities or obligations are authenticated or certified by a trustee or by a registrar other than a trustee, officer or employee of the Company, and may have affixed thereto the common seal of j ,

the Company or a facsimile thereof and may carry interest coupons authenticated by the facsimile l l signature of the treasurer; provided that no mortgage, pledge, assignment, transfer or conveyance l of or charge on the Trust estate as a whole or substantially as a whole shall be made without

! authorization or approval by vote, at a meeting duly called and held, of the holders of a majority of the shares outstanding and entitled to vote thereon; and provided further that even though any l officer who has signed or whose facsimile signature has been placed on any bond or other security or obligation shall have ceased to be such officer before such bond, security or obligation is issued, such bond, security or obligation may nonetheless be issued by the Company; (d) Lcnd and Aid. To advance or lend money to, and otherwise aid by endorsement, gumantee or otherwise, and with or without security, and to make capital contributions to, any corporation, trust, association or other entity, any of the stocks, shares, bonds or other securities or obligations of which shall have been acquired or subscribed for by or on behalf of the l Company or in which the Company has any business interest (including, without limitation of the l generality of the foregoing, the power to guarantee the performance of any undertaking or l obligation or the payment of dividends on stock), and to discharge and cancel without payment any indebtedness thus arising or to convert the same into stocks, shares, bonds, or other obligations of such corporation, trust association or other entity, or any other with or into which it l may be consolidated or merged, or to which its property may be transferred or leased, and in like l

manner to advance or lend money to and otherwise aid any person or company (whether or not a Shareholder), whenever the Trustees shall deem such action to be necessary or convenient in the l

business or conducive to the advantage of the Company; l

(c) Ercrcise Powers of Holder ofImestments. To exercise any and all powers and rights belonging to the holder of any stocks, shares, bonds, securities, property or obligations forming part of the Trust estate, whether by voting or by giving any consent, request or notice, or otherwise, either in person or by proxy or attorney, and to give proxies or powers of attorney therefor, with or without power of substitution, which proxies and powers of attorney may be for meetings or action generally or for any particular meeting, meetings or action, and may include the exercise of any discretionary powers; and, without limiting the generality of the foregoing, to vote in favor of or to consent to the creation of any mortgage, lien or other encumbrance upon all or part of the franchises and property, real and personal, then owned or thereafter acquired, of l any or all of the corporations, trusts, associations and other entities, any of the stocks, shares, l bonds, securities or obligations of which may at the time be subject to this trust, or to vote in favor of or to consent to the merger or consolidation of any such corporation, trust association or other entity with any other corporation, trust association or other entity, or the sale, lease, surrender or abandonment of all or part of the franchises and property, real and personal, of any i such corporation, trust association or other entity; (f) Sell. To sell at public auction or by private contract or otherwise use and deal in and with the whole or any part of the Trust estate, free and discharged of this trust, and to convert, j exchange or refund the whole or any part of the Trust estate for or into any shares, bonds or other securities or obligations, property or effects in which the Company might, under the provisions B-5 l

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hereof, imest any moneys: provided, however, that except as prmided in Article 8(o), Article 57 or Article 60, no sale or other disposition of the Trust estate as a whole or substantially as a w hole shall be made without auth.iri7ation or approval by vote, at a meeting duly called and held, of the holders of two-thirds of the shares outstanding and entitled to vote thereon, but this proviso shall not apply to any disposition pursuant to any mortgage, pledge, or charge; ,

(g) 7ransfer Securitics into Namc3 of Others. To cause any real or personal property, including without limitation of the generality of the foregoing, securities forming all or part of the Trust estate, to be transferred into the name of the Company or transferred into the name of or vested in the Trustecs, or to cause or allow any real or personal property to remain in the name of, or to be transferred into the name of, any other person, firm, association, or other entity, trust, corporation or other entity and in any such case in such manner as not to give notice that the same are affected by any trust; (h) Delegate Powers. To employ and act through and to delegate any or all of the powers and discretions of the Company to, and to permit any or all of such powers and discretions to be exercised by, any of the officers, agents or representatives of the Company or of the Trustecs, including without limitation the officers, employees, agents and representatives referred to in the last paragraph of this Article 8; (i) Collect Funds. 1h collect, sue for, receive and receipt for all sums of money coming due to the Company, to consent to the extension of the time for payment, or to the renewal, of any bonds or other securitics, property or obligations subject to this trust, and to prosecute, defend, compound, compromise, abandon or mijust, by arbitration or othenvise, any actions, suits, proceedings, disputes, claims, demands and things relating to the Trust estate, and to extend time, with or without security, for the payment or delivery of any debts or property and to execute and enter into releases, agreements and other instruments and to pay or satisfy any debts or claims upon any evidence that the Trustees shall think sufficient; (j) Deposit Funds. To deposit any moneys included in the Trust estate in any bank or trust company including any bank or trust company that may at the time be the Trustee, and to entrust to any such bank or trust company for safekeeping any of the stock or share certificates, bonds or other securities, property or obligations and any documents and papers comprised in or relating to the Trust estate; (k) Pay Tacs. To pay any and all taxes or liens of whatever nature or kind imposed upon or against the Company or the Trustee in connection with the Trust estate, or upon or against the Trust estate or any part thereof; (1) Establish Smplus Funds. Tb set apart, from time to time, as surplus funds, such sums as the Trustecs may deem proper out of any sources which according to generally accepted accounting principles may 12 considered surplus, which surplus funds shall be applicable to any purposes to which money forming part of the capital or income of the Trust estate may be applied, including the payment of dividends:

(m) Adopt Scal. To adopt and use a common scal; (n) Purchase Insurance. To take out and maintain insurance or establish self-insurance programs in such amounts and of such kinds and in such companies and through such brokers and agents as may be necessary, convenient or desirable, including insurance policies insuring the Trustees, officers, employees and agents of the Company against claims and liabilities of every nature arising by reason of holding, being or having held any such office or position, or by reason ,

of any action alleged to have been taken or omitted by any such person as a Trustee, officer, employee or agent, including any action taken or omitted that may be determined to constitute B-6

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l negligence, such liability; whether or not the Company would have the power to indemnify such person against (o) Transfer to New 7mst or Corporation. When authorized by a' majority vote of Share-holders at a meeting, to sell and convey as an entirety and going concern all the property and assets of the Company to a corporation or a new association or trust organized for the purpose of acquiring the same and organized with the same authorized classes of shares as the Company shall then have with the same or substantially the same preferences, voting powers, restrictions and qualifications thereof as attach to the shares of the Company, the consideration for such sale and conveyance to be the assumption by such new corporation, association or trust of all liabilities and obligations of the Company then outstanding and the issuance and delivery by such new corporation or association or trust to the Company, or upon its order, for distribution as hereinafter provided for, of such shares as will enable the Company to exchange its shares, share l

for share and class for class, for the shares of such new corporation or association or trust and l

thereupon such exchange shall be made, and this trust shall be terminated, and each Shareholder of the Company by becoming a Shareholder shall agree to receive and accept in such case the shares of such new corporation or association or trust in exchange on the basis aforesaid as a full and final distributive share of the proceeds in liquidation of such sale and conveyance, and further agrees that in such case his or her shares in the Company shall thereafter have no rights l and privileges whatsoever except the right and privilege of being exchanged for shares of such new corporation or association or trust on the basis aforesaid; I (p) Im'est Capital. To invest and re-invest the capital or other funds of this trust in real or personal property of any kind, or in any interest therein:

(q) Estabhsh Pension and Other Compensation Plans. *lo establish and carry out pension, profit-sharing, share bonus, share purchase, ., hare option, savings, thrift and other retirement, incentive, health, welfare and benefit plans, trusts and provisions for any or all of the Trustees, i

I officers, employees, agents and consultants of the Company or of any of its sub,sidiaries:

(r) To enter into or become partners or members in joint ventures, general or limited l partnerships, limited liability companies and any other combinations or associations; (s) To purchase, acquire, hold, utilize, lease, carry on, sell, exchange and dispose of any other business or property, rights, or privileges which rnay be deemed to be suitable, convenient or profitable for or in connection with any of the purposes of the Company:

(t) To grant rights or options good for any period of time, including an unlimited period of time (but not exceeding the duration of the Company) to purchase from the Company any securities of the Company which have been authorized but remain unissued or are held in the treasury, at such prices and on such terms and conditions as may be fixed from time to time by the Trustees; and to create and issue warrants or other instruments representing such rights or options in such form as the trustees may determine:

(u) Perform Other Necessarr Things. To do each and every thing necessary, suitable, desirable, convenient or proper for the accomplishment of any of the purposes or the attainment of any one or more of the objects hereinbefore enumerated or incidental to the powers herein named and, without limiting the generality of the foregoing. to deal with the Trust estate and manage and conduct the business of the trust hereunder as fully as if the Company were the absolute owner of the Trust estate and in so doing to execute all contracts, agreements, deeds, covenants and instruments, and do all such things as the Trustees may deem proper for the i

purposes of the Company, whether or not involving action of a kind or extent legal or customary for a trustee or for the management of trust funds.

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The powers and authority, whether discretionary or otherwise, conterred upon the Trustees by this Article 8 and elsewhere in this declaration of trust may be delegated to committees, officers, employees, agents and representatives of the Company, and shall not be deemed to be mandatory but shall, together

/ with my and all implied powers and discretions, be excuised by the Trustees from time to time to the extent deemed to be advantageous to the Company, and may be exercised either alone or in association with others and to the same extent and as fully as individuals might or could do as principals, agents, contractors or otherwise and either alone or in conjunction with or in partnership with otiers, and both within and without The Commonwealth of Massachusetts. The acts of any committee, officers and agents, within the scope of their respective authorities, shall be as agents and delegates of the Trustees, and shall be deemed to be the acts of the Trustees and not of the Shareholders. When authorved by the Trustees, mortgages, conveyances and other instruments of transfer of real or other property may be executed by any officer of the Company on behalf of the Trustees or such of them as are residents of Massachusetts.

TIIE TltUSTEES

9. Number and Ekction. The persons signing this Declaration of Trust shall be the original Trustees. At such time as the outstanding shares of the Company are not wholly owned by Boston Edison Company (the " Transition Date"). the following provisions shall apply. The number of Trustees shall be determined from time to time by the Trustees, but shall not be less than three nor more than sixteen, divided into classes and elected for terms as set forth below, shall be elected at the annual meeting of the Sharcholders by such Shareholders as have the right to vote at such election. The number of Trustees may be increased at any time or from time to time to any number not more than sixteen either by the Shareholders or by the Trustees by vote of a majority of the Trustees then in office.The number of Trustees may be decreased to any number not less than three at any time or from time to time either by the Shareholders or by the Trustees by a vote of a majority of the Trustees then in office, but only to eliminate vacancies existing by reason of the death, resignation or removal of one or more Trustees.

The Trustees shall be elected as follows. The Trustees shall be divided as nearly equally as possible into three classes,with each class to consist of approximately one-third of the number of Trustees.The first Trustees of the Company shall consist of the directors of Boston Edison Company divided into the same three classes. The term of office of the Trustees of the first class shall continue until the first annual meeting of the Shareholders following the Transition Date, the term of office of the Trustees of the second class shall continue until the second annual meeting of the Shareholders following the Transition Date, and the term of office of the Trustees of the third class shall continue until the third annual meeting of the Shareholders following the Transition Date, and,in each case until their respective successors are chosen and qualified (unless otherwise required by law) or until the Trustee sooner dies, resigns or is removed.

At cach annual meeting beginning with the first annual meeting of the Sharehoklers following the Transition Date, the Trustees el:cted to succeed those whose terms expire shall be of one class and shall be elected for a term which shall continue until the third succeeding annual meeting, and until a successor shall be elected (unless otherwise required by law) or until the Trustee sooner dies, resigns or is removed.

Any Trustec clected to fill a vacancy caused by death, resignation or removal shall be elected for a term which shall coincide with the term of the class of the vacant trusteeship. Any Trustcc elected to fill an ad "tional trusteeship resulting from an increase in the number of Trustees shall be of the class whose term continues and shall be elected to serve until the annual meeting of the Shareholders closest to three years from the date of the increase, and until a successor shall be elected and qualified (unless otherwise required by law) or until the Trustee sooner dies, resigns or is removed. The number of Trustees shall not be increased or decreased at a time when, or to the extent that, it would result in the Trustees not being divided as nearly equally as possible into three classes cach consisting of approximately one-third of the number of Trustees. The total number of Trustees need not be an exact multiple of three. A Trustec may l succeed himself or herself. Whenever the holders of any one or more classes or series of shares of the l Company other than common shares shall have the right, voting separately by class or series, to elect l

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l Trustees at an annual or special rnecting of stockholders, the election term of office, filling of vacancies

) and other features of such trusteeship shall be governed by the terms of such class or series of shares, and such Trustees shall not be divided into classes pursuant to this Article 9 unless expressly provided by such terms. References in this Article 9 to an annual meeting of Shareholders shall be deemed to include a l special meeting held in place of an annual meeting. This Articic 9 may be amended only by vote of the l holders of 80% of the shares issued and outstanding and entitled to vote generally in the election of Trustees; provided. however, that such 80'1 vote shall not be required for any alteration, amendment or l repeal that has been recommended by 80';; of the 'Itustees then in office.

10.

l Resignation; l'a cancies; Remorals. A Trustcc may resign by presenting his or her resignation in writing at a meeting of the Trustees or delivering the same at the principal office of the Company, addressed to the chairman, president or clerk of the Company, and its acceptance by the Trustees shall not be required unless so stated in the resignation. Any vacancy in the number of Trustees not required to be filled by the Shareholders may be filled by the Trustees by vote of a majority of the remaining Trustees ,

although less than a quorum. Any Trustees so chosen shall continue in office for the remainder of the full l term of the class of Trustees in which the new trusteeship was created or the vacancy occurred and until his i or her successor, if there he one, is chosen and qualified. The remaining 'liustees may act notwithstanding j any vacancy in their numbers. Except as otherwise provided in this declaration of trust, a Trustcc (including I persons elected by the Trustees to fill any vacancies) may be removed from office:(i) for cause by the vote

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of the holders of a majority of the shares issued and outstanding and entitled to vote generally in the election of Trustecs: (ii) without cause by the vote of 80% of the shares issued and outstanding and entitled to vote generally in the election of Trustees: or (iii) for cause by vote of a majority of the Trustees then in office. A Trusice may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him or her. Except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the Company, no Trustee resigning or removed shall have any right to any compensation as such Trustec for any period following his or her resignation or removal, or any right to damages on account of such removal, whether his or her compensation be by the month or by the year or otherwise, unless the body acting on the removal, shall in their or its discretion provide for compensation.

11. Itsting in New Trusices. Upon the resignation or removal of a Trustee hereunder and upon the election or appointment of a new Trustee hereunder, such instruments shall be executed, acknowledged and delivered as the remaining Trustees or the new Trustees shall deem necessary or convenient for confirming or providing evidence of the vesting of the Trust estate in the Trustees for the time being who j are residents of Massachusetts. Notwithstanding the failure to execute any conveyance, the Trust estate  ;

shall always (not restricting the same to the above enumerated cases) vest in the Trustees for the time being hereunder and the Trust estate shall always vest in such Trustees as are residents of Massachusetts.

12. Compensation. Each Trustec shall receive such reasonable compensation as the Trustees may  !

determine, and shall not be limited by any provision of law with regard to the compensation of trustees of an express trust.

13. Unissued Shares. In particular, and without limiting the generality of the foregoing, the Trustees may, subject to any requirement of law, at any time issue all or from time to time any part of the unissued  !

shares of the Company from time to time authorized and may determine, subject to any requirements of law, the consideration for which such shares is to be issued and the manner of allocating such considera-tion between capital and surplus. Unless the Trustees otherwise specify, the excess of the consideration for any share with nar value issued by it over such par value shall be paid in surplus. The Trustees may allocate to capital stock less than all of the consideration for any share without par value issued by it, in which case the balance of such consideration shall be paid-in surplus. All surplus shall be available for any corporate purpose, including the payment of dividends.

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14. />ctcrmination of Capital and Income. The Trustees shall have power to determine what constitutes capital or income, what constitutes the income of the Trust estate for any year or other period, in what manner any expenses or disbursements are to be allocated between capital and income, and the amount of the net earnings and of the earned surplus: and every such determination, whether express or implied in the acts or proceedings of the Trustees, shall be conclusive and binding upon all persons interested.

15. Dividends. The Trustees may from time to time in their discretion declare dividends out of the nel carnings of the Trust estate or out of the carned surplus or capital surplus, payable out of the Trust estate, m any date fixed by the Trustees, in cash or property, including without limitation bonds or other obligations of and the shares in the Company, and for that purpose may capitalize all or any part of the earned surplus; but no Shareholder shall have any right to any dividends except when and as the same are declared by the Trustees, and no Trustee or Shareholder, officer, agent or representative of the Company shall be liable therefor, and any Shareholder entitled thereto shall look only to the 11ust estate for the i

payment cf any such dividends.The Company shall pay and distribute the said dividends so declared to the Shareholders according to the number of shares held by them respectively.

16. Fiscal Wr: Accounts. The Trustees may determine the fiscal year for the Company, and the form in which the accounts of the Company shall be kept, and may from time to time change the fiscal year or form of accounts.

17. Action by Board; Guonnn. The action of the Trustees in respect of any matter shall be by vote passed by the Trustees at a meeting or by a written vote without a meeting (with or without notice to the other liustecs) signed by at least a majority of the Trustees. At any meeting of the Trustees, six trustees shall constitute a quorum for the transaction of business, except when the number of Trustees then in office shall be less than twelve, in which case a majority of the Trustees then in office shall constitute a ,

quorum. Any meeting may be adjourned from time to time by a majority of the votes cast on the question, and the meeting may be held as adjourned without further notice. Except as herein otherwise provided, when a quorum is present at any meeting a majority of the Trustees in attendance thereat shall decide any questions before such meeting. Nothing in this Artic!c 17 shall be construed as limiting the delegation of any power to a committee of the Trustecs.

18. By-Laws. The Trustees may by vote of a majority of the Trusiccs then in office, make and from time to time amend, add to or rescind by-laws for the Company (the "By-laws"). The By-laws may, subject to the provisions of this declaration of trust: (a) fix the fiscal year: (b) regulate the affairs of the Trustees, including provisions for the nomination thereof: (c) provide for such committees as the Trustees shall deem appropriate, including an executive committee which shall be vested with all of the powers and authorities of the Trustees in the intervals between meetings of the Trustees: (d) provide for the appointment of a chairman of the Trustees, a president, one or more vice presidents, a treasurer, a clerk ,

and such other officers as the Trustecs may deem appropriate, and the manner of their appointment and removal, and their respective powers and duties; (c) provide for the manner in which documents shall be executed, including share certificates: (f) provide for the appointment of transfer agents or officers and registrars, and (g) contain such further provisions relating to the above matters or otherwise, incidental or in addition to but not inconsistent with the provisions of this declaration of trust, as the Trustees shall deem appropriate.

19 Cernficate Evidencing I' orcs. A certificate signed by the chairman, the president, the treasurer, the clerk or any assistant or temporary clerk, or one or more of the Trustees, shall be conclusive evidence, in favor of every person, firm, association, trust and corporation acting in good faith in reliance thereon, as to the contents of any vote of the Trustecs, or any committee thereof, or of the Shareholders, and as to all matters in such certificate contained relating to the meeting,if any, at which any vote is therein certified to have been passed. including the regularity of the said meeting and the passage of any vote thercat, and as to all other matters and things stated in such certificate, and no person, firm, association, trust or B-10

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corporation shall be obligated to make any inquiry as to any of the said matters, or as to the elecuon or appointment of any person acting as a Trustee at such meeting, or as to the holding of any shares by any I l person, firm. association trust or corporation acting as a Shareholder at such meeting, or be affected by l

l actual or implied notice of any irregularity whatsoever therein. '

l INDEMNIFICATION AND LIMITATION OF LIAltitrlY l

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! 20. 7notccs and OfBccrs. To the extent legally permissible, each of the Company's 'Irustees and 1 officers, as defined in Article 24, shall be indemnified by the Trust estate against any loss, liability or l expense, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and i l counsel fees, imposed upon or reasonably incurred by such person in connection with the defense or i disposition of any action, suit or other proceeding, whether civil or criminal,in which such person may be involved or with which such person may be threatened, while in office or thereafter, by reason of such person's being or having been such a Trustee or officer, except with respect to any matter as to which such person shall have been adjudicated in such action, suit or proceeding not to have acted in good faith in the i reasonable belief that his or her action was in the best interests of the Company; provided, however, that as to any matter disposed of by a compromise payment by such Trustee or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the Company, after notice that it involves such indemnification,(i) by a disinterested majority of the Trustees then in office, or (ii) by a majority of the Disinterested Trustees then in office, provided that there has been 6btained an opinion in i writing of independent legal counsel to the effect that such Trustcc or officer appears to have acted in good l faith in the reasonable belief that his or her action was in the best interests of the Compariy, or (iii) by the vote, at a meeting duly called and held, of the holders of a majority of the shares outstanding and entitled to vote thereon, exclusive of any shares owned by any interested Trustee or officer.

2L Liahiiity. No Trustec, officer or agent of the Company shall be liable except for acts or failures to act which at the time would impose liability on him or her if this trust were a Massachusetts business l corporation and he or she were a director, officer or agent thereof respectively. In determining what he or she reasonably believes to be in the best interesh of the Company, a Trustee may consider the interests of the Company s employees. suppliers, creditors and customers, the economy of the state, region and nation, community and societal considerations, and the long-term and short-term interests of the Company, its subsidiaries and its Shareholders, including the possibility that these interests may best be served by the continued independence of the Company. Notwithstanding any provision of law or this Article 21 or any other provision in this declaration of trust contained, a Trustee shall not be liable to the Company or any Shareholder for monetag damages for breach of fiduciaq duty as a Trustec except with respect to any matter as to which such liability is imposed by applicable law and he or she shall have been adjudicated (i) to have breached his or her duty of loyalty to the Company or its Shareholders, (ii) to have acted not in good faith, or omitted to act in good faith, (iii) to have knowingly violated the law or intentionally engaged in misconduct, or (iv) to have derived any improper personal benefit from a transaction. No amendment to or repeal of this Article sha'l apply to or have any effect on the liability or alleged liability of any Trustee for or with respect to any acts or omissions of such Trustee occurring prior to such amendment or repeal.

22. Books and Reports. In discharging his or her duties a Trustcc or officer of the Company, when acting in good faith, shall be iully protected in relying upon the books of account of the Company or of another organization in which he or she serves as contemplated by Article 24, reports made to the Company or to such other organization by any of its officers or employees or by counsel, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees or similar governing body of such other organization, or upon other records of the Company or of such other organization.

23. Adrance of Espcmes. Expenses, including counsel fees, reasonably incurred by any Trustee or officer with respect to the defense or disposition of any action, suit or proceeding referred to in Article 20 l

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) may be advanced by the Company prior to the final disposition of such action, suit or proceeding, upon receipt'of an undertaking by or on behalf of the recipient to repay such amount unless it is ultimately ~ ,

determined that he or she is entitled to indemnification. <

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24. Right3 Not Exclusirc; Defimrions. The rights of indemnification provided in Article 20 shall not i 4

be exclusive of or affect any other rights to which any Trustee or officer may be entitled and such rights i shall inure to the benefit of his or her successors, heirs, executors, administrators and other legal  !

representatives. Such other rights shall include all powers, immunities and rights of reimbursement which

would be allowed under the laws of The Commonwealth of Massachusetts were the Company a business  ;

i corporation organized under such laws. As used in Articles 20,21,22 and 23 and this Article 24, the terms l

" Trustee" and " officer" include persons who serve at the request of the Company as directors, officers, or trustees of another organization in which the Company has any direct or indirect interest as a shareholder, t creditor or otherwise. An " interested Trustee or officer is one against whom in such capacity the proceeding in question or another proceeding on the same or similar grounds is then pending. Nothing contained in Articles 20,21,22 and 23 and this Article 24 shall affect any rights to indemnification to which j Company personnel other than Trustees and officers may be entitled by contract or otherwise under law.

No 'Rustee shall be obligated to give any bond or other security for the performance of any of his or her l duties.

25. . Sharcholders.. In case any Shareholder shall at any time for any reason be held to or be under i any personalliability solely by reason of his or her being or having been a Shareholder and not by reason of his or her acts or omissions as a Shareholder, then such Shareholder (or his or her heirs, executors, administrators, or other legal representatives) shall be entitled out of the Trust estate to be held harmless from, and indemnified against, all loss, liability or expense by reason of such liability. l INTERESTED TRUSTEES, SHAREIIOLDERS, AND OFFICERS; RATIFICATION BY SIIAREllOLDERS t 1

26. Stercholders Trustccs. Officers and Agents. No agreement, dealing, relationship or arrangement ,

of an) und witi; the Company, or with any company which may be controlled by the Company or in which the Company may have any interest, in which any Shareholder, Trustee, officer, agent or other representa-tive of the Company shall have a personal interest shall be void or voidable or otherwise affected by such l interest nor shall such Shareholder, Trustee, officer, agent or other representa:ive so interested be liable to ;

account in respect thereof, except such effect or liability, if any, as would have resulted under the same circumstances had the Company been a business corporation organized under the laws of The Common- I wealth of Massachusetts. No Trustee, officer, agent or other representative of the Company shall be precluded, by his or her office, from acquiring shares or stock in or bonds or other obligations of or from ,

holding any office or place of profit in the Company or any company in which the Company shall be interested as stockholder or otherwise. No Shareholder, by reason of his or her holding such shares, however great in amount, shall be precluded from holding any office or place of profit hereunder or under any company in which the Company or the Trustees shall be interested as stockholder or otherwise.

27. Authortation or Ratification by Shareholders. Regardless of whether the foregoing provisions have or have not been complied with, any agreement, dealing, relationship or arrangement entered into by or on behalf of the Company or by the Trustees, officers, agents or other representatives of the Company, or by or on behalf of any company in which the Company or the Trustees shall be interested'as stockholder, or otherwise, shall not be voided by reason of the interest therein of any Shareholder, Trustee, officer, agent or other representative nor shall any Shareholder, Trustee, officer, agent or other representative

' being so interested be liable to account to the Company or to the Trustees, officers or Shareholders, or otherwise, for any profit or benefit reahzed through any such agreement, dealing, relationship or arrange-ment by reason of such Shareholder, Trustec, officer, agent or other representative holding that position or of the fiduciary relation thereby established, if such agreement, dealing, relationship or arrangement shall B-12

, , , . - - - y

have been authorized or ratified by the Shareholders or by the stockholders of any such company, as the case may be, af ter notice of the fact of the interest therein (including a general statement of the nature and extent of such interest) of such Shareholder, Trustee, officer, agent or other representative, except that if such agreement, dealing, relationship or arrangement was with a Shareholder or Shareholders the authorization or ratification shall be by a majority vote of disinterested Shareholders at a' meeting.

SilARES OF llENEFICIAL INTEREST

28. Number; Nunassessable. The entire beneficial interest in the Trust estate and in all business conducted by the Company and all profits carned by it shall be, and during the continuance of this trust shall remain, in the owners from time to time of transferable shares of beneficial interest. The shares of beneficial interest shall consist of (i) 100,000,000 common shares all of the same class and each with a par value of one dollar ($1.00), and (ii) 10,000,000 preferred shares, each with a par value of one dollar ($1.00) and may be issued from time to time by the Trustees without the necessity of obtaining the consent of the Shareholders. Subject to the limitations prescribed by law and the provisions of this declaration of trust, the Trustees are authorized to issue the preferred shares from time to time in one or more series, each of such series to have such voting powers, full or limited, or no voting powers, participating, optional or other special rights, and such qualifications, limitations or restrictions thereof, as shall be determined by the Trustees in a resolution or resolutions providing for the issue of such preferred shares. Subject to the powers, preferences and rights of any preferred shares, including any series thereof, having any preference or priority over, or rights superior to, the common shares and except as otherwise provided by law, the holders of the common shares shall have and possess all powers and voting and other rights pertaining to the shares of this Company and each common share shall be entitled to one vote. All shares issued and to be issued shall be fully paid and nonassessable except to the extent otherwise specifically provided in the certificates representing such shares. In any issue of common shares, fractional shares may be issued if authorized by the Trustecs; and in lieu thereof the Trustees may issue transferable or nontransferable instruments representing or relating to fractional interes's (on such terms and in such form as the Trustees shall determine) and may appoint an exchange agent or exchange agents to assist Shareholders in buying or selling such fractional interests.

29. Shares Personal Prope fy; Tmst Only. Shares shall be personal property entitling the holders only to the rights and interest :n ine Trust estate set forth in these presents, and it is expressly declared and agreed by and between he Shareholders, Trustees and officers of the Company that a trust and not a partnership is deemed te be created by this instrument and that irrespective of whether any different status may be held to exist as far as others are concerned, nevertheless as between the said Shareholders, Trustees and officers the Shareholders shall be deemed to hold only the relationship of ccstuis que rmstent to the Trustees, with only such rights as are conferred upon them as such ccstuis que tmstent hereunder.

30. Rights of Shareholders: Limitation on Rights ofAction. No Shareholder shall have or acquire at ,

any time any interest in any specific property, real or personal, at any time forming part of the Trust estate, or any right to any division or partition thereof or any other rights with reference thereto, except to have said property dealt with as herein provided, to receive dividends therefrom, as herein provided, and to share in the distribution of the cash proceeds thereof, or distributions in kind, or both, upon the termination of the trust, as herein provided. No action may be brought by a Shareholder on behalf of the Company unless a prior demand regarding such matter has been made on the Trustees and the Sharehold.

ers of the Company, 31, sfdditional Shares. Additional esmmon shares may be authorized from time to time by a majority vote of the Shareholders at a meeting. Such additional common shares shall rank equally and be in all respects identical with the common i hares originally authorized z.nd may be issued from time to time by the Trustees without the necessity of oataining the consent of the Shareholders.

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, 32. Picferred Shares Additional preferred shares may be authorized from time to time by vote, at a l meeting duly called and held, of the holders of two-thirds of the shares outstanding and entitled to vote l thereon, and such additional shares may be issued in one or more classes and in one or more series within a class and shall have such voting powers, full or limited, or no voting powers, participating, optional or other special nights, and such qualifications, limitations or restrictions thereof, as shall be determined in

( the vote authorizing them or by the Trustees pur3uant to authority granted to it by such vote or as provided j in Article 29

33. All Other Changes in Sharcs. Any authorized shares, whether issued or unissued, may, by vote, at a meeting duly called and held, of the holders of a majority of the shares outstanding and entitled to l vote thereon, be changed by increasing or decreasing their par value, be reduced in number, be changed l into the same or a different number of shares of any class or classes with or without par value, or be classified or reclassified. In connection with any of the foregoing, the Trustees may increase, decrease or adjust the capital accounts of the Company.

34. Consideration for hsue. Unless otherwise prescribed by vote of the Shareholders, all shares may be issued for money, services or property (including other shares of the Company at the time outstanding),

or as a distribution to Shareholders, and upon such terms as to valuation of shares, services or property and otherwise, as the Trustees may in its absolute discretion determine.

35. No Preemptive or PreferentialIbghts of Subscription. No holder of shares of any class and no holder of other securities of the Company, convertible or otherwise, shall have any preemptive or preferential right of subscription to, or purchase of, any securitics of the Company.

36. Treasury Sharcs. Shares in the Company acquired by the Company may be canceled and the number of shares issued may thereby be reduced, or such shares may be held in the treasury and be '

disposed of by tbc Company, when authorized by the Trustees, as the trustees may from time to time determine; but such shares while so held in the treasury shall not be entitled to any voting rights or to any dividends and shall not be deemed outstanding in computing proportions or percentages of shares hereunder or for any other purpose hereof. Shares canceled pursuant to this Article 36 shall have the i status of authorized but unissued shares.

37. Transfer Books. A register or registers shall be kept under the direction of the Trustees, which shall contain the names and addresses of the Shareholders and the number and kind of shares held by them respectively and a record of all transfers thereof. No Shareholder shall be entitled to receive payment of any dividend declared, nor to have any notice given to him or her as herein provided, until he or she has given his or her address to the transfer agent, or such other officer or agent of the Company as shall keep l the said register, for entry thereon. I

38. Transfer Agent. The Company, when authorized by the Trustees, may employ in the City of l Boston or in any other cities the Trustees may designate a transfer agent or transfer agents and a registrar or registrars. The transfer agent or transfer agents shall keep the said registers and record therein the transfers of any of the said shares and countersign certificates of shares issued to the persons entitled to the same. The transfer agents and registrars shall perform the duties usually performed by transfer agents '

and registrars of certificates of stock in a corporation. except as modified by the Trustees. l 39 Sharc Ccmficates. No certificates certifying the ownership of shares need be issued unless the Trustees otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the issuance of share certificates, the form thereof, and similar matters.

40. Lost, Stolen or Destroyed Sharc Cenificates. In the event the Trustees authorize the issuance of share certificates, a new certificate may be issued to replace any certificate previously issued, on satisfac-tory evidence that the said certificate previously issued has been worn out, mutilated, lost or destroyed and on such terms, if any, as to indemnity and otherwise, as the Trustees shall deem proper.

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l l 41. 7ransfer ofSharcs. Every transfer of any certificated shares (otherwise than by operation of law) l shall be signed by the transferor or by his or her agent thereunto duly authorized in writing, and upon I

delivery thereof to the Company or a transfer agent of the Company, accompanied by the existing '

certificate for such shares and such evidence of the genuineness of such transfer, authorization and other matters as may reasonably be required, shall be recorded in the register, and a new certificate therefor shall be issued to the transferee, and in case of a transfer of only a part of the shares represented by any l certificate a new certificate for the residue thereof shall be issued to the transferor. A Shareholder of (

record shall be deemed to be the holder of the share or shares represented thereby for all purposes hereof, I l and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Company shall l l

be affected by any notice of a transfer until due presentment of the certificate for such share or shares for

)

registration of transfer. The Trustees may determine from time to time procedures for the transfer of uncertificated shares. ,

4

42. Transfers by Operation of Law. Any person becoming entitled to any shares in consequence of the death, bankruptcy or insolvency of any Shareholder, or otherwise by operation oflaw, shall be recorded in the register as the holder of the said shares, and receive a new certificate for the same, upon production of the proper evidence thereof and delivery of the existing certificate to the Company or a transfer agent of the Company. Until such production of evidence and delivery of the existing certificate, the Shareholder of record shall be deemed to be the holder of such shares for all purposes hereof, and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Company shall be affected by any notice of such death, bankruptcy, insolvency or other event. The Trustees may determine from time to time procedures for the transfer by operation of law of uncertificated shares.

43. Joint Owners. Any two or more persons in whose names any share is registered shall be treated as joint owners of the entire interest therein, and no entry shall be made in the register or in any certificate ,

that any person is entitled to any future, limited or contingent interest in any share. However, any person j registered as a holder of any share may, subject to the provisions hereinafter contained, be described in the l

register or in any certificate as a trustee or fiduciary of any kind, and appropriate words may be added to the description to identify such trust. l 4

44. No Duty to Examine into Tmsts, Pleages. Etc., to Which Shares are Subject. The Company shall not, nor shall the Trustees or the Shareholders or any officer of the Company or any transfer agent or other agents of the Company, or the Trustees, be bound to take notice or be affected by notice of any trust, whether express, implied or constructive, or of any charge, pledge or equity to which any of the said shares or the interest of any of the Shareholders in this trust may be subject, or to ascertain or inquire whether any sale or transfer of any such shares or interest by any such Shareholder or his or her personal representatives is authorized by such trust, charge, pledge or equity, or to recognize any person as having i any interest therein, except the persons registered as such Shareholders. The receipt of the person in whose name any share is registered, or, if such share is registered in the names of more than one person, the receipt of any one of such persons, or the receipt of the duly authorized agent of any such person, shall be a sufficient discharge for all dividends and other money and for all shares, bonds, obligations and other property payable, issuable or deliverable in respect of such share and from all liability to see to the application thereof.

MEETINGS OF SilAREllOLDERS

45. Annual Meeting. An annual meeting of the Shareholders shall be held on the last Tuesday of Aprilin every year, or on such other date as the Trustees or the chairman or the president may from time to time fix, at the principal office of the Company or at such other place in Massachusetts as may be designated by the Trustees, the chairman or the president, for the purpose of electing Trustees and for such other purposes as may be prescribed by law and hereby or as may be specified in the notice by the Trustees or by the chairman or by the president of the Company. If such annual meeting is omitted on the day l

l

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i B-15

herein provided for, a special meeting may be held in lieu thereol, and any business transacted or election held at such special meeting shall have the same effect as if transacted or held at such annual meeting.

46. Special Meetings. The Trustees chairman or president of the Company may, whenever any of them think fit, call or direct any officer of the Company to call a special meeting of the Shareholders to be held at the principal office of the Company or,in their discretion, at any other place in Massachusetts, and such special meeting shall be so called by the clerk, or in the case of the death, incapacity or refusal of the clerk, by another officer, upon written application of one or more Shareholders who hold at least forty percent in interest of the shares entitled to vote at such special meeting.

47. Presiding Of]icer. The chairman or, if there is no chairman or the chairman is absent, the i president shall preside at every meeting of the Shareholders, but if neither the chairman nor the president is present at the commencement of the meeting or, being present, shall not be willing to preside, the Shareholders present in person or by proxy shall choose the chairman of such meeting.

48. Businc33 to be Tran3 acted. At any annual or special meeting of Shareholders, no business shall be transacted other than such as is referred to in the notice of the meeting.

49. Notices. A written or printed notiec of each meeting of the Shareholders, whether annual or special, specifying the time, place and purposes thereof, shall be given as hereinafter provided by the clerk  ;

or any assNtant clerk or by an officer designated by the Trustees to each of the Shareholders entitled to vote thereat at least seven (7) days (including Sundays and holidays) before such meeting. Every notice to

> any Shareholder required or provided for helein may be given to him or her personally or by mailing it to him or her, postage prepaid, at his or her address specified in the records of the Company. Notice shall be deemed to have been given at the time when it is so mailed. In respect of any share held jointly by several persons, notice so given to any one of them shall be sufficient notice to all of them. Any notice so sent to the address of any Shareholder shall be deemed to have been duly sent in respect of any such share whether held by him or her solely or jointly with others, notwithstanding he or she he then deceased or be bankrupt or insolvent or legally incompetent, and whether the Trustees or any person sending such notice have knowledge or not of his or her death, bankruptcy or insolvency or legal incompetence, until some other person or pctsons shall be registered as holders. The certificate of the person or persons giving such notice shall be sufficient evidence thereof, and shall protect all persons acting in good faith in reliance on such certificate. Whenever notice of meeting is required to be given to a Shareholder under any provision of Massachusetts law applicable to the Company or of this declaration of trust, a written waiver thereof, executed before or after the meeting by such Shareholder or Shareholder's attorney thereunto authorized and filed with the records of the meeting shall be deemed equivalent to such notice. l i

50. Ibting: Quormn. At all meetings every Shareholder shall, subject to the provisions of Article 53,  !

have one ve for each share held by him or her and may vote at any meeting or any adjournment or adjournments therco! in person or by proxy in writing dated not more than six months before the meeting named therein, which proxies shall be filed with the clerk or other person responsible to record the proceedings of the meeting before being voted; and, except as otherwise provided herein, the holders of a majority of all the shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction of business. The placing of a shareholder's name on a proxy pursuant to telephonic or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instructions have been authorized by such shareholders shall constitute execution of such proxy by or on behalf of such shareholder. Shares owned directly or indirectly by the Company, if any, shall not bc  ;

deemed outstanding for this purpose, and the Company shall not, directly or indirectly, vote any share of its own shares. When any share is held jointly by several persons. any one of them may vote at any meeting in person or by proxy in respect of such share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such share. If the holder of any share is a minor or a ,

l person of unsound mind, or subject to guardianship or to the legal control of any other person as regards B-16

the charge or management of such share, he or she may vote by his or her guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. No ballot shall be required for any election unless requested by a Shareholder present or represented at the meeting and entitled to vote in the election.

51. Adjournment of Meeting. Any meeting (or portion thereof) may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting (or portion thereof) may be held as adjourned wi.hout further notice.

52. Requisite Ibte to Act. Except as otherwise herein provided, when a quorum is present at any meeting. a plurality of votes properly cast for election to any office shall elect to such office, and a majority of the shares represented at the meeting and entitled to vote upon any question properly brought before the meeting shall decide such question. Provisions hereunder for a . majority vote of Shareholders at a meeting mean a vote of the holders of a majority of those shares entitled to vote thereon which are represented in person or by proxy at such meeting.

53. Record Datefor Ibring. Dividends and Offerings. For the purpose of determining the Sharehold-ers who are entitled to vote or act at any meeting or any adjournment thereof or who are entitled to receive payment of any dividend or of any other distribution or offering, the trustees may from time to time fix .in advance a time, which shall be not more than sixty (60) days before the date of any meetmg of Shareholders or the date for the payment of any dividend or of any other distribution or the date of the offering, as the record date for determining the Shareholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or such offering, and in such case only Shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Company after the record date; or without fixing such record date the Trustees may for any of such purposes close the register or transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, (i) the record date for determining Shareholders having the right to notice of or to vote at a meeting of Shareholders shall be at the close of business on the date next preceding the day on which notice is given, and (ii) the record date for determining Shareholders for any other purpose shall be at the close of business on the day on which the Trustees acts with respect thereto.

DURATION AND TERMINATION OF TRUST; COMBINATION; AMENDMENTS

54. Duration of Tmst. Unless terminated as provided in Article 8(o) or Article 56, this trust shall continue without limitation of time.

55. Death of Shareholder or Trustcc Not to Tenninare Tmst. The death of a Trustee hereunder or of a Shareholder or the dissolution of a Shareholder hereunder during the continuance of this trust shall not operate to terminate this trust, nor shall it entitle the legal representatives of any such Trustee or Shareholder to an accounting or to take any action in the courts or otherwise.

56. Tenninationt Combination; Affiliation. Except as provided in Article 57 below, the Trustees may terminate this trust at any time, or may cause the Company to be merged, combined, consolidated or otherwise affiliated with another trust, association, company, corporation or other entity,if such termina-tion, merger, combination, consolidation, or affiliation has been authorized by vote, at a meeting duly called and held, of the holders of two-thirds of the shares outstanding and entitled to vote thereon or has been authorized pursuant to Article 8(o). Such termination, merger, combination. consolidation er affiliation shall become effective only upon presentation to the Trustees, as required by Article 59, of the counterpart of the certificate referred to in said Article 59, or at such later time as may be specified in the vote effecting such action. In respect of any such merger, combination, consolidation or affiliation (other than as provided in Article 8(o)), the agreement in respect thereof shall confer on the holders of all shares of the Company who dissent from such transaction within the time and in the manner provided in the Massachusetts statute applicable to business corporations, substantially those rights they would have if the B 17

t Company were at the time a Massachusetts business corporation. Such rights shall be the Shareholders' exclusive remedy in respect of such holders' dissent from any such actions.

57. Cenain Tramactions.

A. Higher lbte for Cenain Business Tansactions. In addition to any affirmative vote required by law or otherwise in this declaration of trust, and except as otherwise expressly provided in Section C of this Article 57:

(1) any merget or consolidation of the Company or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other company (whether or not itself an Interested Shareholder) which is or after such merger or consolidation would be an Affiliate (as hereinafter defined) or Associate (as hereinafter defined) of an Interested Shareholder; or (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder involving any assets or securities of the Company, any Subsidiary or any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder having an aggregate Fair Market Value (as hereinafter defined) in excess of 59h of the total consolidated book value of the total assets of the Company and its Subsidiaries as of the end of the Company's most recent fiscal year prior to the time the determination is made; or (3) the adoption of any plan or proposal for the termination, liquidation or dissolution of the Company proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of any l

Interested Shareholder; or (4) any reclassification of securitics (including any reverse sted Vit) or recapitalization of the Company or any merger or consolidation of the Company with any of a Subsidiaries or any other transaction (whether or not with or otherwise involving an Interested Shareb )lder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock (as hereinafter defined), or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Sharcholder or any Affiliate or Associate of any Interested Shareholder; or (5) any tender offer or exchange offer made by the Company for shares of Capital Stock which may have the effect of increasing an Interested Shareholder's percentage beneficial ownership (as hereinafter defined) so that following the completion of the tender offer or exchange offer the Imerested Shareholder's percentage beneficial ownership of the outstanding Capital Stock may exceed 11096 of the Interested Shareholder's percentage beneficial ownership immediately prior to the commencement of such tender offer or exchange offer; or (6) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (1) to (5);

shall require the affirmative vote of the holders of Voting Shares (as hereinafter defined) representing shares equal to the sum of (i) a majority of the then outstanding Voting Shares, excluding Voting Shares of which such Interested Shareholder is the beneficial owner, plus (ii) the number of Voting Shares of which such Interested Shareholder is the beneficial owner,

! voting together as a single class. Such affirmative vote shall be required etwithstanding the fact I that no vote may be required, or that a lesser percentage may be spccified, by law or any agreement with any national securities exchange or otherwise.

B. Definition of " Business Transaction" For the purposes of this Article 57 the term

" Business Transaction" shall mean any transaction that is referred to in any one or more of clauses (1) through (6) of Section A of this Article 57.

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C. lihen Highcr lhte is Not Required. The provisions of Section A of this Article 57 shall not be applicable to any direct or indirect purchase or other acquisition by the Company or any Subsidiary of any shares of Capital Stock from an Interested Shareholder. 'lhe provisions of Section A of this Article 57 shall also not be applicable to any particular Business Transaction involving an Interested Shareholder, and such Business Transaction shall require only such affirmative vote, if any, as is required by law or by any other provision of this declaration of trust if the Business Transaction shall have been approved by a majority of the Disinterested Trustees (whether such approvalis made prior to or subsequent to the acquisition of beneficial ownership of the Voting Shares that caused the Interested Shareholder to become an Interested Shareholder).

D. Certain Definitions. For purposes of this Article 57:

(1) The term " Capital Stock" shall mean all the shares of beneficial interest of the Company authorized to be issued from time to time under Article 28 of this declaration of trust. t (2) The term " person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock.

(3) The term " Interested Shareholder" shall mean any person (other than the Company or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the Company or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who or which (a)is the beneficial owner of Voting Shares representing 59b or more of the votes entitled to be cast by the holders of all then outstanding Voting Shares; or (t,)is an Affiliate of the Company and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Shares representing 596 or more of the votes entitled to be cast by the holders of all the outstanding Voting Shares.

(4) A person shall be a " beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrange-ment or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding. voting or disposing of any shares of Capital Stock. For tne purposes of determining whether a person is an Interested Shareholder pursuant to paragraph 3 above, the l

' number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of this paragraph 4, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwisc.

(5) An " Affiliate" of a specified person is a person that directly, or indirectly through one or I more intermediaries, controls, or is controlled by, or is under common control with, the person j specified.

(6) The term " Associate" used to indicate a relationship with any person means (a) any company (other than the Company or any Subsidiary) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 109h or more of any class of equity securities, (b) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (c) any relative or spouse of such person, or any B-19 m m

y _ ._ _ _ _ . _ _ - - _ _ _ _ _ _ m . _ _

relative of such spouse, who has the same home as such person or who is a Trustee or officer of the Company or any of its parents or subsidiaries.

(7) The term " Subsidiary" means any company of which a majority of any class of equity security is beneficially owned by the Company, PROVIDED, liOWEVER, that for the purposes of the definition of Interested Shareholder set forth in paragraph 3 above and the definition of Associate set forth in paragraph 6 above, the term " Subsidiary" shall mean only a company of which a majority of cach class of equity security is beneficially owned by the Company.

(8) The term " Disinterested Trustee" means any Trustee who is not an Affiliate or Associate or representative of the Interested Shareholder and was a ' trustee prior to the time that the Interested Shareholder became an Interested Shareholder, and any Trustee who is a successor of a Disinterested Trustee, is not an Affiliate or Associate or representative of the Interested Shareholder and is recommended or elected to succeed the Disinterested Trustec by a majority of the Disinterested Trustees.

(9) The term " Fair Market Value" means (a)in the case of cash, the amount of such cash,(b)in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite'Iape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or,if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or,if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period immediately preceding the date in question on the National Association of Securitics Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotation is available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Trustees in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Disinterested Trustecs.

(10)The term " Voting Shares" means all Capital Stock which by its terms may be voted generally in the election of Trustees of the Company.

E. Powers of the Disinterested Trusiccs. A majority of the Disinterested Trustees shall have the power and duty to determine for purposes of this Article 57, on the basis of information known to them after reasonable inquiry, (1) whether a person is an Interested Shareholder, (2) the number of shares of Capital Stock or other securities beneficially owned by any person (3) whether a person is an Affiliate or Associate of another, and (4) whether the assets that are the subject of any Business Transaction have, or the consideration to be received for the issuance or transfer of securitics by the Company or any Subsidiary in any Business Transaction has, an aggregate Fair Market Value in excess of the amount set forth in clause (2) of Section A of this Article 57. Any such determination made in good faith shall be binding and conclusive for all the purposes of this Article 57.

F. No Effect on Fiducia y Obligations ofInterested Sharcholders. Nothing contained in this Article 57 shall be construed to relieve any Interested Shareholder from any fiducian obligation imposed by law.

G. Ahcration, Amendment, Repeal. Notwithstanding any other provisions of this declara-tion of trust (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law or this declaration of trust), the affirmative vote of the holders of 80% of the then outstanding Voting Shares shall be required to alter, amend or repeal this Article 57; PROVIDED, HOWFVER, that this Section G shall not apply to, and such 80% vote shall not bc l I

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. m.. _ _ _ _ _ . _ . _ _ _ _ . . _ _ _ _ - . _ . _ __

l required for. any alteration, amendment or repeal recommended by a majority of the Disinter-ested Trustees.

l 58. Amendments. The declaration of trust may be altered, amended, added to or rescinded by an instrument in writing signed by a majority of the Trustees, if the same has been authorized by majority vote

. l of the Shareholders at a meeting, and such other vote, if any, as may be required by the rights or preferences relating to any class or series of shares; provided that if such alteration, amendment, addition l or rescission shall in the judgment of the Trustees be of a fundamental character it shall require authorization by vote, at such a meeting, of the holders of a majority of the shares outstanding and entitled to vote thereon; and provided further that any alteration, amendment, addition or rescission of any provision requiring a vote of the holders of a specified percentage of the shaas shall be on!/ by vote of the

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3 holders of such percentage; and provided further that the provisions of Articles 3 and 4 exempting from

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j l personal liability the Shareholders. Trustees, officers, agents and other representatives of the Company i

may be amended only by unanimous vote of the holders of all shares entitled to vote at the time such vote I is taken and such amendment shall take effect only prospectively. Such alteration, amendment, addition or l rescission shall become effective at such time as may be specified in the vote effecting such action.

l Notwithstanding anything preceding in this Article to the contrary but subject to the provisions of l Article 57, the vote of the holders of 80% of the shares issued and outstanding and entitled to vote generally in the cicetion of Trustees shall be required for any alteration amendment or repeal of Articles 9 l and 10; provided, however, that such 80% vote shall not be required for any alteration, amendment or

( repeal adopted or recommended by 80% of the Trustees then in office. Amendments for the purpose of l

' changing the name of the Company or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision contained in this declaration of trust shall not require authorization by vote of the Sb.ircholders.

l 59. Certificate of 7crmination or Amend acnt. In case this trust shall be terminated or any merger, l combination, consolidation or affiliation shall be effected. or any of the terms, powers and provisions i

herein contained shall be altered, amended, added to or rescinded, pursuant to the provisions of l {

Article 8(o), Article 56 or Article 58 or other authority, a certificate in any number of counterparts deemed desirable, setting forth such termination, alteration, amendment, addition or rescission or the terms of such mercer, combination, consolidation or affiliation and either that the Shareholders have authorized j the same in accordance with the provisions of said Article 8(o), Article 56 or Article 58, or the other i j authority pursuant to which the same has been made, shall be signed by the chairman or president and by  ;

l the clerk or any assistant clerk and shall be acknowledged by either the chairman or president signing the I

same and shall be recorded or filed in the various public offices, if any, in which this declaration of trust is l

then recorded or filed and at the principal office of the Company and in such places as may be required by l law, but failure to record or file any such vote or resolution shall not affect the validity thereof. ,

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l 60. Disposition of 7 hest Estate on 7ermmatwn. Upon the termination of this trust the Trustees shall, l

upon such terms as shall be determined by the Trustees, sell and convert into money or into shares, bonds l or other securities or obligations, whether of the purchaser or otherwise, the whole or any part of the Trust l estate and shall apportion the proceeds thereof and any property forming part of the Trust estate excepted l from such sale among all the Shareholders in accordance with their respective rights ratably accnrding to l the number and kind of shares held by them respectively. In making any sale under this provision the i Trustees shall have power to sell by public auction or private contract and to buy in or rescind or vary any l contract of sale and to resell, without being answerable for loss, and for the said purposes to execute or

l. cause to be executed all proper deeds and instruments and to do all proper things. The Trustees may, after

! the distribution of the full amounts of money,if any, due upon liquidation or termination on any preferred shares of any class or series which may be outstanding. divide the whole or any part of the remaining Trust estate in its actual state of investment among the Shareholders in accordance with their respective rights l

ratably according to the number and kind of shares held by them respectively, and for such purposes the Trustees shall have power to determine the values of the property comprising said remaining Trust estate.

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l MISCELLANEOUS

61. Filing. This instrument and any amendment hereto shall be filed with the Secretary of The Commonwealth of Massachusetts and in such other places as may be required under the laws of The j Commonwealth of Massachusetts and may also be filed or recorded in such other places as the Trustees j deem appropriate. Unless any such amendment sets forth some later time for the effectiveness of such I amendment, such amendment shall be effective upon its filing with the Secretary of The Commonwealth of {

Massachusetts. A restated declaration of trust, integratirm into a single instrument all of the provisions of  !

this instrument which are then in effect and operative, may be executed from time to time by the Trustecs and shall, upon filing with the Secretary of The Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may hereafter be referred to in lieu of this instrument and the various amendments thereto.

62. Protection of Company, Stock of li'hich Held by inest. No corporation, trust, association or body politic shall be affected by notice that any of its shrres or bonds or other securities or obligations are subject to this trust or be bound to see to the executic n of this trust or to ascertain or inquire whether any transfer of any such shares, bonds or occurities or obligations by the Company is authorized, notwithstand-ing such authority may be disputed by some other person, firm, association, trust or corporation.

63. Arnhority of the 7histees to Constnic Terms Hereof The Trustecs shall have the authority to construe any of the terms, powers and provisions herein contained and to act on any such construction. and its construction of the same and any action taken pursuant thereto by the Trustees, er any committee.

officer or agent in good faith shall be final and conclusive.

64 Effect of Captions and 7hble of Contents. The captions and Table of Contents are inserted for convenience of reference, and are not to be taken as any part of this instrument or to control or affect the meaning, construction or effect of the same.

65. Countciparts. This instrument may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart.

66. Gorcening Law. This instrument is executed by the original Trustees and delivered in The Commonwealth of Massachusetts, and with reference to the statutes and law thereof, and the rights of all parties and the construction and effect of every provision hereof shall be subject to and construed according to the statutes and law of said Commonwealth.

67. Provisions in Conflict it'iih Law or Regulations. The provisions of this instrument are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions would be inconsistent with any of the conditions necessary for qualification of the Company as an exempted holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended, and the rules and regulations thereunder or is inconsistent with other applicable laws and regulations, such provision shall be deemed never to have constituted a part of this instrument, provided that such determination shall not affect any of the remaining provisions of this instrument or render invalid or improper any action taken or omitted prior to such determination. If any provision of this instrument shall be held invalid or unenforceable in any jurisdiction such invalidity or unenforecability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this instrument in any jurisdiction.

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IN WITNESS WifEREOF we have hereunto set our hands and seals at Boston in The Common- l wealth of Massachusetts on the date first above mentioned.

[ SEAL] /s/ TilOMAS J. MAY Thomas J. May

[ SEAL] /s/ JAMES J. JUDoE

• James J. Judge

[ SEAL] /s/ TilEODORA S. CONVISSER Theodora S. Comisser COMMONWEALTli OF MASSACliUSLTTS COUNTY OF SUFFOLK, SS.

March 25,1997 Then personally appeared before me the above-named Thomas J. May, James J. Judge and Theodora S. Convisser, and severally acknowledged the foregoing instrument to be their free act and deed.

WITNESS MY IIAND and official seal at Boston, Massachusetts.

[ NOTARIAL SEAL) /s/ WAYNE R. FRIGARD My commission expires 7/24/98 Notary Public in and for The Commonwealth of Massachusetts B-23

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APPENDIX C 1997 STOCK INCENTIVE PIAN 1

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llOSTON EDISON COMPANY 1997 STOCK INCENTIVE PLAN

1. PURPOSE The purpose of this 1997 Stock Incentive Plan (the " Plan") is to advance the interests of Boston Edison Company (the " Company") and its subsidiaries by enhancing their ability (a) to attract and retain employees who are in a position to make contributions to the success of the Company and its subsidiaries; (b) to reward employees for such contributions; and (c) to encourage employees to take into account the long-term interests of tbc Company and its subsidiaries through ownership of shares of, and other interests in, the Company's common stock (" Common Stock").

The Plan is intended to accomplish these goals by enabling the Company to grant awards (" Awards")

to eligible employees. Awards may be in the form of Stock Options (as described in Section 6), Stock Appreciation Rights (as described in Section 7), Restricted Stock Awards (as described in Section 8),

Deferred Stock Awards (as described in Section 9), Performance Unit Awards (as described in Section 10),

Dividend Equiva! cot Awards (as described in Section 11), and Other Stock-Based Awards (as described in Section 12).

2. ADMINISTRATION The Plan will be administered by the Executive Personnel Committee of the Board of Directors of the Company, excluding any member who would not be (i) an "outside director" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the " Code"), and the regulations thereunder, or (ii) a non-employee director as defined in Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended (the " Exchange Act") (the " Committee"). The Committee will have full discretionary authority, not inconsistent with the express provisions of the Plan, to administer the Plan in all respects, induding without limitation, authority (a) to grant Awards to such cligible employees as the Committee may select (" Participants"); (b) to determine the type of Awards to be granted and the times of grants; (c) to determine the number of shares of Common Stock to be covered by any Award;(d) to determine the terms and conditions of any Award, which terms and conditions may differ among individual Awards and Participants; (c) to prescribe the form or fanns of instruments evidencing Awards and any other i instruments required under the Plan and to change such forms from time to time;(f) to adopt, amend and l rescind rules and regulations for the administration of the Plan:(g) to interpret the Plan and to decide any l

questions and settle all controversies and disputes that may arise in connection with the Plan; and (h) to waive compliance by a Participant with any obligation to be performed by him under ar, Award. except that the Committee may not, (i) in the case of an incentive stock option (as described in Section 6), take any action without consent of the Participant which would cause such option to lose its status as an " incentive stock option" ("150") within the meaning of section 422 of the Code, or (ii) in the case of an Award intended to qualify as " performance-based compensation" within the meaning of Section 162(m)(4)(C) of the Code, increase the amount of compensation payable under the Award to the extent that such increase would cause the Award to lose its qualification as such performanec-based compensation. Such determina-tions and actions of the Committee shall be conclusive and shall bind all parties.

3. EITECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. Grants of Awards under the Plan may be made prior to that date (but after adoption of the Plan by the Board of Directors), subject to approval of the Plan by the stockholders.

No Award may be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board of Directors, but Awards previously granted may extend beyond that date.

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4. SilARES SUlijECT TO Till: PIAN (a) Number of Shares. Subject to adjustment as provided in Section 15. the aggregate number of shares of Common Stock that may be delivered under the Plan is 2,000,000, including shares issued in lieu of or upon reinvestment of dividends arising from award 3. Shares of Common Stock may be issued up to this maximum pursuant to any type or types of Awards, including ISOs. For purposes of this limitation, Awards and shares of Common Stock which are forfeited or reacquired by the Company, and Awards which are satisfied or otherwise terminated without the issuance of shares of Common Stock, will not be counted.

(b) Special Limitations Applicable to Cenain Awards. Subject to adjustment as provided in Section 15 to the extent such adjustment is consistent with the continued satisfaction by Awards of the require- I ments of Section 162(m)(4)(C) of the Code. (i) the maximum number of shares of Common Stock for which Options and SARs may be awarded under the Plan to any Participant in any calendar year is in each case 100.000 shares, and (ii) the maximum number of shares of Common Stock with respect to which Restricted Stock Awards and Awards intended to qualify as " performance-based compensation" under Section 162(m)(4)(C) of the Code may be granted to any Participant in any calendar year is in each case the equivalent of 25,000 shares. For purposes of the preceding sentence, the regrant of a canceled Option '

or SAR, or the repricing of an Option or SAR, shall be treated as a separate Award to the extent required under Section 162(m)(4)(C) of the Code.The per-individual Award limitations described in this paragraph are intended to enable certain Awards under the Plan to qualify for the performance-based compensation exemption rules set forth under Section 162(m)(4)(C) of the Code and shall be subject to amendment or revision to the extent (but only to the extent) consistent with such rules.

(c) Shares to be Delivered. Shares delivered under the Plan will be authorized but unissued shares I of Common Stock or, if the Committee so decides in its sole discretion, previously issued Common Stock acquired by the Company in the open market or in private transactions, or shares of Common Stock held in treasury. No fractional shares of Common Stock will be delivered under the Plan.

5. ELIGilllLITY Employees eligible to become Participants shall be those key employees of the Company and its subsidiaries who, in the opinion of the Committee, are in a position to make'a contribution to the success of the Company or its subsidiaries. A subsidiary for purposes of the Plan is a corporation or other entity in which the Company owns, directly or indirectly, stock or other equity-like interests possessing 50% or more of the total combined voting power of all classes of stock or other equity interests. Members of the Committee will not be eligible to become Participants.

6. STOCK OPTIONS Stock Options granted under the Plan (" Options") may be either ISOs or non-qualified stock options

("NSOs"). Except to the extent expressly designated as an ISO (or to the extent it does not qualify as an ISO even if so designated), each Option will be an NSO.

No term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted to the Committee under the Plan be exercised, so as to disqualify the Plan or, without the consent of the optionec, any ISO, under Section 422 of the Code. The documents evidencing ISOs will contain such provisions as are required of ISOs under the applicable provisions of the Code.

Options granted under the Plan will be subject to the following terms and conditions and will contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee deems desirable:

(a) Escrcisc Price. The exercise price of each Option will be determined by the Committee, but may not be, in the case of an ISO, less than 100% (1107c, in the case of an ISO granted to a ten-percent C-3 l

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stockholder) of the fair market value per share of Common Stock at the time the Option is granted.1 or

( this purpose," ten-percent stockholder" means any employee who at the time of grant owns directly, or is deemed to own by reason of the attribution rules in section 42 !(d) of the Code, Common Stock possessing more than 107c of the total combined mting power of all classes of stock of the Company or of any of its parent or subsidiary corporations.

(b) Duration of Options. An Option will be exercisable during such period or periods as the i Committee may specify. The latest date on which an Option may be exercised will be the date which is ten

! years (five years, in the case of an ISO granted to a ten-percent stockholder) from the date the Option was j granted or such earlier date as may be specified by the Committee at the time the Option is granted.

(c) Exercise of Options.

l (1) Options will be exercisabic at such future time or times, whether or not in installments, as determined by the Committee at or after the grant date. The Committee may at any time accelerate the exercisability of all or any portion of any Option.

(2) Any exercise of an Option must be by written notice to the Company, accompanied by(i) the document evidencing the Option (the " Option Certificate") and any other documents required by the Committee and (ii) payment in accordance with Section 6(d) below for the number of shares of Common Stock for which the Option is exercised.

(d) Payment for and Delircry of Common Stock Common Stock purchased upon exercise of an Option shall be paid for as follows: (1) in cash or by certified check, bank draft or money order payable to the order of the Company, or (2)if so permitted by the Option Certificate or otherwise determined by the Committee. (i) through the delivery of shares of Common Stock (held for at least six months, or such other period as the Committee may specify) having a fair market value on the last business day preceding the date of exercise equal to the purchase price, or (ii) by a combination of cash and Common Stock as provided in clauses (1) and (2)(i) above, or (iii) by delivery of a promissory note of the Participant to the Company,in the case of an ISO, payable on such terms as are specified in the Option Certificate, and in the case of an NSO, payable on such terms as are specified in the Option Certificate or as are othenvise specified by the Committee, or by a combination of cash (or cash and Common Stock) and the Participant's promissory note;provided, however, that if the Common Stock delivered upon exercise of the Option is an original issue of authorized Common Stock, at least so much of the exercise price as represents the par value of such Common Stock must be paid in cash if the Committee determines that such cash payment is required by law.

(e) Nontransferability of Options. Except as othenvise determined by the Committee or specified in the Option Certificate, no Option may be transferred other than by will or by the laws of descent and distribution, and during a Participant's lifetime an Option may be exercised only by him or her, (f) Death or Disability. Except as otherwise determined by the Committee, if a Participant's employment with the Company and its subsidiaries terminates by reason of death or total and permanent disability, each Option held by the Participant will become fully exercisable and will remain exercisable after the date of such termination for a period of two years in the case of death and one year in the case of total and permanent disability (but in no event later than the date the option would have expired in all events under Section 6(b)). In the case of a deceased Participant, such Option may be exercised within such time limits by his executor or administrator, or by the person or persons to whom the Option is transferred by will or the applicable laws of descent and distribution.

(g) Other Termination of Employment. Except as otherwise determined by the Committee, if a Participant's employment with the Company and its subsidiaries terminates for any reason other than death or total and permanent disability, all Options held by the Participant that are not then exercisable l shall terminate. Options that are exercisable on the date of termination will continue to be exercisable for l a period of three months (but in no event later than the date the option would have expired in all events l C-4

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under Section Nb)) unless the employee has admitted to, or been convicted of, any act of fraud, theft or dishonesty arising in the course of, or in connection with, his employment with the Company and its subsidiaries, in which case the Option will terminate immediately and in full. all execpt as otherwise determined by the Committee. Except as othemise determined by the Committee, atter completion of that three-month period, such Options shall terminate to the extent not previously exercised, expired or terminated,

7. STOCK APPRECIATION RIGIITS (a) Nature of Stock Appreciation Right. A Stock Appreciation Right ("SAR")is an Award entitling the recipient to receive an amount in cash or shares of Common Stock or a combination thereof having a value equal to the excess of the fair market value of a share of Common Stock on the date of exercise over the fair market value of a share of Common Stock on the date of grant (or over the Option exercise price, if the SAR was granted in tandem with an Option). multiplied by the number of shares with respect to which the SAR has been exercised, with the Committee having the right to determine the form of payment.

(b) Grant of SARs. SARs may be granted in tandem with, or independently of, Options granted i

under the Plan. In the case of an SAR granted in tandem with an NSO, such SAR may be granted either at or after the time of the grant of such Option. In the case of an SAR granted in tandem with an ISO, such SAR may be granted only at the time of the grant of the Option. SARs will be evidenced by such written agreement as is deemed appropriate by the Committee.

An SAR or applicable portion thereof granted in tandem with an Option will terminate and no longer be exercisable upon the termination or exercise of such Option, except that an SAR granted with respect to less than the full number of shares covered by an Option will not be reduced until the exercise or termination of the related Option exceeds the number of shares not covered by the SAR.

(c) 7erms and Conditions of SAR3. SARs will be subject to such terms and conditions as are determined from time to time by the Committee, subject. in the case of SARs granted in tandem with Options, to the following:

1 (1) SARs will be exercisable only at such time or times and to the extent that the related Option '

is exercisable.

I (2) Upon the exercise of an SAR, the applicable portion of any related Option must be l surrendered.

(3) SARs will be transferable only with the related Option. Except as otherwise determined by j the Committee, all SARs will be exercisable during the Participant's lifetime only by the Participant or l his legal representative. l (4) An SAR granted in tandem with an Option may be exercised only when the market price of the Common Stock subject to the Option exceeds the exercise price of such Option.

The provisions of Sections 6(f) and 6(g) relating to the exercisability and termination of Options shall also apply to SARs, whether or not granted in tandem with Options.

Any exercise of an SAR must be by written notice to the Company, accompanied by the document evidencing the SAR and any other documents required by the Committee.

(d) Di3cretionary Payments. Notwithstanding that an Option at the time of exercise shall not be accompanied by a related SAR, if the market price of the shares subject to such Option exceeds the l cxercise price of such Option at the time of its exercise, the Committee may,in its discretion, cancel such Option, in which event the Company shall pay to the person exercising such Option an amount equal to the i difference between the fair market value of the Common Stock to have been purchased pursuant to such  !

exercise of such Option (determined on the date the Option is canceled) and the aggregate consideration '

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to have been paid by such person upon such exercise. Such payment shall be by check or in shares of Common Stock having a fair market value (determined on the date the payment is to be made) equal to the amount of such payments or any combination thereof, as determined by the Committec. The Committee may exercise its discretion under the first sentence of this paragraph (d) only in the event of a written request of the person exercising the option, which request shall not be binding on the Committee.

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8. RESTRICTED STOCK (a) Nature of Restricted Stock Award. A Restricted Stock Award (" Restricted Stock Award") is an Award entitling the recipient to acquire shares of Common Stock (" Restricted Stock") for a purchase price (which may be zero), subject to such conditions, including the restrictions specified in Section 8(d) below, as the Committee may impose at the time of grant.The Committee may also condition such acquisition on the attainment of specified performance goals as described in Section 16(f) below.

(b) Restncred Stock Award Agreement. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award within 60 days (or such shorter period as the Committee may specify) following the Award date by making payment to the Company by certified or bank check or other instrument acceptable to the Committee in an amount equal to the specified purchase price, if any, of the shares covered by the Award and by executing and delivering to the Company an agreement (a " Restricted Stock Award Agreement") in such form as the Committee determines.

(c) Rights as a Stockholder Upon complying with Section 8(b) above, a Participant will have all the rights of a stockholder with respect to the Restricted Stock awarded to him including voting and dividend rights, subject to the restrictions described in this Section 8 and subject to any other conditions contained in the Restricted Stock Award Agreement. Unless the Committee otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of any restrictions under the Plan.

(d) Restriction. Except as otherwise determined by the Committee, shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, except as specifically

provided herein. If a Participant ceases for any reason to be employed by the Company or its subsidiaries

! other than due to death or total and permanent disability, shares of Restricted Stock held by such l

Participant shall be resold to the Company at their purchase price, or forfeited to the Company if the

, purchase price was zero, except as specifically set forth herein or otherwise determined by the Committee.

l Shares of Restricted Stock resold to the Company shall have the status of authorized but unissued shares of Common Stock.

(1) The Committee will specify in the Restricted Stock Award Agreement the date or dates I (which may depend upon or be related to the attainment of performance goals and other conditions) on which the nontransferability of the Restricted Stock anci il e obligation of the Participant to resell l

j such Stock to the Company will lapse. The Committee may et any time accelerate such date or dates or waive such performance goals and other conditions.

1 (2) Unless othenvise determined by the Comnittee or specified in the Restricted Stock Award Agreement if the Participant's employment terminates because of death or total and permanent disability, all restrictions on shares of Restricted Stock held by the Participant will lapse.

(c) Notice of Election. Any Participant making an election under Section 83(b) of the Code with respect to a Restricted Stock Award must provide a copy thereof to the Company within 30 days of the filing of such election with the Internal Revenue Service.

(f) Diridends. Dividends paid on shares of Restricted Stock shall be either paid at the dividend payment date or deferred for payment to such date as determined by the Committee, in cash or in unrestricted shares of Common Stock having a fair market value equal to the amount of such dividends.

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l Shares distributed in connection with a stock split or dividend in shares of stock, and other property '

distributed as a dividend. Shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such shares of Restricted Stock or other property has been distributed.

9. DEFERRED STOCK AWARDS.

(a) Nature of Deferred Stuck Award. A Deferred Stock Award (" Deferred Stock Award") is an award entitling the recipient to acquire shares of Common Stock (" Deferred Stock") without payment in one or more installments at a future date or ,datea, all as determined by the Committee. The Committee

may condition such acquisition on the attainment of specified performance goals as described in Section 16(f) below.

(b) Dcferred Stock Award Agreement. A Participant who is granted a Dcferred Stock Award shall have no rights with respect to such Award unless within 60 days of the grant of such Award or such shorter l period as the Committee may specify, the Participant shall have accepted the Award by executing and delivering to the Company an agreement (a " Deferred Stock Award Agreement") in such form as the Committee determines.

1 (c) Restrictions on 7Fansfer: Except as otherwise determined by the Committee Deferred Stock Awards and all rights with respect to such Awards may not be sold, assigned, transferred, pledged, or

! otherwise er cumbered, and shall be exercisable during the Participant's lifetime only by the Participant or the Particip:.nt's legal representative.

(d) 7.ig/us as a Stockholder. A Participant receiving a Deferred Stock Award will have rights of a stockhol?cr only as to shares of Deferred Stock actually received by the Participant under the Plan and not with respect to shares subject to the Award but not actually received by the Participant. A Participant shall be entitled to receive a stock certificate for shares of Deferred Stock only upon satisfaction of all conditions therefor specified in the Deferred Stock Award Agreement.

! (e) Tenninmion. Except as othenvise determined by the Committee, a Participant's rights in all l Deferred Stock Awards shall automatically term,inate upon the termination of such Participant's employ-ment by the Company and its subsidiaries for any reason (including death).

l (f) Acceleration. II'aircr, etc. At any time prior to the termination of a Participant's employment, the I Committee may in its discretion accelerate, waite, or, subject to Section 16, amend any or all of the I

restrictions or conditions imposed under any Deferred Stock Award.

(g) Payments in Respect of Deferred Stock. Without limiting the right of the Committee to specify different terms, the Deferred Stock Award Agreem-t may either make no provisions for, or may require or permit the immediate payment, deferral, or ins .. ment of amounts equal to, or less than, any cash dividends which would have been payable on the Deferred Stock had such stock been outstanding, all as determined by the Committee in its sole discretion.

10. PERFOIO1ANCE UNIT AWARDS.

(a) Nature of Pciformance Units Awards. A Performance Unit Award (" Performance Unit Award")

is an award entitling the recipient to acquire cash or shares of Common Stock, or a combination of cash and shares of Common Stock, upon the at:ainment of specified performance goals as described in Section 16(f) below.The Committee in its sole discretion shall determine whether and to whom Performance Unit Awards shall be made, the performance goals applicable under each such Award, the periods during which performance is to be measured and all other limitations and conditions applicable to each such Award.

Performance Unit Awards may be awarded independent of or in connection with the granting of any other Award under the Plan.

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(b) /trfonnance limt Award Agreement. A Participant shall have no rights with re:pec' to a Performance Unit Award unless within 60 days of the grant of such Award or such shorter period is the Committee may specify, the Participant shall have accepted the Award by executing and delivering to the Company a Performance Unit Award Agreement.

(c) Restrictions on 7iansfer: Except as otherwise determined by the Committee, Perfor. nance Unit Awards and all rights with respect to such Awards may not be sold, assigned, transferred, pl:dged, or otherwise encumbered, and if exercisable over a specified period, shall be exercisable during the Partici.

pant's lifetime only by the Participant or the Participant's legal representative.

(d) Rights as a Studholder A Participant receiving a Performance Unit Award will have rights of a stockholder only as to shares of Common Stock actually received by the Participant under the Plan and not with respect to shares subject to the Award but not actually received by the Participant. A Participant shall be entitled to receive a stock certificate evidencing the acquisition of shares of Common Stock under a Performance Unit Award only upon satisfaction of all conditions therefor specified in the Performance Unit Award Agreement.

(c) Tennination. Except as otherwise determined by the Committee, a Participant's rights in all Performance Unit Awards shall automatically terminate upon the termination of such Participant's

. employment by the Company and its subsidiaries for any reason (including death).

(f) Acceleration, ilhiwr etc. At any 6me prior to the termination of a Participant's employment, the Committ:c may in its discretion acurate, waive, or, subject to Section 16, amend any or all of the restrictions or conditions imposed under any Performance Unit Award.

(g) Ercrcise. The Committee in its sole discretion shall establish procedures to be followed in exercising any Performance Unit Award, which procedures shall be set forth in the Performance Unit Award Agreement. The Committee may at any time provide that payment under a Performance Unit Award shall be made, upon satisfaction of the applicable performance goals, without exercise by the Participant. Except as otherwise specified by the Committee, a Performance Unit granted in tandem with an Option may be exercised only while the Option is exercisable, and the exercise of a Performance Unit granted in tandem with any other Award shall reduce the number of shares subject to the related award on such basis as is specified in the Performance Unit Award Agreement.

11. DIVIDEND EQUIVALENT AWARDS.

(a) Nature of Dividend Equivalent Awards. A Dividend Equivalent Award (" Dividend Equivalent Award") is an Award entitling the Participant to receive cash, shares of Common Stock, or other property equal in value to dividends paid with respect to a specified number of shares of Common Stock. Dividend Equivalent Awards may be awarded on a free-standing basis or in connection with another Award, and may be paid currently or on a deferred basis.The Committee may provide at the date of grant or thereafter that the Dividend Equivalent Award shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional shares of Common Stock or such other investment vehicles as the Committec ,

may specify: provided. however, that Dividend Equivalent Awards (other than free-standing Dividend Equivalent Awards) shall be subject to all conditions and restrictions of the underlying Awards to which they relate. The Committee may also condition such Award on the attainment of specified performance goals as described in Section 16(f) below.

(b) Dividend Equiralent Award Agreement. A Participant who is granted a Dividend Equivalent Award shall have no rights with respect to such Award unless within 60 days of the grant of such Award or such shorter period as the Committee may specify, the Participant shall have accepted the Award by executing and delivering to the Company an agreement (a " Dividend Equivalent Award Agreement") in ,

such form as the Committee determines.

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(c) Rc3rncimns on 7ransfer. Except as othenvise determined by the Committee, Dividend Equiva-lent Awards and all rights with respect to such Awards may not be sold, assigned, transferred, pledged, or otherwise encumbered.

(d) Rights as a Stoc kholder A Participant receiving a Dividend Equivalent Award will have rights of a stockholder only as to shares of Common Stock actually received by the Participant under the Plan and not with respect to shares subject to the Award but not actually received by the Participant.

(c) Termination. Except as othensise determined by the Committee, a Participant's rights in all Dividend Equivalent Awards shall automatically terminate upon the termination of such Participant's employment by the Company and its subsidiaries for any reason (including death).

(f) Acccleration, IVaircr. etc. At any time prior to the Participant's termination of employment, the Committee may in its discretion accelerate, waive, or, subject to Section 16 of the Exchange Act, amend any or all of the restrictions or conditions imposed under any Dividend Equivalent Award.

12. OTHER STOCK HASED AWARDS.

(a) Nature of Awards. The Committee may grant other Awards under which Common Stock is or may in the future be acquired ("Other Stock-Based Awards"). Such awards may include, without limitation. debt securities convertible into or exchangeable for shares of Common Stock upon such conditions, including attainment of performance goals, as the Committee shall determine. Subject to the purchase price limitations in paragraph (b) below, such convertible or exchangeable securities may have such terms and conditions as the Committee may determine at the timc of grant. However, no convertible or exchangeable debt shall be issued unicss the Committee shall have provided (by Company right of repurchase, right to require conversion or exchange, or other means deemed appropriate by the Commit-tec) a means of avoiding any right of the holders of such debt to prevent a Company transaction by reason of covenants in such debt. The Committee may also condition such Awards on the attainment of specified performance goals as described in Section 16(f) below.

(b) Purchase Pdce; Form of Payment. The Committee may determine the consideration, if any, payable upon the issuance or exercise of an Other Stock-Based Award. The Committee may permit payment by certified check or bank check or other instrument acceptable to the Committee or by surrender of other shares of Common Stock (excluding shares then subject to restrictions under the Plan).

(c) Forfeitme ofAwards: Repurchase of Stock: Acceleration or if aiver of Restrictions. The Committee may determine the conditions under which an Other Stock-Based Award shall be forfeited or,in the case of an Award involving a payment by the recipicnt the conditions under which the Company may or must repurchase such Award or related Common Stack. At any time the Committee may in its sole discretion accelerate, waive, or, subject to Section 16 of the Exchange Act, amend any or all of the limitations or conditions imposed under any Other Stock-Based Award.

(d) Othcr Stock-Based Award Agreements. A Participant shall have no rights with respect to any Other Stock-Based Award unless within 60 days after the grant of such Award (or such shorter period as the Committec may specify) the Participant shall have accepted the Award by executing and delivering to l the Company an agreement (an "Other Stock-Based Award Agreement") in such form as the Committee I determines.

(c) Restdctions on Transfer Except as othenvise determined by the Committee, Other Stock-Based Awards may not be sold. assigned, transferred. pledged, or encumbered nor shall any Other Stock-Based ,

Award be transferred other than by will or by the laws of descent and distribution or be exercisabic during l the Participant's lifetime by other than the Participant or the Participant's legal representative. l I

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(f) Rights as a StocAholder A recipient of any Other Stock-Based Award will have rights of a stockholder only at the time and to the extent. if any, specified in the Other Stock-Based Award Agreement or otherwise determined by the Committee.

(g) Decmed Diridend Paymcins Defemd3. Without limiting the right of the Committee to specify ditterent terms, an Other Stock-Based Award Agreement may require or permit the immediate payment, waiver, deferral, or investment of dividends or deemed dividends payable or deemed payable on Common Stock subject to the Award. ,

13. SUPPLl: MENTAL GRANTS.

(a) Louns. The Company may in its sole discretion make a loan to the recipient of an Award hereunder, either on or after the date of grant of such Award. Such loans may be made either in connection with the exercise of a Stock Option. an SAR or an Other Stock-Based Award, in connection with the purchase of shares under any Award, or in connection with the payment of any federal, state and local income tax in respect of income recognized under any Award. The Committee shall have full authority to decide whether to make a loan hereunder if it determines that the making of such loan is in the best interest of the Company, and to determine the amount, term, and provisions of any such loan, including the interest rate (which may be zero) charged in respect of any such loan, whether the loan is to be secured or unsecured, the terms on which the loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no loan hereunder shall provide or reimburse to the borrower the amount used by him for the payment of the par value of any shares of Common Stock issued, have a term  ;

(including extensions) exceeding ten years in duration, or be in an amount exceeding the total exercise or purchase price paid by the borrower under an Award or for related Common Stock under the Plan plus an amount equal to the cash payment permitted in the following paragraph.

(b) Cash Grants. The Committee may at any time authorize a cash payment,in respect of the grant ,

or exercise of an Award under the Plan (or the lapse or waiver of restrictions under an Award) which shall I not exceed the amount which would be regobed in order te pay in fu n ry federal, state a id local income tax due as a result of income recognized by the recipient under both the Award and such cash payment,in each case assuming that such income is taxed at the regular maximum marginal ra'e applicable to individuals under the Code as in effect at the time such income is includable in the recipient's income.

Subject to the foregoing, the Committee shall have complete authority to decide whether to make such i cash payments in any case, to make provision for such payments either simultaneously with or after the I grant of the associated Award and to determine the amount of each such payment.

11. CilANGE OF CONTROL Notwithstanding any other provision of this Plan,in the event of a Change of Control of the Company as defined in EXHIBIT A hereto (a) each outstanding Award held by each Participant the exercisability of which is restricted or limited will immediately become fully exercisable; and (b) restrictions and conditions on each outstanding . Award subject to such restrictions and conditions held by each Participant will immediately lapse or be deemed waived.

15. CllANGES IN COMPANY; SUBSTITUTE AWARDS (a) Changes in Capital Stock. In the event of a stock dividend stock split or combination of shares, recapitalization or other change in the Company's capital stock, the number and kind of shares of stock, securitics of the Company or other consideration issued or issuabic in respect of Awards then outstanding or subsequently granted under the Plan, the maximum number of shares of stock or securities that may be delivered under the Plan, the purchase price and other relevant provisions will be appropriately adjusted by the Committee, whose determination shall be binding on all persons.

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The Committee may also adjust the number of shares, securities or other consideration issued or issuable in respect of outstanding Awards. the exercise price of outstanding Awards and the other terms of outstanding Awards and may make adjustments in the terms and conditions of, and the criteria and performance objectives included in. Awards, to take into consideration material changes in accounting practices or principles, consolidations or mergers (except those described in Section 15(b) below),

acquisitions or dispositions of stock or property or any other event if it is determined by the Committee that such adjustment is appropriate to avoid distortion in the operation of the Plan. Adjustments under this paragraph will be made only to the extent they are consistent with the requirements for ISOs or under Section 162(m)(4)(C) of the Code.

(b) Merger, etc. Subject to Section 14,in the event of a dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation or its outstanding shares are converted into securitics of another corporation or exchanged for other consideration, all Awards granted hereunder will terminate, but during a period commencing 20 days prior to the effective date of any such dissolution or liquidation (or 20 days prior to any earlier rehtted sale of substantially all the assets of the Company) or of any such merger or consolidation, subject to the effectiveness of such dissolution, liquidation, sale, merger or consolidation (1) all Awards outstanding hereunder the exercisability of w hich is restricted or limited will become immediatt'y exercisable, and (2) all restrictions and conditions on all Awards subject to such restrictions and conditions will immediately lapse or be deemed waived;provided.

however, that, unless the event will give rise to a Change of Control or it is anticipated that a Change of Control will coincide with or follow the event, the Committee may instead arrange that the successor or surviving corporation, if any, grant replacement or substitute Awards on terms and conditions as the Committee considers appropriate in the circumstances.

(c) Substitute Awards. The Company may grant Awards under the Plan in substitution for stock and stock based awards held by employees of another corporation who concurrently become employees of the Company or its subsidiary as the result of a merger or consolidation of the employing corporation with the Company or its subsidiary or the acquisition by the Company or a subsidiary of property or stock of the employing corporation. The Committee may direct that the substitute Awards be granted on such terms and conditions as the Committee considers appropriate. The shares which may be delivered under such substitute Awards will be in addition to the maximum rumher of shares provided for in Section 4(a) only to the extent that the substitute Awards are both (1) granted to persons whose relationship to the Company does not make (and is not expected to make) them subject to Section 16(b) of the Exchange Act and (2) are granted in substitution for awards issued under a plan approved, to the extent then required under Rule 16b-3 (or any successor rule under the Exchange Act), by the stockholders of the entity which issued such predecessor awards.

16. GENERAL PROVISIONS (a) No Distribution: Compliance liith Legal Requirements, etc. The Committec may requirc cach person acquiring Common Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the Common Stock without a view to distribution thereof.

l The Company will not be obligated to deliver any shares of Common Stock pursuant to an Award (1) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, including,if required, the receipt of all necessary approvals from the Massachu-setts Department of Public Utilities, and (2) if the outstanding Common Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (3) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Common Stock has not been registered under the Securities Act of 1933, as amended, the Company may rcquire j such representations or agreements as counsel for the Company may consider appropriate to avoid '

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violation of such Act and may require that the certificates evidencing such Common Stock bear an appropriate legend restricting transfer.

Notwithstanding any provision of the Plan, the Company will be under no obligation to deliver shares of Common Stock to an estate of a deceased Participant, or to the person or persons to whom the Award  !

has been transferred by the Participant's will or the applicable laws of descent and distribution, until the Company is satisfied as to the authority of such person or persons.

(b) Tat liithholding, etc. Each Participant will, no later than the date as of which the value of an Award or of any Common Stock or other amounts received hereunder first becomes includable in gross income for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, all federal, state and local taxes required by law to be withheld with respect to such income. The Company and its subsidiaries will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otheiwise due to the Participant.

The Committee may provide,in respect of any transfer of Common Stock under an Awaid, that if and to the extent withholdmg of any federal, state or local tax is required, the Participant may elect in such manner as the Committee prescribes, to have the Company hold back from the transfer Common Stock havmg a value calculated to satisfy such withholding obligation, or to deliver to the Company pJe,iausly owned shares of equal value. Notwithstanding the foregoing, in the case of a Participant subject to the restrictions of Section 16(b) of the Exchange Act no such cicction shall be effective unicss made in compliance with any applicable requirements of Rule 16b-3(c) or any successor rule under such Act.

(c) Continuance of Employment. For purposes of the Plan, cmployment of a Participant will not be considered terminated (1) in the case of sick leave or other bona fide leave of absence approved for purposes of the Plan by the Committee, so long as the Participant's right to re-employment is guaranteed either by statute or by contract, or (2) in the case of a transfer to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to ,

which section 424(a) of the Code would apply.

(d) Fair Market l' htc.

a For purposes of the Plan, in general, " fair market value" of a share of Common Stock on any date means the closing price on such date as reflected in the New York Stock Exchange Composite Index. If, however, the Committee determines that a different meaning is in any circumstance necessary in order to comply with applicable law, such different meaning will apply in that CifCumstance.

(c) Employment Rights. Neither the adoption of the Plan nor the grant of Awards will confer upon any employee any right to continued employment with the Company or any subsidiary or affect in any way the right of the Company or any subsidiary to terminate the employment of an employee at any time, Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under this Plan shall not constitute an element of damages in the event of termination of the employment of an employce even if the termination is in violation of an obligation of the Company to the employee by contract or otherwise.

(f) Awards Subject to Perfcmnance Conditions. The Committcc rnay, at the time any Award described in the Plan is granted, irnpose the condition (in addition to any conditions specified or authorized in any other provisions of the Plan), that performance goals must be met prior to the Participant's realization of any vesting, payment or benefit under the Award. Performance goals may be related to personal performance, corporate performance, departmental performance, or any other cate-gory of performance established by the Committee. The Committee will determine the performance goals, the period or periods during which performance is to be measured, and all other terms and conditions applicable to the Award. If necessary in order to qualify an Award for the performance based remunera- l tion exception described in Section 162(m)(4)(C) of the Code and the regulations thereunder, the Committee shall in writing preestablish one or more specific, objectively determinable performance goal or l

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. _ . . _ . _ _ . _ . . _ _ _ _ . _ _ _ _ . _ . _ _ _ _ _ _ - . ~ . _ . . . _ . _ _ _ _ _ _ _

e goals (based solely on one or more qualified performece criteria) no later than ninety (90) days after the commenecment of the period to which the performare relates (or in any such other time as is required to satisfy the condit:ons of Section 162(m)(4)(C) of the Code and the regulations thereunder). For purposes of the preceding sentence, a qualified performance crb :rion is any of the following: (i) carnings per sharc, (ii) individual performance objectives, (iii) net incom.s .iv) proforma net income, (v) return on designated

, assets, (vi) return on revenues, or (vii) satisfaction of Company-wide or departmental based objectives.

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17. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION.

Neither adoption of the Plan nor the grant of Awards to a Participant shall affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue Common Stock to such Participant as a bonus or otherwise, or to adopt other plans or arrangements under which Common Stock may be issued to employees.

The Committee may at any time discontinue granting Awards under the Plan. With the consent of the Participant, the Committee may at any time cancel an existing Award in whole or in part and grant the Participant another Award for such number of shares of Common Stock as the Committet specifies, l subject to Section 4(b). The Committee may at any time or times amend the Plan or any outstanding ,

Award for the purpose of satisfying the requirements of any changes in applicable laws or regulations or ,

for any other purpose which may at the time be permitted by law; and may at any time terminate the Plan as to any further grants of Awards;provided, however, that (except to the extent expressly required or l permitted herein) no such amendment shall, without the approval of the stockholders of the Company, (a) increase the maximum number of shares available for delivery under the Plan, (b) change the group of employees eligible to receive Awards under the Plan, (c) reduce the price at which ISOs may be granted, (d) extend the time within which Awards may be granted, or (c) amend the provisions of this Section 17, and no such amendment shall aaversely affect the rights of any Participant (without his consent) under any Award previously granted.

As Adopted by the Board of Directors: January 23,1997 As Approved by the Stockholders: '

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EXilllllT A A " Change of Control" will occur for purposes of this Plan if (i) any individual, corporation, partnership, company or other entity (a " Person"). which term shall include a group, becomes the

" beneficial owner"(as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the

" Exchange Act")) of securitics of the Company representing more than 307c of the combined voting power of the Company's then-outstanding securities (other than as a result of acquisitions of such securities from the Company), (ii) there is a change of control of the Company of a kind which would be required to be reported under item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act)(or a similar item in a similar schedule or form), whether or not the Company is then subject to such reporting requirement, (iii) the Company is a party to, or the stockholders approve, a merger, consolidation, or other reorganization (other than (a) a merger, consolidation or other reorganization which would result in the i voting securities of the Company outstanding immediately prior thereto continuing to represent, either by remaining outstanding or by being converted into vested securitics of the surviving entity, more than 50%

of the combined voting power of the voting securities of the Company or such sur iving entity outstaading immediately after such merger, consolidation, or other reorganization, or (b) a merger, consolidation, or other reorganization effected to implement a recapitalization of the Company or establish a holding '

company structure, or similar transaction in which no Person acquires more than 207c of the combined voting power of the Company's then outstanding securities, a sale of all or substantially all assets, or a plan of liquidation or (iv) individuals who, at the date hereof, constitute the Board cease for any reason to constitute a majority thereof; PROVIDED, liOWEVER, that any director who is not in office at the date hereof but whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the date hereof or whose election or nomination for election was previously so approved (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or 3

threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be deemed to have been in office at the date hereof for purpose of this definition. ,

Notwithstanding the foregoing provisions of this EXIIIBIT A, a " Change of Control" will not be

deemed to have occurred solely because of the acquisition of securities of the Company (or any reporting j requirement under the Exchange Act relating thereto) by an employee benefit plan maintained by the 1 Company for its employees.

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Exhibit B l l

Boston Edison's 1996 Annual Report to the SEC on Form 10-K l

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UNITED STATES 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 i 1934 For the fiscal year ended December 31,1996 OR l [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHA.NGE ACT -

OF 1934 l

For the transition period from to Commission file number 1-2301 l BOSTON EDISON COMPANY (Exact name of registrant as specified in its chaner)

Massarhusetts 04-1278810 (State or otherjurisdiction of (1.R.S. Employer incorporation or organization) Identification No.)

j 800 Boylston Street, Boston, Massachusetts 02199 (Zip Code)

(Address of principal executive offices) l Registrant's telephone number, including area code: 617-424-2000

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l Secunties registered pursuant to Section 12(b) of the Act:

l Name of each exchange Title of each class on which recistered Common stock, par value $1 per share New York Stock Exchange Boston Stock Exchange Cumulative preferred stock:

7.75% Series, par value $100 per sharc New York Stock Exchange (represented by depositary sharcs-each l represents one-fourth interest in par value) 1 8.25% Series, par value $100 per sharc New York Stock Exchange  !

(represented by depositary sharcs-each l represents one-fourth interest in par value) l l

Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has 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 registrant was reauired to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __

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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 111 of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-afliliates of the registrant as of March 21,1997 computed as the average of the high and low market price of the common stock as reported in the listing of composite transactions for New York Stock Exchange listed securities in the Wall Street Journal: $1,261,389,298.

l I Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

l l Class Out.itandine at March 21,1997

Common Stock, $1 par value 48,514,973 shares

! DOCUMENTS INCORPORATED BY REFERENCE

( Jg1 Document l Ill Portions of definitive proxy statement dated March 26,1997 for Annual Meeting of Stockholders to be held May 15,1997.

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! J l Boston Edison Company i

Form 10-K Annual Report  !

l December 31, 1996 1

1 Part I Page j i l

Item 1. Business 2 Item 2. Properties and Power Supply 7 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 l

Part II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis 15 l Item 8. Financial Statements and Supplementary Financial Information 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 51 Part III Item 10. Directors and Executive Of ficers of the Registrant 52 Item 11. Executive Compensation 52 Item 12. Security ownership of Certain Beneficial owners and j Management 53 I i

Item 13. Certain Relationships and Related Transactions 53 l Part IV j Item 14. Exhibits, Financial Statement Schedules and Reports on Form B-K 54 i

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e' Part I

• i Item 1. Business  !

(a) General Development of Business l

Boston Edison Company (the company) is an investor-owned regulated public utility incorporated in 1886 under Massachusetts law. The Company operates in i

' the energy and energy services business, which includes the generation, purchase, transmission, distribution and sale of electric energy and the development and implementation of electric demand side management programs.

Refer to the Positioning in the Industry section of Item 7 for information regarding the restructuring of the electric utility industry process currently

! underway and its po..ential impacts on the Company, The Company also conducts unregulated activities through its wholly owned subsidiary, Boston Energy Technology Group (BETG). Through BETG and its subsidiaries, the company is engaged in certain nonutility businesses, including energy utilization and conservation, construction management and diatrict energy. Refer to Note A to the Consolidated Financial Statements in Item 8 f or more information regarding the Company's nonutility business ventures.

In January 1997, the company announced a plan to form a holding company structure. The holding company structure, which is subject to shareholder and I regulatory approvals, is further described in dote A to the Consolidated Financial Statements in Item 8.

l (b) Financial Information about Industry Segments l 1

l The Company operates primarily as a regulated electric public utility, '

therefore industry segment information is not applicable.

(c) Narrative Description of Business Principal Products and Services The Company supplies electricity at retail to an area of 590 square miles, including tne city of Boston and 39 surrounding cities and towns. The 1 l population of the area served with electricity at retail is approximately 1.5 )

! million. In 1996 the Company served an average of 657,487 customers. The Company also supplies electricity at wholesale for resale to other utilities and municipal electric departments. Electric operarJ ng revenues by class for the last three years consisted of the following: I

1996 1995 1994 l l Retail electric revenues

Commercial 50% 504 50?

l Residential 27% 28% 28h l Industrial 97 9% 9%

other 2% 2% 2%

Wholesale and contract revenues 124 114 119 i

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i Sources and Availability of Fuel The Company owns two stations whose generating units have the ability to burn oil, natural gas or both, one nuclear power station and ten combustion turbine generatorr. The Company's generation by type of fuel and the cost of fuel for each of the last five years were as follows:

Percentage of Company ' Average Cost of Fuel Generation by Source (%) ($ per Million BTU) 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992 011 16.1 17.5 27.8 31.3 33.7 3.04 2.66 2.35 2.38 2.40 Gas 33.3 39.9 31.6 24.3 25.7 3.11 2.20 2.28 2.67 2.55 tLuclear 50.6 4_2.6 40.6 44.4 40.6 0.41 0.43 0.50 0.51 0.52 The majority of the Company's residual oil purchases consists of imported oil acquired primarily from international suppliers. The Company has contracts with major oil companies that can supply most of its estimated requirements, assuming no major disruptions in oil producing regions. Within contract provisions, the Company has the ability to purchase significant amounts of oil in the spot market when it is economical to do so.

A portion of the Company's natural gas is supplied on an interruptible basis by contract. These contracts permit interruptions in deliveries by the supplier when natural gas supplies or pipeline capacity is unavailable. The Company is currently required to fuel New Boston Station exclusively by natural gas, except in certain emergency circumstances, as part of a 1991 consent order with the Massachusetts Department of Environmental Protection.

The Company has arrangements for a firm supply of natural gas to run the station at a minimum level and has a least-cost rian for operating beyond this minimum lev-l which principally utilizes interruptible gas supplies or short-term capacity purchases.

In order to obtain fuel for use at its nuclear generating unit, the Company must obtain supplies of uranium concentrates and secure contracts for these concentrates to go through the processes of conversion, enrichment and fabrication of nuclear fuel assemblies. The Company currently has contracts for supplies of uranium concentrates and the processes of conversion, enrichment and fabrication through 2002, 2000, 2004 and 2012, respectively.

4 Franchises l I

Through its charter, which is unlimited in time, the Company has the right to engage in the business cf producing and selling electricity, steam and other i forms of energy, nas powers incidental thereto and is entitled to all the rights and privileges of and subject to the duties imposed upon electric l

companies under Massachusetts laws. The locations in public ways for the Company's electric transmission and distribution lines are obtained f rom municipal and other state authorities which, in granting these locations, act 1 as agents for the state. In some cases the action of these authorities is '

subject to appeal to the Massachuretts Department of Public Utilities (MDPU).

The rights to these locations are not limited in time, but are not vested and are subject to the action of these authorities and the legislature.

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Seasonal Na ture of Business .

The Company's kWh sales and revenues are typically higher in the winter and summer than in the spring and fall as sales tend to vary with weather conditions. In addition, the Company currently bills higher base rates to commercial and industrial customers during the billing months of June through September as mandated by the MDPU. Accordingly, greater than half of the Company's annual earnings typically occurs in the third quarter. As part of the Company's settlement agreement which. is discussed in the Positioning in the Industry section of Item 7, it is expected that the seasonal variances of the Company's rates will be discontinued. Refer also to the selected Consolidated Quarterly Financial Data (Unaudited) in Item 8.

Conpetitive Conditions The Company is operating in an increasingly competitive environment. Changes in the industry include ongoing competition in wholesale power markets and increased pressure for retail customer choice. These forces are due to a i variety of factors, including legislative and regulatory proceedings at both federal and state levels designed to foster competition and changes in customers expectations. Refer to the Positioning in the Industry a.d Outlook for the Future sections of Item 7 for information regarding electric utility industry restructuring and the Company's response to the competitive environment.

Environmental Matters 1 l

The Company is subject to numerous federal, state and local standards with respect to the management of wastes, air and water quality and other ]

environmental considerations. These standards could require modification of existing facilities or curtmilment or termination of operations at thers facilities. They could also potentially delay or discontinue construction of new facilities and increase capital and operating costs by substantial amounts. Noncompliance with certain standards can, in some cases, also result in the imposition of monetary civil penalties.

Environmental-related capital expenditures for the years 1996 and 1995 were

$2.7 million and $2.9 million, respectively. These expenditures are

)

forecasted to be approximately $2 ndllion in each of the years 1997 and 1998, i The Company believes that its operating facilities are in substantial I compliance with currently applicable statutory and regulatory environmental requirements. Additional expenditures could be required as changes in environmental requirements occur.

Refer to the Environmental section of Item 7 for more information. l 1

Number of E.rployees I

As of March 22, 1997, the Company had 3,323 full-time and 14 part-time utility employees including 2,260 represented by two locals of the Utility Workers Union of America, AFL-CIO. The locals' labor contracts are effective through I May of the year 2000. Subsidiary operations had 54 full-time employees.

Employee relations are considered satisfactory by the Company.

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(d) Financial Information about Foreign and Domestic Operations and Export Sales Refer to Principal Products and Services of this item for informat< nn regarding the geographical area served by the Company and revenues by clorr l for the last three year,s.

(e) Additional Informat(on Regulation The Company and its wholly owned subsidiary, Harbor Electric Energy Company (HEEC), operate primarily under the authority of the MDPU, whose jurisdiction includes supervision over retail rates for electricity and financing and investing activities. In addition, the Federal Energy Regulatory Commission (FERC) has jurisdiction over various phases of the Company's business including rates for power sold at wholesale for resale, facilities used for the transudssion or sale of that power, certain issuances of short-term debt and regulation of the system of accounts. The Company's subsidiary BETG and its subsidiaries are not subject to such regulation.

The Company is required to submit annual performance standards to the MDPU applicable to its generating units and other units from which the Company purchases power through long-term contracts. Under this generating unit performance program, the Company provides quarterly progress reports to the MDPU. The MDPU has the right to reduce subsequent fuel and purchased power billings if it finds that the Company has been unreasonable or imprudent in the operation of its generating units or in the procurement of fuel. The Company believes that its current provision for refunds is sufficient to cover potential refunds. l

)

The Nuclear Regulatory Commission (NRC) has Lroad jurisdiction over the siting, construction and operation of nuclear reactors with respect to public health and safety, environmental matters and antitrust considerations. A license granted by the NRC may be revoked, suspended or modified for failure to construct or operate a facility in accordance with its terms. The Company ,

currently holds an operating license for Pilgrim Station which expires in l 2012. Continuing NRC review of existing regulations and certain operating l occurrences at other nuclear plants have periodically resulted in the i imposition of additional requirements for all nuclear plants in the United States, including Pilgrim Station. NRC inspections and investigations can result in the issuance of notices of violation. These notices can also be accompanied by orders directing that certain actions be taken or by the impecition of monetary civ4' penalties. In January 1997, the Company submitted a request for NRC review regarding the calculation of Pilgrim's emergency core cooling system net postive suction head. NRC practice will not allow the plant to restart until this review is performed. The Company anticipates that the review will be completed prior to the completion ot Pilg rim' s current refueling and maintenance outage. The unit is currently expected to return to service in late April.

In addition, the Company could undertake certain actions regarding Pilgrim Station at the request or suggestion of its insurers or the Institute of Nuclear Power Operations, a voluntary association of nuclear utilities j dedicated to the promotion of safety and reliability in the operation of j nuclear power plants. Nuclear pbwer continues to be a subject of political controversy and public debate manifested from time to time in the form of j requests for various kinds of federal, state anti lacal legislative or j regulatory action, direct voter initiatives or teferenda or litigation. The  ;

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Company cannot predict the extent, cost or timing of any modifications to "

Pilgrim Station which could be necessary in the future as a result of additional regulatory or other requirements, nor can it determine the ef fect i

of such future requirements on the continued operation of Pilgrim Station.

The Company continuously evaluates the operation of the station from the standpoint of safety, reliability and economics and believes that such-continued operation is in the best interests of the Company and its customers.

Capital Expenditures and Financings The company's most racent estimates of capital and nuclear fuel expenditures, allowance for funds used during construction U4FUDC) , long-term debt maturities and sinking fund requirements for the years 1997 through 2001 are as follows:

(in thousands) 1997 1998 1999 2000 2001 Capital expenditures (1) $140,000 $150,000 $160,000 $160,000 $140,000 Nuclear fuel expenditures 0 0 29,500 $ 14,000 $ 33,000 $ 16,000 AFUDC (2) $ 2,000 S 2,000 S 2,000 0 2,000 $ 2,000 Long-term debt $101,600 $101,600 $ 1,600 $166,600 S 1,600 Preferred stock

_sinkino fund $ L OOO S 2.000 S 2 g000 0 2.000 0 52,000 (1) Includes unregulated business ventures.

(2) Excludes AFUDC on nuclear f uel.

The Company continuously reviews its capital expenditure and financing programs. These programs and, therefore, the estimates shown above are subject to revision due to changes in regulatory requirements and the effects of the industry restructuring process, environmental standards, availability and cost of capital, interest rates and other assumptions.

Utility plant expenditures in 1996 were $151 ndllion and consisted primarily of additions to the Company's transmission and distribution systems and nuclear. generation facility.

Refer to the Liquidity section of Item 7 for more information regarding the  !

Company' s capital resources. l l

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Item 2. Froperties and Power Supply The Company's total electric generation capacity f rom Company-owned f acilitiea consisted of the following:

Year l

capacity Type Unit Location Installed Pilgrim Nuclear Plymouth, Mass. 670 Nuclear 1972 Power Station New Boston Station South Boston, Mass. 730 Fossil 1965-1967 Units 1 and 2 Mystic Station Everett, Mass.

Units 4-5-6 388 Fossil 1957-1961 Unit 7 592 Fossil 1975 l Combustion turbine 14 Fossil 1969 generator Combustion turbine Various 278 Fossil 1966-1971

_ generators (nine)

(a) In megawatts (mi) based on winter capability audit results.

The Company also owns approximately 6% of W.F. Wyman Unit 4. The 619 MW oil-fired unit located in Yarmouth, Maine, began operations in 1978 and is operated by Central Maine Power Company. Additional electric generation capacity is available to the Company through its contractual arrangements with other utilities and nonutilities and its participation in the New England Power Pool as further described in this item.

The Company's significant items of property consist of electric generating stations, substations and service centers, and are generally located on 1 Company-owned land. The Company's high-tension transmission lines are l generally located on land either owned or subject to easements in its favor.

The Company's low-tension distribution lines and fossil fuel pipelines are located principally on public property under permission granted by municipal and other state authorities.

As of December 31, 1996, the Company's transmission system ennsisted of 362 miles of overhead circuits operating at 115, 230 and 345 ki? ucits (kV) and 156 miles of underground circuits operating at 115 and 345 kV. The substations supported by these lines are 45 transmission or ec~bined transmission and distribution substations with transformer capacity of 10,281 megavolt amperes (MVA), 63 4 kV distribution substations with transformer capacity of 1,205 MVA and 18 primary network units with 88 MVA capacity. In addition, high tension service was delivered to 242 customers' substations.

)

The overhead and underground distribution systems cover approximately 4,700 and 900 miles of streets, respectively. HEEC, the Company's regulated subsidiary, has a distribution system that consists principally of a 4.1 mile 115 kV submarine distribution line and a rubstation which is located on Deer Island in Boston, Massachusetts. HEEC prcrides the ongoing support required to distribute electric energy to its one cuctomer, the Massachusetts Water Resources Authority, at this location. ,

1 The Massachusetts Energy Facilities Siting Board (EFSB) must approve Company 4 plans for the construction of cartein new c neration or transmission l facilities based upon findings that each f acilities are consistent with state 1 public health, environmental pr +ectioa and resource use and development i

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l policies. The Company currently has one proceeding before the EFSB, which ~

concerns proposed transmission and station facilities in Hopkinton and Milford, Massachusetts.

Purchased Power Contracts Information regarding long-term contracts for the purchase of electricity is included in Note M to the Consolidated Financial Stutements in Item 8.

Under the Company's two long-term purchased power contracts with the Massachusetts Bay Transportation Authority (MBTA), the MBTA retains the right to utilize the combustion turbines for its own emergency use and for testing purposes while the Company retains New England Power Pool credit for their capacity and output.

Sales Contracts The Company has agreements with Commonwealth Electric Company and Montaup Electric Company under which each purchase 11% of the capacity and corresponding energy of Pilgrim Station and pay 11% of the unit's fixed and operating costs plus an annual return on investment. The Company has sindlar agreements with multiple municipal electric companies for a total of 3.7% of the capacity and corresponding energy of Pilgrim Station.

New England Power Pool The Company is a member of the New England Power Pool (NEPOOL), a voluntary association of electric utilities and other electricity suppliers in New England responsible for the coordination, monitoring and directing of the operations of the major generating and transmission f acilities in the region.

To obtain maximum benefits of power pooling, the electric facilities of all l member companies are operated by NEPOOL as if they were a single power system. l This is accomplished through the use of a central dispatching system that uses '

the lowest cost generation and transmission equipment available at any given time. This operation is the responsibility of NEPOOL's central dispatch center, the New England Power Exchange (NEPEX). As a result of its participation in NEPOOL, the Company's operating revenues and costs are affected to some extent by the operations of the other members. The dispatching of Company-owned generating facilities by NEPEX may be affected by minimally increasing energy requirements and any additions to New England generation capacity.

In December 1996, NEPOOL filed with the FERC to restructure the power pool to comply with recent FERC orders requiring rpen access to transmission and changes to the membership and governance provisions of the power pooling agreement. The filing also proposed changes which would transfer operating responsibility of the integrated transmission and generation system in New England to an Independent System Operator and establish a bic-based market for unbundled energy services in lieu of the current cost-based pricing mechanism.

The FERC has allowed the transmission and governance changes to become effective March 1, 1997, subject to refund and further orders. WEPOOL l proposed that the changes in operations responsibility and market-based l pricing would become effective in the second half of 1997. These changes were l proposed in anticipation of the restructuring of the electric utility industry and the entrance of new providers in the energy market.

l The Company's net capacity was 3,613 MW at its winter peak and 3,385 MW at its summer peak. Its corresponding NEPOOL capacity obligations were estimated to be 3,399 MW and 3,256 MW, respectively.

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I Item 3. Legal Proceedings The Company was named as a party in lawsuits filed in both the US District Court and the Massachusetts Norfolk Superior Court by Subaru of New England, Inc. and Subaru Distributors Corporation in 1992. The plaintiffs claimed certain automobiles stored on lots in South Boston suffered pitting damage caused by emissions f rom the Company's New Boston generating station. In February 1997, the Company settled the lawsuit brought by Subaru Distributors Corporation. The settlement did not have a material impact on the Company's financial position or results of operations. The Subaru of New England, Inc.

lawsuit is still pending.

In 1991 the Company was named in a lawsuit brought in the United States District Court for the District of Massachusetts (US District Court) alleging discrim.natory employment practices under the Age Discrimination in Employment Act of 1967 concerning employees af fected by the Company's 1988 workforce reducticn. In December 1996, the Company reached a settlement of this lawsuit under w'aich there is no finding or admission of discriminatory employment practices. The Company anticipates full recovery from its insurance carrier for this settlement.

Also refer to Note L.6. to the Consolidated Financial Statements in Item 8 for a discussion of legal issues involving hazardous waste sites.

Item 4. Submission of Matters to a Vote of Security Holoers There were no matters submitted to a vote of security holders during the fourth quarter of 1996.

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Executive Officers of the Registrant

• The names, ages, positions and business experience during the past five years '

of all the executive officers of Boston Edison Company and its subsidiaries as of March 1, 1997 are listed below. There are no family relationships between any of the officers of the Company, nor any arrangement or understanding L between any company officer and another person pursuant to which the position as officer is held. Officers of the Company hold office until the first  !

l meeting of the directors following the next annual meeting of the stockholders '

and until their respective successors are chosen and qualified.

l Business Experience Name, Age and Position During Past Five Years I l

Thomas J. Ma y, 49 Chairman of the Board, President 1

Chairman of the Board, President l and Chief Executive Officer (since i and Chief Executive Officer 1995), Chairman of the Board and Chief Executive Officer (1994-1995), President and Chief Operating Officer (1993-1994) and Executive Vice President (1990-1993); Director (since 1991)

Chairman of the Board and Chief Executive Officer and Director, Harbor Electric Energy Company, Boston Energy *e-hnology Group, TravElectric Services Corp. and Boston Edison Services, Inc.;

Chairman of the Board and

. Director, Rez-Tek International Corp. and Coneco Corp.; Director, BecoCom, Inc. and Northwind Boston, LLC Alison Alden, 48 Senior Vice President - Sales, Senior Vice President - Sales, Services Services and Human Resources and Human Resources (since 1996), Vice President -

Sales & Service (1993-1996) and Director - Orgar.iLa Lional Development (1990-1993)

Director, Hat-wr Electric Energy Company, Boston Energy Technology Group and Coneco Corp.

E. Thomas Boulette, 54 Senior Vice President - Nuclear Senior Vice President - Nuclear (since 1993), Vice President -

Nuclear Operations and Station Director (1992-1993) and Vice i

President - Operations (1989-1992) of Maine Yankee Atomic Power Company 10 I

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l Business Experience Name, Age and Position During Past Five Years l

L. Carl Gustin, 53 Senior Vice President - Corporate '

Senior Vice President - Corporate Relations (since 1995), Sendor

Relations Vice President - Marketing &

Corporate Relations (1989-1995)  ;

i John J. Higgins, Jr., 64 Senior Vice President (since 1990)

Senior Vice President Douglas S. Horan, 47 Senior Vice President and General l Senior Vice President and Counsel (since 1995), Vice l General Counsel President and General Counsel l (1994-1995) and Deputy General Counsel (1991-1994)

Director and General Counsel, Harbor Electric Energy Company; Director, Boston Energy Technology j Group and BecoCom, Inc.

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l James J. Judge, 41 Senior Vice President and l Senior Vice President and Treasurer (since 1995), Assistant Treasurer Treasurer (1989-1995) and Dire-tor - Corporate Planning l (1993-1995) i l Senior Vice President, Treasurer and Director, Harbor Electric Energy company and Boston Energy Technology Group; Director, TravElectric Services Corp.,

Boston Edison Services, Inc.,

BecoCom, Inc., Northwind Boston, LLC and EnergyVision, LLC i

Ronald A. Ledgett, 58 Senior Vice President - Fossil, j Senior Vice President - Fossil, Field Servi n and Electric 1 Field Service and Electric Delivery (since 1996), Senior Vice 1 Delivery President - Power Delivery (1991- )

1995) l l

Robert J. Weafer, Jr., 50 Vice President - Finance, )

Vice President - Finance, Controller and Chief Accounting  ;

controller and Chief Officer (since 1991) )

Accounting Officer

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Business Experience

• Name, Age and Position During Past Five Years Theodora S. Convisser, 49 Clerk of the Corporation (since Clerk of the Corporation 1986) and Assistant General Counsel (since 1984)

Clerk, Harbor Electric Energy ,

Company, Boston Energy Technology l Group, TravElectric Services  ;

Corp., Boston Edison Services, Inc., Rez-Tek International Corp. ,  ;

Coneco Corp., Becocom, Inc. and '

Northwind Boston, LLC a

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Part II i Item 5. Market for the Registrant's Common Stock and Belated Stockholder Matters (a) Market Information '

The Company's common stock is listed on the New York and Boston Stock Exchanges.

Following is the high and low market value per share of the Company's common stock as reported in the Wall Street Journal for each of the quarters in 1996 and 1995:

1996 1995 High Low High Low First quarter $30 1/8 $26 1/4 $25 1/2 $23 1/8 '

Second quarter $27 1/8 $23 5/8 $27 $23 3/8 Third quarter $25 3/8 $21 3/4 $27 1/2 $24 1/2 Fourth,_ quarter $27 $21 3/4 $29 1/2 $ 2,g_,3[4 (b) Holders As of March 21, 1997, the Company had 35,630 holders of record of its common stock.

(c) Dividends Following are the dividends declared per share of common stock for each of the quarters in 1996 and 1995:

1996 1995 First quarter $0.470 $0.455 ,

Second quarter $0.470 $0.455 Third quarter $0.470 40.455 l Fourth quartq,r $0.470 $0.470 (d) Other Information Ratio of earnings to fixed charges and ratio of earnings to fixed charges and I preferred stock dividend requirements for the year ended December 31, 1996:

Rat!o of earnings te " xed charges 2.91 Ratio of earnings to fixed charges and preferred stock dividend requirements 2.41  !

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Item 6. Selected Financial Data ~

The following table summarizes five years of selected consolidated financial data of the Company (in thousands, except per share data).

1996 1995 1994 1993 1992 i

Operating revenues $1,666,303 $1,628,503 $1,544,735 $1,482,159 $1,411,753 l Net inceme $ 141,546 $ 112,310 $ 125,022 $ 118,218 $ 107,298 Earnings per share of common stock S 2.61 $ 2.08(a) S 2.41 $ 2.28 $ 2.10 Total assets $3,729,291 $3,637,170 S3,608,699 $3,468,724 $3,286,335 Long-term ,

debt $1,058,644 $1,160,223 $1,136,617 $1,272,497 $1,091,073 Eedeemable ,

preferred -

stock $ 203,419 $ 206,514 S 208,514 S 210,514 $ 210,514 1

Cash  !

dividends declared per common share S 1.880 0 1.835 $ 1.775 $ 1.715 $ 1.655 (a) Includes $0.44 per share restructuring charge. Excluding the i restructuring charge, 1995 earnings per share were $2.52. I Certain reclassifications were made to the data reported in prior years to conform with the current method of presentation.

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Item 7. Mana gement' s Discussion and Analysis Positioning in the Industry

Background

Electric utilities have traditionally operated under a monopolistic regulatory framework. Under this framework customers have been restricted to a single electricity provider, typically a vertically integrated electric utility engaged in the generation, transmission and distribution of electricity.

However, since the 1970's, the electric energy business has become increasingly competitive. With the enactment of the Public Utility Regulatory Policies Act of 1978, a new independent power producer industry commenced, competing with traditional electric utilities for opportunities to generate electric power. In recent years many state utility commissions, including the Massachusetts Department of Public Utilities (MDPU), have initiated inquiries into restructuring the electric utility industry with a goal of promoting competition and extending to all customers the option of choosing their own electricity suppliers. In 1996, Massachusetts electric utilities and other interested parties participated in the industry restructuring proceeding before the MDPU. This process culminated in the latter part of the year with a series of settlement agreements and the issuance by the MDPU of its formal electric industry restructuring plan.

Electric utility industry restructuring In December 1996, we reached a settlement agreement with the Massachusetts Attorney General and the Massachusetts Division of Energy Resources that resolves certain necessary issues surrounding electric industry restructuring.

This agreement must be filed with and approved by the MDPU. If approved, the settlement agreement allows retail electric customers the ability to choose their electricity supplier (referred to as retail access). Retail access would occur at the later of January 1, 1998 or the date when retail access is made available to all customers of Massachusetts investor-owned utilities (the Retail Access Date). The settlement agreement provides us with the ability to fully recover our stranded costs incurred under the traditional electric ratemaking structure.

Under the settlement agreement, all retail customers will have the opportunity to select their electricity provider starting on the Retail Access Date.

Retail customers will continue to receive electric delivery service under regulated rates. Customers who choose not to participate in the competitive market will have the option of continuing to buy power from our electric l delivery business at " Standard offer" prices for seven years. The " Standard i

off-." will provide customers with electric service at rates designed to give a 10A savings in electric prices, our electric delivery business will l l purchase power for " Standard offer" service from suppliers through a l

l competitive bidding process.

Commencing with the Retail Access Date, the retail delivery rates of our distribution business will include a non-bypassable access charge designed to recover all of our stranded costs which are currently estimated to be approximately $3 billion. These costs include the above-market commitments under existing purchased power contracts, our net generation plant investment, l nuclear decommissioning commitments and regulatory assets related to our generation business.

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As part of the settlement we have agreed to divest our fossil generating '

plants no later than six months after the Retail Access Date. We expect to continue operation of Pilgrim Nuclear Power Station with a new revenue mechanism for recovery of Pilgrim's future costs and have agreed to estimate the market value of the station by December 31, 2002.

Regulatory assets related to our generation business and our net generation plant investment will be recovered with a return over a twelve-year period.

As an incentive to mitigate stranded costs, our return on equity will be

. increased for mitigation prior to the Retail Access Date and as the transition

} access charge declines thereafter. The aggregate amount of the access charge l will be reduced by the net proceeds trom the fossil divestiture and the market valuation of Pilgrim Station. Nuclear decommissioning commitments and )

above-market commitments under existing purchased power contracts will be collected over the lives of the underlying obligations which are expected to -]

exceed twelve years. Certain severance, employee training and community-related transitional payments are also recoverable through the access charge.

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Our electric delivery business will remain fully subject to rate regulation.

As part of the agreement, while there will be some rate design changes, our base rate revenue level (non-fuel) will be frozen until the Retail Access Date when customer choice begins.

Effective with the commencement of retail choice and pursuant to the

, settlement agreement, our electric delivery business will annually file with j the MDPU a computation supporting our return on average common equity j associated with distribution system operations. The return on equity would be

pubject to a floor of 6% and a ceiling of 11.75%. If the return on equity is below 6%, we would be authorized to add a surcharge to customer rates in order I .to reach the 6% floor. If the return on equity is above 11%, we would be required to adjust customer rates by an amount necessary to reduce the calculated return on equity between 11% and 12.5% by 50%, and a return above 12.5% by 100%. No adjustment would be made if the return on equity falls between 6% and 11%.

i The settlement also provides for the continued protection of the environment through stringent emissions standards, a continued conadtment to energy conservation and renewable resource programs and protections for low-income customers.

l In October 1996, another major electric utility in Missachusetts, along with the Massachusetts Attorney General, the Massachusetts Division of Energy Resources and other parties filed a settlement agreement with the MDPU. Their

settlement agreement provides for retail choice, full compensation for

! potential stranded costs and the divestiture of its fossil and hydroelectric l generating business. In addition, customers that do not choose an alternative supp31er would receive " Standard offer" service that would provide a 10%

savings in electric prices upon the Retail Access Date, un Feoruary 26, 1997, the MDPU issued an order accepting this utility's settlement agreement.

We anticipate that the MDPU will issue a decision on our settlemen* agreement in the second or third quarter of 1997. Implementation of the settlement will also be subject to enactment of enabling legislation by the Massachusetts legislature and rulings by the Federal Energy Regulatory Conadssion (FERC).

In the first quarter of 1997, both the Massachuretts Governor and a Joint l Committee of the Massachusetts legislature filed separate bills on

restructuring the electric utility industry. The major principles of these bills are substantially consistent with those of the MDPU restructuring plan, including the opportunity for stranded cost recovery and reduced electricity 1

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prices. The bills clarify the MDPU's authority to create the opportunity for retail customer choice by January 1, 1998.

In December 1996, the MDPU issued its formal electric industry restructuring plan. The stated goal of the plan is to reduce costs, over time, for all consumers of electricity. Under the MDPU's proposal, the current monopoly regulatory framework will evolve into a competitive market system featuring consumer choice among providers of generation services. The transmission and  ;

distribution of electricity will remain monopolies subject to rate regulation.  ;

Joint ventures l

We currently conduct unregulated activities through our wholly owned j subsidiary, Boston Energy Technology Group (BETG). In December 1996, BETG l signed a joint venture agreement with Residential Communications Network, Inc., currently known as RCN Telecom Services, Inc. (RCN), to form a limited  ;

liability company to provide local and long-distance telephone service, video, high-speed Internet access and other telecommunications-related services (the l l

" Telecommunications Venture"). The unregulated entity will be owned up to 49% l by BETG, with RCN having the day-to-day management responsibility. The projected costs of creating the " Telecommunications Venture", which is planned )

to serve 1.6 million customers in the greater Boston area, is approximately

$300 million over several years. The joint venture agreement is subject to a number of conditions which must be satisfied before formal operations begin, including the obtaining of certain regulatory approvals.

In January 1997 BETG, through one of its wholly owned subsidiaries, signed definitive agreements with Williams Energy Services Company (WESCO), a subsidiary of The Williams Companies, Inc., to form EnergyVision, LLC, an unregulated limited liability company. This " Energy Marketing Venture" will market electricity, natural gas and energy-related services to retail customers in the six New England states. EnergyVision began operations in February 1997. BETG, through its subsidiary, and WESCO each own 50% of the new company, with an expected combined initial investment of less than $10 adllion.

Holding Company In January 1997, we announced a plan to form a holding company structure. The holding company structure, which is subject to shareholder and regulatory approvals, is intended to provide increased financial, managerial and organizational flexibility in order to better position us to operate in the changing electric utility industry. It will permit us to take advantage of nonutility business opportunities in a more timely manner. In addition, the holding company structure will clearly separate our regulated and unregulated '

lines of business enabling us to pursue nonutility business ventures in a l manner consistent with the electric utility industry restructuring principles I outlined by the MDPU. The holding company structure is a well-established form of organization for companies conducting multiple lines of business, ]

particularly entities engaging in both regulated and unregulatad activities.

All investor-owned Passachusetts electric utilities, other than Boston Edison, are currently organized in a holding company structure.

1992 Rate Settlement As referred to in the following Results of Operations, the MDPU had previously approved our three-year settlement agreement effective November 1992. This agreement provided us with retail rate increases, cllowed for the recovery of demand side management conservation program costs, specified certain 17

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accounting adjustments and clarified the timing and recognition of certain ~

expenses. The agreement also set a limit of 11.75% on our rate of return on common equity for each of the calendar years 1993, 1994 and 1995, excluding I any penalties or rewards from performance incentives. The retail rate increases consisted of two annual retail base rate increases of $29 million l effective November 1993 and November 1994 and an annual performance adjustment l charge effective November 1992 through October 2000. The performance

) adjustment charge varies annually based on the performance of Pilgrim Nuclear .

Power Station. This charge is further described in the Electric Sales and I Revenues section. We did not make a base rate filing upon the expiration of  ;

the 1992 settlement agreement, therefore base rates have remained in effect at l their 1995 levels.

Results of Operations 1996 versus 1995 I

Earnings per share of common stock were $2.61 in 1996 compared to $2.08 in 1995. Earnings in 1995 reflected a nonrecurring before tax charge of $34 ndllion ($20.7 million net of tax, or $0.44 per share) associated with our corporate restructuring. The restructuring is discussed further in Note F to the Consolidated Financial Statements. Excluding the nonrecurring restructuring charge, earnings per common share increased 3.6% over 1995 primarily due to lower operations and maintenance and interest expenses and higher Pilgrim performance revenues. These positive changes were partially offset by an increase in depreciation expense.

Operating revenues Operating revenues increased 2.3% over 1995 as follows:

1 (in thousands)

Retail electric revenues $48,649 Demand side management revenues (20,545)

Wholesale revenues (2,072)

Short-term sales and other revenues 11,768 Increase in operatina revenues $37,000 Retail electric revenues increased $48.6 million. Fuel and purchased power revenues increased approximately $36 ndllion. These higher revenues are offset by higher fuel and purchased power expenses and, therefore, have no net effect on earnings. Performance revenues, which vary annually based on the operating performance of Pilgrim Station, increased $14.5 million as Pilgrim Station operated at a higher capacity in 1996. Pilgrim's annual performance adjustment charge is discussed further in the Electric Sales and Revenues section. Retail kWh sales increased 2.8% in 1996, primarily due to the positive economic impacts on our commercial customers.

Demand side nanagement (DSM) revenues decreased primarily due to a decline in current DSM program expenditures.

The primary reason for the decrease in wholesale revenues is due to a decrease in Pilgrim contract customer revenues. These revenues decreased despite increased kWh sales due to lower operations and maintenance expense related to Pilgrim Station. Pilgrim contract customers are billed for their proportionate share of the unit's costs.

Net short-term sales and other revenues increased $11.8 million. Despite lower kWh sales, short-term sales revenues increased approximately $6 million 18

. . _ _ _ -_ . _ _ _ .. _ _ . _ . _ _ _ _ _ _ _ _ _ _ __ _ m __ .

D.

due to higher fuel prices. Revenues from short-term sales result in a corresponding reduction to future fuel and purchased power billings to retail customers and, therefore, have no net effect on earnings. This increase also reflects an increase in revenue from non-electric sources in 1996.

Operating expenses Fuel and purchased power expenses increased $53 million. Fuel expense increased, despite a slight dectease in company generation, due to ,

significantly higher oil and natural gas prices. Purchased power expense reflects a higher volume of energy purchases and an overall increase in energy prices. These increases were partially offset by the timing effect of fuel and purchased power cost collection. Fuel and purchased power expenses are substantially recoverable through fuel and purchased power revenues.

Operations and maintenance expense decreased $41 million primarily due to lower labor costs resulting from our 1995 restructuring and the continuing cost control efforts of each of our business units. In addition, the amortization of deferred nuclear outage costs decreased $9 million. As discussed in Note B to the consolidated Financial Statements, in the third quarter of 1995 we made a retroactive change to the amortization period of these deferred costs from five years to two years, consistent with the two-year cycle between refueling outages at Pilgrim Station.

The 1995 operating expenses reflect a $34 million nonrecurring charge related to our corporate restructuring. Refer to the Results of Operations for 1995 versus 1994 and Note F to the Consolidated Financial Statements for additional information regarding our 1995 restructuring.

Depreciation and amortization increased $32 million. The increase is primarily the result of a change in the estimated remaining economic lives of our Mystic 4, 5 and 6 fossil generating units in the second quarter of 1996, retroactive to the beginning of the year, and an increase in the depreciable plant balance. The change in estimated economic lives of Mystic 4, 5 and 6 i resulted in a $22 million increase in depreciation expense for the year. l Refer to Note B to the Consolidated Financial Statements for more information j on depreciation expense. i I

The decrease in DSM programs expense reflects the decline in current DSM i program expenditures. l The increase in income taxes is due to higher net income and a higher effective tax rate in 1996. Our effective tax rate in 1996 is 38.2% versus 37.1% in 1995.

Interest charges Interest on long-term de)t cecreased due to the maturity of $100 million i 8 7/8% debentures in December 1995 and $100 million 5 1/84 debentures in March ,

1996. These decreases were partially offset by the issuance of $125 million 7.80% debentures in May 1995 which were outstanding for all of 1996. Other interest charges increased due to an increase in interest on short-term debt 1 caused by the higher average short-term debt level partially offset by a lower 1 average short-term borrowing rate. The short-term debt balance increased as a result of the debenture maturities and the redemption of $4 ndllion of preferred stock in 1996. Allowance for borrowed funds used during construction UNFUDC), which represents the financing costs of construction, decreased due to lower overall construction activity during 1996, shorter construction periods, and lower short-term interest rates.

19

1995 versus 1994 Earnings per share of common stock were $2.08 in 1995 compared to $2.41 in 1994. Earnings in 1995 reflect the nonrecurring before tax charge of $34 million ($20.7 ndllion net of tax, or $0.44 per share) associated with our corporate restructuring. The charge reflects the costs of early retirement and severance programs implemented as part of our organizational streamlining and reorganization into business units. Excluding the restructuring charge, earnings per common share were $2.52 in 1995, an increase of 4.6% over 1994.

This increase is due to the $29 million annual retail base rate increase effective November 1994, the ending of amortization of deferred cancelled nuclear costs in 1994, a 1.2% increase in retail kWh sales and lower revenue reserve provisions. These positive impacts were partially offset by higher income and property taxes, nuclear outage amortization and employee benefit expenses in 1995 over 1994 levels, and a gain recorded in 1994 related to a favorable court ruling on an eminent domain case.

Operating revenues Operating revenues increased 5.4% over 1994 as follows-(in thousands)

Retail electric revenues $69,851 Demand side management revenues 8,783 Wholesale revenues (1,799)

Short-term sales and other revenues 6,933 Increase in operatina revenues $83,768 Retail electric revenues increased $69.9 million. Approximately $28 million of the increase was due to the November 1994 base rate increase while approximately $11 million was due to the increase in retail kWh sales. Fuel I and purchased power revenues increased $11 million as a result of the timing l effect of fuel and purchased power cost recovery. These higher revenues are i offset by higher fuel and purchased power expenses and, therefore, have no net  !

effect on earnings. Pilgrim performance rey?nues increased $9 million primarily due to a higher performance rate effective in 1995 and a 17%

increase in generation.

A new annual conservation charge for recovery of demand side management program costs was implemented in February 1995. Under this charge all 1995 program costs were recovered in 1995. This resulted in higher DSM revenues and expenses than in prior years when certain program costs were deferred and recovered over a six year period.

Short-term sales increased as a result of higher generating availability in 1995. Revenues from short-term sales result in a corresponding reduction to future fuel and purchased power billings to retail customers and, therefore, have no net effect on earnings.

Operating expenses Fuel and purchased power expenses increased $22 million primarily due to the timing effect of fuel and purchased power cost collection. Excluding the timing effect, fuel expense increased due to an 8% increase in fossil j generation while purchased power expense was substantially unchanged. Fuel l and purchased power expenses are substantially recoverable through fuel and j purchased power revenues.

l a

20

l 9,-

Operations and maintenance expense increased 3.3% over 1994. This was primarily due to an $11 ndllion increase in the amortization of deferred nuclear outage costs. In the third quarter of 1995 we made a retroactive change to the amortization period of deferred nuclear outage costs from five years to two years as discussed in Note B to the Consolidated Financial Statements. In addition, employee benefit expenses increased primarily due to higher postretirement benefit expenses recorded in accordance with the 1992 settlement agreement. We also incurred higher administrative costs in positioning the company for changes in the industry, which were offset by lower operating costs in the electric delivery business. Electric generation costs increased only 1% in 1995, primarily due to a refueling and maintenance outage at Pilgrim Station.

The $34 million nonrecurring restructuring charge was incurred over the third and fourth quarters of 1995 as a result of our corporate reorganization announced in July 1995. As part of the reorganization, 330 employees elected l to retire under enhanced retirement programs and 149 employees whose positions l were eliminated became eligible for benefits under a special severance program. Refer to Note F to the Consolidated Financial Statements for additional information.

Depreciation and amortization expense increased due to a higher average depreciable plant balance.

In 1994 we fully expensed the remaining deferred costs of the cancelled Pilgrim 2 nuclear unit.

The increase in demand side management programs expense is related to the increase in DSM revenues. Beginning with the annual conservation charge implemented in February 1995, DSM costs are recovered and expensed primarily l in the year incurred. The 1995 expense includes $31 million of 1995 program l costs and $14 ndllion of amortization of costs capitalized in 1992 through 1994.

Property and other taxes increased primarily due to higher Boston property taxes resulting from capital additions.

Our effective annual income tax rate for 1995 was 37.1% vs. 31.4% for 1994.

The higher rate is the result of a $10 million adjustment to deferred income  ;

tax expense made in 1994 in accordance with the 1992 settlement agreement. 1 I

other income The net decrease in other 4 come is primarily due to a $5.7 million gain recognized in 1994 from a court ruling on a 1989 eminent domain taking of certain of our property.

1 Interest charges Interest on long-term debt increased due to a S125 million debenture issuance in May 1995, partially offset by interest savings from first mortgage bond and debenture redemptions in 1994. Other interest charges increased slightly due to higher short-term interest rates partially offset by a lower average short-l term debt level. AFUDC decreased due to a lower construction work-in-progress balance and shorter construction periods, partially offset by higher short-term interest rates.

l l

l 21

Electric Sales and Revenues Electric sales Retail P4hsales increased 2.8% in 1996. The major contributor to this increase was the positive effect on commercial customers of a continued strong economy in our retail service territory. The strong economy's impact in greater Boston is illustrated by the highest cammercial office occupancy rate in 15 years. In addition, hotel occupancy rates and non-manufacturing employment increased over 1995. The commercial sector represents approximately 50% of our electric operating revenues. Residential sales, which represent approximately 274 of electric operating revenues, decreased slightly primarily due to overall milder than normal weather conditions.

Industrial sales remained relatively flat. This sector represents approximately 9% of electric operating revenues. Tot: _ kWh sales, including wholesale, increased 3.3%. The increase in wholesale sales was primarily due to higher sales to our Pilgrim contract customers as the plant was operating for substantially all of 1996. In addition, sales to our municipal customers increased due to a reduction in available energy supply in New England.

A 1.2% increase in retail kWh sales in 1995 was primarily due to a stronger economy, partially of f set by the impact of demand side management programs.

Total kWh sales increased 3.89 primarily due to an increase in Pilgrim contract customer sales.

Electric revenues our retail electric rates are subject to the jurisdiction of the MDPU. As discussed in the Positioning in the Industry section, we reached a settlement agreement in December 1996 that, if approved, resolves certain necessary issues surrounding electric industry restructuring. As part of the settlement agreement our electric delivery business will provide " Standard offer" customers service at rates designed to give a 10% savings in electric prices.

Under the agreement, our base rates will remain frozen until the Retail Access Date (the later of January 1, 1998 or the date when retail access is made available to all customers of Massachusetts investor-owned utilities) . We do not expect that maintaining base rates at their current level until the Retail Access Date will have a material adverse effect on our financial condition or results of operations. After the Petail Access Date, the return on equity on our electric delivery business will be subject to an 11.75% ceiling which is lower than has been experienced in the recent past.

The annual performance adjustment charge from our 1992 settlement agreement

w. m. die MDPU remains in affect through the year 2000 and provides ua with opportunities to improve our financial results. The most significant potential impact of this perform _..ce incentive is sed on Pilgrim Station's annual capacity factor. An annual capacity factor between 601 and 68s would provide us with approximately $54.5 million of revenues in the performance year ended October 1997. For each percentage point inc. ease in capacity factor above 68%, annual revenues will increase by approximately $800,000.

For each percentage point decrease in capacity factor below 60% (to a minimum of 35%), annual revenues will decrease by approximately S900,000. We are currently billing customers based on an 85% capacity factor. This is a decrease from the capacity factor of 90.9e achieved in the performance year ended October 1996 due to the scheduled routine refueling outage that began in February 1997. We earned $67.6 million in revenues related to Pilgrim's capacity factor in the performance year ended October 31, 1996.

22

, - . - _ - - - ~ -.

l I i  !

Pilgrim Station was shut down for approximately three months in 1994 due to a '

non-nuclear problem with its electrical generator. Regularly scheduled maintenance work was also performed during the shutdown. The power needs usually met by the station were met by other generating plants or purchased l

from other suppliers as necessary. We do not believe that the generator l damage resulted from actions within our control. Our recovery of the l incremental purchased power costs during the outage through fuel and purchased power revenues, however, remains subject to review by the MDPU under a j generating unit performance program.

Liquidity We ordinarily meet most of our cash requirements for plant expenditures with internally generated funds. These funds are cash flows from operating activities, adjusted for changes in working capital and the payment of dividends. During 1996, 1995 and 1994 our internal generation of cash provided 170%, 102% and 109%, respectively of our plant expenditures. The capital spending level, excluding nuclear fuel, forecasted for 1997 is $144 million which includes amounts for utility plant and our new business ventures. The capital spending level over the next five years is forecasted to be approximately $750 million. In addition to capital expenditures, we 1 have long-term debt and preferred stock payment requirerants of $103.6 million l per year in 1997 and 1998, $3.6 million in 1999, $168.6 million in 2000 and S53.6 million in 2001.

External financings continue to be necessary to supplement our internally generated funds, primarily through the issuance of short-term commercial paper and bank borrowings. We have authority from the FERC to issue up to $350 ndllion of short-tean debt. We also have a $200 million revolving credit agreement and arrangements with several banxs to provide additional short-term credit on a committed as well as on an uncommitted and as available basis. At December 31, 1996, we had approximately $201 ndllion of short-term debt outstanding, none of which was incurred under the revolving credit agreement.

In 1994 the MDFU approved our financing plan to issue up to $500 million of equity and long-term securities through 1996. In 1996 the MDPU approved our request to extend this financing plan through 1998. Authority to issue approximately $322 million remains under this plan. Proceeds from issuances under this plan are to be used to refinance short and long-term securities and to fund capital expenditures and working capital requirements. Refer to Notes H and I to the Consolidated Financial Statements for additional information relating to our financing activities. We intend to issue $100 million of two-year debt in March 1997.

outlook for the Future Cor;stitive forces within the electric utility industry continued to increase in 1996. Changes in the industry include ongoing competition in wholesale power narkets and increased pressure for retail customer choice. These forces are due to a variety of factors, including legislative and regulatory proceedings at both federal and state levels designeo to foster competition and changes in customer expectations. The trend continues toward increased competition through modified regulation of the industry. In Massachusetts, open access to generation markets for retail customers is approaching rapidly.

The effects of competition have been evident in the wholesale energy market, j In response to the competition from other electric utilities and nonutility i generators to sell electricity for resale, we secured long-term power supply j agreements with our seven wholesale customers that set rates through 2002 and

( beyond. This segment represents 3% of our operating revenues.

l 23

.~ _. - _ - . - _ _ _ _ --- . - _ - . . - _ - - - . . - - - .

I'

. t '

- t In January 1997, we filed an open access tariff with the FERC that i incorporates our transmission rates into a New England regional transmission tariff. This filing, which is subject to approval, was made in response to the FERC's open access transndssion order that was issuad in April 1996. The order requires all utilities with transndssion systems to file open access '

tariffs, to provide service under those tariffs to transmission customers comparable to service provided to their electric energy customers and to take service under the tariffs for wholesale purchases and sales. The order also supports the full recovery of legitimate and verifiable costs previously incurred under federal and state regulation. The provisions in the order >

provide a framework for significant changes in the electric utility industry.

We do not expect the FERC order to significantly impact the results of our operations, which are primarily regulated by the MDPU.

Additional competition exists with alternative fuel suppliers as customers are able to substitute natural gas, steam or oil for electricity for heating or cooling purposes. In addition, industrial and large commercial customers may pursue options to generate their own electric power or factor the cost of electricity into their decisions to relocate to new service territories.

In addition to our involvement in the MDPU's restructuring proceeding, we have actively responded to the changing electric. utility industry in other ways, r In 1995 we reorganized the company into separate business units in order to strengthen our competitiveness. The Customer, Fossil Generation, Nuclear

• Generation and Corporate Services business units were designed to sharpen management focus along our significant lines of operation while maintaining  ;

company-wide strategic goals. The restructuring reduced our workforce which resulted in a significant increase in labor efficiencies and cost savings. We  ;

also continued to develop customer alliances and provided economic development t rates to some customers. These actions all illustrate our commitment to be a competitively priced, reliable provider of energy. i In the traditional revenue requirements model, our electric revenues have been based on the cost of providing electric service. As such, we are subject to certain accounting standards that are not applicable to other businesses and industries in general. We believe that we currently meet the criteria of  ;

these standards. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS 71) requires  !

us to defer recognition of certain costs when incurred when we expect to receive future rate recovery of these costs. The Securities and Exchange Commission has recently begun to focus on how the changes in the electric >

utility industry have affected utilities' ability to continue to apply  !

regulatory accounting. The final rules issued by the MDPU or the enactment of '

legislation in Massachusetts could, in the near term, cause us to no longer meet the criteria for application of SEAS 71 for some of our operations.

Should this occur, we would be required to take an immediate noncash charge to income for all of our affected regulatory assets and the above-market portion

• of purchased power contracts. In addition, a write-down of utility plant assets would be required under Statement of Financial Accounting Standards No.

121, Accounting for the Impairment of Long-Lived Assets and for Leng-Lived Assets to be Disposed Of, if competitive or regulatory change results in a  ;

probability that future cash flows will not be sufficient to recover our i investment in those assets. Based on our settlement agreement we expect to i recover all strandable costs through a non-bypassable access charge to be paid by customers of our electric delivery business. Under our settlement agreement, our delivery business will remain subject to rate-regulation and, therefore, will continue to meet the criteria of these accounting standards.

As noted earlier, under our settlement agreement we expect to continue to operate Pilgrim Station with the ability to collect stranded costs related to o

24 +

...v, - - , . . - ,4 .. , , - , .-- - - . . - - +

l the unit. Although not anticipated based on our settlement agreement, the nonrecovery of strandable costs could have a material impact on our results of operations and financial condition. However, if laws are enacted or regulatory decisions are made that do not offer Massachusetts electric utilitier an opportunity to recover previously reviewed, prudently incurred commitments to provide service to our customers, we believe we have strong legal arguments to challenge such laws or decisions. We will actively pursue the full recovery of stranded costs and are prepared to take the action necessary to protect the interests of our shareholders.

Other Matters connecticut Yankee on December 4, 1996, the board of directors of Connecticut Yankee Atomic Pow *r Company (CYAPC), which owns and operates the Connecticut Yankee nuclear electric generating unit (Connecticut Yankee), unanimously voted to retire ths .

Haddam Neck, Connecticut unit. The decision was based on an economic analysis of the costs of operating the unit through 2007, the period of its operating license, compared to the costs of closing the unit and incurring replacement power costs for the same period. We have a 9.5% equity investment in CYAPC of approximately $10 million. Refer to Note L.4. to the Consolidated Financial Statements for more information regarding Connecticut Yankee.

Environmental We are subject to numerous federal, state and local standards with respect to waste disposal, air and water quality and other environmental considerations.

These standards can require that we modify our existing facilities or incur increased operating costs.

We own or operate approximately 40 properties where oil or hazardous materials were previously spilled or released. We also continue to face possible liability as a potentially responsible party in the cleanup of approximately ten multi party hazardous waste sites in Massachusetts and other states where we are alleged to have generated, transported or disposed of hazardous waste at the sites. Refer to Note L.6. to the Consolidated Financial Statements for more information regarding hazardous waste issues.

In October 1996, the Accounting Standards Executive Committee of the American Institute o+ Certified Public Accountants issued Statement of Position 96-1, Enviror.mer.tal Remediation Liabilities, effective in 1997. This statement contaft.s authoritative guidance on specific accounting issues that are present in ene recognition, measurement, display and disclosure of environmental remediation liabilities. We do not believe that this statement will have a material effect an our financial position or results of operations.

Uncertainties cor tinue tc exist with respect to the disposal of both spent nuclear fuel and low-level radioactive waste (LLW) resulting from the operation of Pilgrim Station. The United States Department of Energy (DOE) is responsible for the ultimate disposal of spent nuclear fuel; however, there are uncertainties regarding the DOE's schedule of acceptance of spent fuel for disposal. In 1995 we regained access to the LLW disposal facility located in Barnwell, South Carolina. Refer to Note E to the consolidated Financial Statements for further discussion regarding spent nuclear fuel and LLW disposal.

The 1990 Clean Air Act Amendments require a significant reduction in nationwide emissions of sulfur dioxide frem fossil fuel-fired generating 25

units. Sulfur dioxide emissions will be restricted through a market-based i l

system of allowances. In 1996 we sold sulfur dioxide allowances related to i

the years 2000 to 2010 that are expected to be in excess of our needs.

Proceeds from the sale of these allowances were recorded as a regulatory liability as it is probable that we will be required to refund the proceeds to l customers. We have the option to repurchase certain of these allowances at  ;

specified prices from 2000 to 2010. We currently do not anticipate exercising i these options; however, their potential exercise will be based on numerous factors, including the timing of the Retail Access Date. As discussed in the ,

Positioning in the Industry section, under our settlement agreement we have l agreed to the divestiture of our fossil generating plants no later than six months after the Retail Access Date (the later of January 1, 1998 or the date when retail access is made available to all customers of Massachusetts investor-owned utilities). If regulatory approval is not obtained or is delayed, it is possible that we could continue to operate these units. Other provisions of the 1990 Clean Air Act Amendments involve limitations on emissions of nitrogen oxides from existing generating units. Combustion system modifications made to New Boston and Mystic Stations, including the

+

installation of low nitrogen oxides burners at New Boston, have allowed the units to meet the provisions of the 1995 standards. Depending upon the outcome of certain Massachusetts Department of Environmental Protection air quality modeling studies currently in progress, the continued operation of these units could require additional emission reductions by 1999 or years thereafter. The extent of any additional endssion restrictions and the cost of any further modifications is uncertain at this time.

)

l Public concern continues regarding electromagnetic fields ( EMF) associated with electric transmission and distribution facilities and appliances and wiring in buildings and homes. Such concerns have included the possibility of adverse health effects caused by EMF as well as perceived effects on property values. Some scientific reviews conducted to date have *:ggested associations between EMF and potential health effects, while other studies have not substantiated such associations. The National Research Council recently reported that there is no conclusive evidence that exposure to EMF from power lines and appliances presents a health hazard. The panel of scientists, working with the National Academy of Sciences, report that more than 500 studies over the last several years have produced no proof that EMF causes '

leukemia or other cancers or harms human health in other ways. We continue to l support research into the subject and are participating in the funding of i industry-sponsored studies. We are aware that public concern regarding EMF in ,

some cases has resulted in litigation, in opposition to existing or proposed  !

facilities in proceedings before regulators or in requests for legislation or regulatory standards concerning EMF levels. We have addressed issues relative l to EMF in various legal and regulatory proceedings and in discussions with customers and other concerned persons; however, to date we have not been significantly affected by these developments. We continue to closely monitor all aspects of the EMF issue.

Litigation We were named as a party in lawsuits by Subaru of New England, Inc. and Subaru Distributors Corporation. The plaintiffs claimed certain automobiles stored on lots in South Boston suffered pitting damage caused by emissions from our New Boston Station generating unit. In February 1997, we settled the lawsuit brought by Subaru Distributcrs Corporation. The settlement did not have a material impact on our financial position or results af operations. The Subaru of New England, Inc. lawsuit is still pending.

26 1

I

__ . _ . , _ . ._ _ _ _ _ ____m__. _ _ _ - _ _ _ _ _ _ _ . _ . _ . _ _ . - _ _ _ . _ . . _ _ _ . . _

'. i Refer to Note L.7. to the Consolidated Financial Statements for more  !

information on these lawsuits and other legal matters in which we are  !

involved.

Safe harbor cautionary statement We occasionally make forward-looking statements such as forecasts and projections of expected future performance or statements of our plans and objectives. These forward-looking statementa may be contained in filings with j the Securities and Exchange Commission, press releases and oral statements.

Actual results could potentially differ naterially from these statements. l Therefore, no assurances can be given that the outcomes stated in such  !

forward-looking statements and estimates will b~ achieved.

4 The preceding sections include certain forward-looking statements about the effects of the industry restructuring process and our related settlement agreement, our joint ventures, operating results, Pilgrim Station's  ;

performance, Connecticut Yankee and environmental and legal issues.

The effects of the industry restructuring process currently underway at the MDPU and our related settlement agreement could differ from our expectations.

This could occur as regulatory decisions and negotiated settlements between utilities and intervenors are finalized. In addition, the development of a l competitive electric generation market, the impacts of actual electric supply i and demand in New England and legislative action may affect the ultimate results of the industry restructuring and our settlement agreement. j The timing and activities of our joint ventures as well as our actual investments may differ from our expectations. This could occur-if required [

regulatory approvals are delayed or not obtained.

The impacts of our continued cost control procedures on our operating results f could differ from our expectations. The effects of changes in economic  !

conditions, tax rates, interest rates, technology and the prices and

• availability of operating supplies could materially affect our projected operating results. j Pilgrim Station's performance could differ from our expectacicos. The station's capacity f actor could be impacted by changes in regulacions or by unplanned outages resulting from certain operating conditions.

I The ultimate liability related to the shutdown of Connecticut Yankee could i differ from the current estimate. In addition, although not anticipated, it l is possible that some portion of our share of post-ope _otion costs may not be ,

recoverable from ultimate customers. l l

The impacts of various environmental and legal issues could differ from our i expectations. New regulations or changes to existing regulations could impose additional operating requirements or liabilities other than expected. The effects of changes in specific hazardous waste site conditions and cleanup technology could affect our estinated cleanup liabilities. The impacts of changes in available information and circumstances regarding legal issues could affect our estimated litigation costs.

27

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_- . _ _ _ _ _ _ . _ _ _ _m_. ._.m ._ . . .m_ _ _ _ - . _ . _ _ _ . _ _ _ _ _ . _ . _ _ _ . _ _ _ _ _ _ _

l 1

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Item 8. Financial Statements and Supplementary Financial Information Consolidated Statements of Income years ended December 31, (in thousands, except earnings per share) 1996 1995 1994 Operating revenues $1,666,303 $1,628,503 $1,544,735 Operating expenses:

Fuel and purchased power 588,893 535,806 513,825 ,

operations and maintenance 417,372 458,196 443,545 i Restructuring costs 0 34,000 0 Depreciation and amortization 185,494 153,339 148,845

, Amortization of deferred costs of cancelled nuclear unit 0 0 19,791 Demand side management programs 30,825 45,125 35,436 -

Taxes-property and other 107,086 106,361 100,015 Income taxes 88,703 68,276 54,7,98 Total operating expenses )

1,418,373 1,401,103 1,316,257 Operating income 247,930 227,400 228,478 ,

Other income (expense), net 698 (575) 3,979 ~

Operating and other income 248,628 226,825 232,457 Interest charges:

Long-term debt 94,823 106,640 102,570 Other 14,551 12,642 12,343 Allowance for borrowed funds used during construction (2,292) (4,767) (7,478) '

Total interest charges 107,082 114,515 107,435 i Net income 141,546 112,310 125,022 Preferred stock dividends 15,365 15,571 15,765 Earnings available for common shareholders $ 126,181 $ 96,739 $ 109,257 Weighted average common shares outstanding 48,265 46 592 45,338 Earninas per share of common stock $ 2.61 $ 2.00 $ 2.41 Consolidated Statements of Retained Earnings years ended December 31, .

1996 1995 '

(in thousands) 1994 Balance at the beginning of the year $ 257,344 S 247,004 $ 218,292 Net inceme 141,546 112,310 125,022 Subtotal 398,890 2'4,314 34',314 Cash dividends declared:

Preferred stock 15,365 15,571 15,765 Common stock 90,834 86,399 80,545 ,

Subtotal 106,199 101,970 96,310 ,

Provision for preferred stock redemption and issuance costs (a) 905 0 0 galance at the end of the year $ 291,786 $ 2511_344 $ 247.,204 (a) Refer to Note B.7. to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.  !

28

Consolidated Balance Sheets December 31, (in thousands) 1996 1995 Assets Utility plant in service, at original cost $4,393,585 $4,315,422 Less: accumulated depreciation 1,550,317 $2,843,268 1,439,996 $2,875,426 Nuclear fuel 351,453 302,594 Less: accumulated amortization 268,509 82,944 251,951 50,643 ,

Construction work in progress 30,376 29,573  !

Net utility plant 2,')S6,588 2,955,642 Investments in electric companies, at equity 23,054 23,620 Nuclear decommissioning trust 132,076 102,894 l Current assets: l Cash and cash equivalents 5,651 5,841 l Accounts receivable 233,024 219,114  ;

Accrued unbilled revenues 34,922 37,113 '

Fuel, materials and supplies, at average cost 57,075 59,631 Other 45,146 375,818 23,607 345,306 Deterred debits: l Regulatory assets power contracts 88,963 21,396 '

Other regulatory assets 113,063 128,699 Other 39,729 59,613 Total assets $3,72L 291 $3,637,170 i

capitalization and Liabilities Common stock equity $1,036,424 $ 989,438 ,

Cumulative preferred stock: l Nonmandatory redetmable series 119,954 11;,677 Mandatory redeemable series 81,465 84,837 Long-term debt 1,058,644 1,160,223 Current liabilities:

Long-term debt / preferred stock due within one year $ 102,667 $ 102,667 Notes payable 201,454 126,441 Accounts payable 134,083 133,474 Accrued interest 24,378 25,113 Dividends payable 25,343 25,351 Other 115,812 603,737 138,044 551,090 Deferred credits:

Power contracts 88,963 21,396 i I

Accumu_ated deferred inn _e taxes 498,718 497,282 Accumulated deferred investment tax credits 58,899 62,970 Nuclear decommissioning liability 133,388 113,2Aa Other 49,099 36,969 Commitments and contingencies Total capitalization and liabilities $3t l29,291 $3,637,170 The accompanying notes are an integral part of the consolidated financial statements.

29

Consolidated Statements of Cash Flows years ended December 31, (in thousands) 1996 1995 1994 Operating activities:

Net income S141,546 S112,310 $125,022 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 228,259 202,294 203,222 Deferred income taxes and investment tax credits (4,057) (25,193) (8,276)

Allowance for b zrowed funds used during construction (2,292) (4,767) (7,478)

Net changes in:

Accounts receivable and accrued unbilled revenues (11,719) (34,626) (20,701)

Fuel, materials and supplies (2,171) 7,202 3,093 Accounts payable 609 2,978 23,196 Other current assets and liabilities (44,514) 26,485 35,217 other, net 50,921 23,975 14,847 Net cash provided by operating activities 356,582 310,658 368,142 Investing activities:

Plant expenditures (excluding AFUDC) (151,045) (180,822) (198,771)

Nuclear fuel expenditures (52,967) (13,621) (21,934)

Demand side management expenditures 0 0 (37,007)

Sale of plant assets, net (106) 3,018 15,972 Nuclear decommissioning trust investments (29,182) (20,063) (16,771)

Electric company investments 566 1,058 (386)

Net cash used in investing activities (232,734) (210,430) (258,897)

Financing activities:

Issuances:

Common stock .

12,559 64,888 10,634 Long-term debt 0 125,000 15,000 Redemptions:  ;

Preferred stock (4,000) (2,000) (2,000)

Long-term debt (101,600) (100,600) (50,000)

Net change in notes payable 75,013 (88,345) 10,635 Dividends paid (106,010) (100,152) (95,460)

Net cash used in financing activities (124,038) (101,209) (111,191)

Net decrease in cash and cash equivalents (190) (981) (1,946)

Cash and cash equivalents at the beginning of the year 5,841 6,822 8,768 Cash and cash ecuivalents at the end of the year S 5, 65J S 5,841 $ 6 gggg Supp.emental disclosures of cash flow information:

Cash paid during the year for:

Interest, net of amounts capi *alized $100 910 S104,n11 $ 99,287 Income taxes S 98,668 S 96,180 S 46,074 The accompanying notes are an integral part of the consolidated financial statements.

30

Notes to Consolidated Financial Statements Note A. Nature of operations We are an investor-owned regulated public utility operating in the energy and energy services business. This includes the generation, purchase, transmission, distribution and sale of electric energy and the development and implementation of electric demand side management programs. A portion of our generation is produced by our wholly owned nuclear generating unit, Pilgrim Nuclear Power Station. We supply electricity at retail to an area of 590 square miles, including the city of Boston and 39 surrounding cities and towns. We also supply electricity at wholesale for resale to other utilities and municipal electric departments. Electric operating revenues were 88%

retail and 12% wholesale in 1996. We also conduct unregulated activities through our wholly owned subsidiary, Boston Energy Technology Group (BETG).

Through BETG and its subsidiaries, we are engaged in certain nonutility businesses, including energy utilization and conservation, construction management and district energy. In December 1996, BETG signed a joint venture agreement with Residential Communications Network, Inc., currently known as RCN Telecom Services, Inc. (RCN), to form a limited liability company to provide local and long-distance telephone service, videe, high-speed Internet access and other telecommunications-related services (the " Telecommunications Venture"). The unregulated entity will be owned up to 494 by BETG, with RCN having the day-to-day management responsibility. The joint venture agreement is subject to a number of conditions which must be satisfied before formal operations begin, including the obtaining of certain regulatory approvals. In January 1997, BETG, through one of its wholly owned subsidiaries, signed definitive agreements with Williams Energy Services Company (WESCO), a subsidiary of The Williams Companies, Inc., to form EnergyVision, LLC, an unregulated limited liability company. This " Energy Marketing Venture" will market electricity, natural gas and energy-related services to retail customers in the six New England states. BETG, through its subsidiary, and WESCO each own 50% of the new company which began operations in February 1997.

In January 1997, we announced a plan to form a holding company structure. The holding company structure, which is subject to shareholder and regulatory approvals, is intended to provide increased financial, managerial and organizational flexibility in order to better position us to operate in the changing electric utility industry. It will permit us to take advantage of nonutility business opportunities in a more timely manner. In addition, the holding company structure will clearly separate our regulated and unregulated lines of business enabling us to pursue nonutility business ventures in a manner consistent with the electric utility industry restructu ag principles outlined by the Massachusetts Department of Public Utilities (MDPU). The he?"ing company structure is a well-easablished form of organization for companies conducting multiple lines of business, particularly entities engaging in both regulated and unregulated activities. All investor-owned Massachucetts electric utilities, other than Boston Edison, are currently organized in a holding company structure.

Refer also to Note C to these Consolidated Financial Statements for potential changes in the nature of our operations as a result of the electric utility industry restructuring.

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=. ~ , ~.- .

Note B. Significant Accounting Policies

1. Basis of Consolidation and Accounting The consolidated financial statements include the actisities of our wholly owned subsidiaries, Harbor Electric Energy Company (HEEC) and PETG. All significant intercompany transactions have been eliminated. Certain reclassificaticns have been made to the prior year data to conform with the current presentation.

We follow accounting policies prescribed by the Federal Energy Regulatory Commission (FERC) and the MDPU. We are also subject to the accounting and reporting requirements of the Securities and Exchange Commission. The consolidated financial statements conform with generally accepted accounting principles (GAAP). As a rate-regulated company we are subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SEAS 71), under GAAP. The application of SEAS 71 results in differences in the timing of recognition of certain expenses from that of other businesses and industries. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

2. Revenues We record estimates of revenues for electricity used by our customers but not l yet billed at the end of each accounting period. l

3. Forecasted nsel and Purchased Power Bates The rate charged to retail customers for fuel and purchased power allows for fuel and purchased power costs which are not included in our base rates to be billed to customers using a forecasted rate. The difference between actual costs and the amounts billed to customers is recorded as an adjustment to fuel and purchased power expenses and is included in accounts receivable on the consolidated balance sheet until subsequent rates are adjusted. The MDPU has the right to reduce our subsequent fuel and purchased power rates if they find that we have been unreasonable or imprudent in the operation of our generating units or in purchasing fuel.

l

4. Utility Plant Utility plant is stated at original cost of construction. The costs of replacements of property units are capitalized. Maintenance and repairs and replacements of ndnor items are expensed as incurred. T"e ariginal cost of property retired, net of salvage value, and the related costs of removal are charged to accumulated depreciation.

S. Depreciation and Nuclear niel Amortization Depreciation of our utility plant is computed on a straight-line basis using composite rates based on the estimated useful lives of the various classes of property. Excluding the adjustment discussed below, the overall composite depreciation rates were 3.26%, 3.28% and 3.31% in 1996, 1995 and 1994, respectively.

32

Upon the completion of a review of our electric generating units, we determined that our oldest and least ef ficient fossil units (Mystic 4, 5 and

6) are unlikely to provide competitively priced power beyond the year 2000.

Therefore, during the second quarter of 1996, we revised the estimated remaining economic lives of these units to five years retroactive to the beginning of the year. The effect of this change in estimate is an annual increase to. depreciation expense of $22 million.

The cost of decommissioning Pilgrim Station is excluded from our depreciation rates. Refer to Note E to these Consolidated Financial Statements for a discussion of nuclear decommissioning. The cost of nuclear fuel is amortized based on the amount of energy Pilgrim Station produces. Nuclear fuel expense also includes an amount for the estimated costs of ultimately disposing of spent nuclear fuel and for assessments for the decontamination and decommissioning of United States Department of Energy nuclear enrichment facilities. These costs are recovered from our customers through fuel rates.

6. Deferred Nuclear outage costs We defer the incremental costs associated with nuclear refueling outages when incurred and amortize them over future periods. In 1995 we changed the amortization period from five years to two years. The two-year amortization period is consistent with the two-year cycle between nuclear refueling outages at Pilgrim Station.

7. Costs Associated with Issuance and Redangption of Debt and Preferred Stock Consistent with our recovery in electric rates, we defer discounts, redemption premiums and related costs associated with the redemption and issuance of long-term debt and preferred stock. The costs related to long-term debt are recognized as an addition to interest expense over the life of the debt or replacement debt. Beginning in 1996, consistent with an accounting order received from the FERC, we reflect costs related to preferred stock redemptions and issuances as a direct reduction to retained earnings over the average life of the replacement preferred stock series.

8. Allowance for Borrowed Funds Used During Construction (ATUDC)

AFUDC represents the estimated costs to finance utility plant construction.

In accordance with regulatory accounting, AFUDC is included as a cost of utility plant and a reduction of current interest charges. Although AFUDC is not a current source of cash income, the costs are recovered from customers over the service life of the related plant in the form of increased revenues collected as a result of higher depreciation expense. Our AFunC rates in 1996, 1995 and 1994 were 5.87%, 6.353 and 4.45%, respectively, and represented only the cost of short-term debt.

9. Cash and Cash Equivalents cash and cash equivalents are comprised of highly liquid securities with

' maturities of 90 days or less when purchased. Outstanding checks are included in cash and accounts payable until they are presented for payment.

10. Allowance for Doubtful Accounts our accounts-receivable are substantially recoverable. This recovery occurs both from customer payments and from the portion of customer charges that provides for the recovery of bad debt expense. Accordingly, we do not maintain a significant allowance for doubtful accounts balance.

33

11. Regulatory Assets Regulatory assets represent costs incurred which are expected to be collected from customers through future charges in accordance with agreements with our regulators. These costs are expensed when the correspcnding revenues are received in order to appropriately match revenues and expenses The majority of these costs is currently being recovered from customers over varying time periods. No return on investment is being earned on the regulatory assets.

Regulatory assets consisted of the following:

December 31, 1996 1995 Power contracts $ 88,963 $ 21,396 Pedemption premiums 31,052 36,832 Income taxes, net 47,483 46,121 Postretirement benefits costs 15,009 15,009 Decontamination and decomadssioning 13,190 13,968 Nuclear outage costs S,432 13,471 Other 2,897 3,298

_ {2,,12,d26 S150,095

12. Earnings Per Share of Conanon Stock Earnings per share of common stock is calculated by dividing net income, after the payment of preferred stock dividends, by the weighted average common shares outstanding during the year.

Note C. Electric Utility Industry In December 1996, we reached a settlement agreement with che Massachusetts Attorney General and the Massachusetts Division of Energy Resources that, if approved by the MDPU, allows all retail electric customers in our service area j to choose their electricity supplier (referred to as retail access) beginning '

as early as January 1, 1998. As part of the settlement, we have agreed to divest our fossil generating plants no later than six months after the commencement of retail access. Accordingly, other than Pilgrim Nuclear Power Station, we will no longer own any electricity generating facilities. The rates of our retained electric delivery business will continue to be regulated by the MDPU and will include a non-bypassable access charge for the collection of our stranded costs. These costs include the above-market commi t ments under existing purchased power contracts, our net generation plant i n .- ment, nuclear decommissioning commitments and regulatory assets relatea to our generation business. Implementation of the settlement will be subject to enactment of enabling legislation by the Massachusetts legislature and rulings j by the FERC.

In the traditional revenue requirements model, our electric revenues have been based on the cost of providing electric service. As such, we are subject to certain accounting standards that are not applicable to other businesses and industries in general. We believe that we currently meet the criteria of these standards. SEAS 71 requires us to defer recognition of certain co*ts when incurred when we expect to receive future rate recovery of these costs.

The Securities and Exchange Commission has recently begun to focus on how the changes in the electric utility industry have affected utilities' ability to I continue to apply regulatory accounting. The final tales issued by the MDPU or the enactment of legislation in Massachusetts could, in the near term, cause us to no longer meet the criteria for application of SEAS 71 for some of l our operations. Should this occur, we would be required to take an immediate 34

5 noncash charge to income for all of our affected regulatory assets and the above-market portion of purchased power contracts. In addition, a write-down of utility plant assets would be required under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, if competitive or regulatory chance results in a probability that future cash flows will not be sufficient to recover our investment in those assets. Based on our settlement agreement we expect to recover all strandable costs through a non-bypassable access charge to be paid by our delivery business customers. Under our settlement agreement, our delivery business will remain subject to rate regulation and, therefore, will continue to meet the criteria of these accounting standards. As noted earlier, under our settlement agreement we expect to continue to operate Pilgrim Station with the ability to collect stranded costs related to the unit. Although not anticipated based on our settlement agreement, the nonrecovery of strandable costs could have a material impact on our results of operations and financial condition.

However, if laws are enacted or regulatory decisions are made that do not offer Massachusetts electric utilities an opportunity to recover previously reviewed, prudently incurred commitments te provide service to our customers, we believe we have strong legal arguments to challenge such laws or decisions.

We will actively pursue the full recovery of stranded costs and are prepared to take the action necessary to protect the interests of our shareholders.

Our 1992 settlement agreement provided us with two annual retail base rate increases of $29 million effective in November 1993 and November 1994 and an eight-year annual performance adjustment charge. We did not make a base rate filing upon the expiration of the settlement agreement in 1995, therefore base rates have remained in effect at their 1995 levels.

Note D. Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ( S EAS 109) . SEAS 109 requires the recognition of deferred tax assets and liabilities for the future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SEAS 109 we recorded net regulatory assets of $47.5 million and $46.1 million and corresponding net increases in accumulated deferred income taxes as of December 31, 1996, and December 31, 1995, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.

Accumulated deferred income taxes consisted of the following:

December 31, (in thousands) 1996 1995 Deferred tax liabilities:

Plant-related $532,390 $521,280 Other 95,642 95,148 l 628,032 616,428 Deferred tax assets:

Plant-related 8,406 12,590 Investment tax credits 38,005 40,632 Other 82,903 65,924 129,314 119,146 Net accumulated deterred inco_me taxes $498,718 $497,282 35

l l

l l

1 No valuation allowances for deferred tax assets are deemed necessary. l 1

1 Previously deferred investment tax credits are amortized over the estimated l

lives of the property giving rise to the credits.

I Components of income tar expense were as follows: j years ended December 31, I (in thousands) 1996 1995 1994  !

Current income tax expense $92,760 $93,469 $63,358 Deferred income tax expense 14 (21,115) (4,468)

Investment tax credits (4,071) (4,078) (4,092)

Income taxes charged to operations 88,703 68,276 54,798 ,

Taxes on other income: I current (721) (1,729) 2,550 Deferred 0 0 284 '

(721) (1,729) 2,834 Total income tax _ expense $87,982 $66,547 S57,632 '

l The effective income tax rates reflec'.ed in the consolidated financial l statements and the reasons for their differences from the statutory federal income tax rate were as follows:

1996 1995 1994 l Statutory tax rate 35.04 35.06 35.0% 1 State income tax, net of federal income tax benefit 4.3 4.3 4.3 l Investment tax credits (1.8) (2.3) (2.3)  ;

Reversal of deferred taxes - settlement agreement - -

(5.5) 1 Other 0.7 0.1 (0.1)  !

_ Effective tax rate 38.25 37.1% 31.4% i Note E. Nuclear Decommissioning and Nuclear Waste Disposal

1. Nuclear Deconanissioning When Pilgrim Station's operating 1.' ce"se expires in 2012 we will be required to decommission the plant. We rec estimate of decommissioning costs in depreciation expense on the consol..ateu statements of income over Pilgrim's expected service life. Decommissioning expense was $12 million, $14 million and $15 million in 1996, 1995 and 1994, respectively. The estimate used to determine our annual expense is based on a 1991 study that documents a cost of approximately $328 ndllion to decommission the plant using the " green field" method, which provides for the plant site to be completely restored to its original state. The cost estimate was incorporated in our 1992 retail settlement agreement. We receive recovery of the annual expense through charges to our retail customers and from other utility companies and municipalities which purchase a contracted amount of Pil""im's electr i c generation. The funds we collect from decommissioning charges are deposited in an external trust and are restricted to use for decommissioning and related expenses. The net earnings on the trust funds, which are also restricted, increase the nuclear deconnissioning trust balance, thus reducing the amount to be collected from customers.

The 1991 decommissioning study was partially updated for internal planning purposes in order to evaluate the potential impact cf long-term spent fuel storage options resulting from delays in the United States Department of Energy (DOE) spent fuel removal progranu Refer to part 2 below for a discussion of spent fuel removal. The partial update indicates an estimated decommissioning cost of $400 million in 1991 dollars based upon a revised 36

O. ,

spent fuel removal schedule and utilization of dry spent fuel storage technology. No further update is currently available; however, we will continue to monitor DOE spent fuel removal schedules and developments in spent fuel storage technology along with their impact on the decommissioning estimate. We anticipate that we will be permitted to recover our actual ultimate decommissioning costs from our retail and contract customers.

In February 1996, the Financial Accounting Standards Board (EASB) issued proposed new rules for accounting for liabilities related to closure and removal of long-lived assets, which include decommissioning of nuclear generating facilities. If these proposed rules rre adopted we would be required to retroactively recognize the entire estimated liability for decommissioning costs on the balance sheet, offset by an addition to utility plant. The plant addition would be depreciated over Pilgrim's remaining expected service life. The liability would be measured based on the present value of estimated future cash flows. The cumulative effect of adoption of these proposed rules could result in the recognition of a regulatory asset to be recovered from customers to the extent that the present value difference in the liability between when the liability was incurred and when the rules are adopted exceeds the depreciation expense previously recognized for decommissioning. In addition, trust fund earnings would be reported on the income statement. Depending on the results of the EAS B' s redeliberation of certain issues regarding these proposed rules, it plans to issue either a final statement or revised proposed rules in the second quarter of 1997.

2. Spent Nuclear Fuel The spent fuel storage facility at Pilgrim Station is expected to provide storage capacity through approximately 2003. We have a license amendment from the Nuclear Regulatory Commission to modify the facility to provide sufficient room for spent nuc13ar fuel generated through the end of Pilgrim's operating license in 2012; however, any further modifications are subject to review by the MDPU. We are actively exploring the feasibility of other spent fuel storage facilities and technologies, including proposed participation in a limited liability company (LLC) which would undertake construction of a private spent fuel storage facility in the state of Utah or other locations.

Our participation in this LLC requires approval by the MDPU and is currently J

the subject of a petition seeking such approval.

8 In July 1996, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the DOE is obligated to begin taking spent nuclear fuel for disposal in 1998. The decision was in response to petitions filed by us and other interested parties in 1994 seeking declaratory rulings concerning this j obligation. In December 96, the DOE notified us and other nuclear plant i owners that it would be unable to begin acceptance of spent nuclear fuel for l disposal in 1998. Along with other interested parties, we again filed a j petition with the U.S. Court of Appeals for the District of Columbia circuit seeking declaratory rulings concerning enforcement and remedies for DOE's failure to accept spent fuel for disposal in a timely manner. Under the I Nuclear Waste Policy Act of 1982 it is the ultimate responsibility of the DOE I to permanently dispose of spent nuclear fuel. We currently pay a fee of $1.00 per net megawatthour sold from Pilgrim Station generation under a nuclear fuel disposal contract with the DOE. The fee is collected from customers through fuel charges. The DOE has been conducting scientific studies evaluating a potential spent nuclear fuel repository site at Yucca Mountain, Nevada. The potential site, however, has encountered substantial public and political ,

opposition and the DOE has publicly stated that it will be unable to begin acceptance of spent nuclear fuel for disposal by the date specified in the Nuclear Waste Policy Act. We cannot predict at this time whether or on what l

37

8 l

f schedule the DOE will eventually construct a spent fuel repository or what the effect will be of any delays in such construction. ,

3. Low-Level Radioactive Waste We regained access to low-level radioactive waste (LLW) disposal facilities located in Barnwell, South Carolina, in 1995. This site is currently the only l

disposal facility available to us. Legislation has been enacted in Massachusetts establishing a regulatory process for managing the state's LLW, including the possible siting, licensing and construction of a disposal facility within the state, or, alternatively, an agreement with one or more other states. Pending the construction of a disposal facility within the state or the adoption by the state of some other LLW management procedure, we I will continue to monitor the situation and investigate other available '

options.

Note F. Corporate Restructuring l

In 1995 we streamlined the corporate organization and reorganized the company l into separate business units in order to strengthen our competitiveness in the changing electric energy market. In conjunction with this reorganization we offered enhanced retirement programs and implemented a special severance I program to reduce employee staffing levels. Under the enhanced retirement l programs 330 employees elected to retire, and 149 employees rhose positions l were eliminated became eligible for benefits under the special severance program. These programs resulted in a $34 million pre-tax charge ($20.7 I million net of tax) over the third and fourth quarters of 1995. The charge i l consisted of $24 million for the retirement programs and $10 million for the j l severance program. The enhanced retirement programs were offered to all employees at least 55 years old, with different years of service requirements for management and union employees. The programs provided for supplemental salary payments and waivers of the early retirement pension reduction and the i medical and life insurance benefits years of service requirement. The special severance program, which applied to management and support personnel, was provided for all employees whose positions were eliminated in the j reorganization. Severance benefits provided included salary payments, medical insurance and outplacement services. As of December 31, 1996, there was no l

material obligation remaining for these programs.

l Note G. Pensions and Other Postretirement Benefits

1. Pensions We have a defined benefit funded retirement plan with certain contributory features that covers substantially all employees. Benefits are based upon an employee' s years of service and nighest eligible average compensation during j the last ten years of credited amployment. Our fundi.lg policy is to l contribute an amount each year that is not less than the minimum required l contribution under federal law or greater than the maximum tax deductible amount. The retirement plan assets consist of equities, bonds, money market funds, insurance contracts and real estate funds.

We also have a supplemental retirement plan for certain management employees.

j Benefits under this plan are based on final compensation upon retirement. The plan is not funded. The plan's cost and benefit obligation amounts are included in the following pension information for 1995 and 1996. Amounts related to the plan prior to 1995 were not material to our total pension costs.

I t

38

- -_ _ - .-. . _ . - ~ . _ . _-. - . _ . _ _ - __ . .. ._ _ _ - .

8 Net pension cost consisted of the following components:

years ended December 31, (in thousands) 1996 1995 1994 Current service cost - benefits earned $13,452 $11,339 $15,057 Interest cost on projected benefit obligation 32,325 31,789 33,961 Actual net (return)/ loss on plan assets (40,335) (72,192) 214 Net amortization and deferral 17,064 49,557 (32,169)

Net pension cost $22,506 $20,493 S17,063 In accordance with our 1992 settlement agreement we deferred the difference between the net pension cost of the retirement plan and its annual funding amount through 1995. Net pension costs recognized in 1995 and 1994 were $2E.2 million and $25.0 million, respectively.

We used the following assumptions for calculating pension cost:

1996 1995 1994 Discount rate 7.25+ 8.256 7.00%

Expected long-term rate of return on assets 10.00% 10.00% 10.00s Compensation increase rate 3.90% 3.90% 4.50t The plans' funded status were as follows:

December 31, (in thousands) 1996 1995 Supplemental Supplemental Retirement Retirement Retirement Retirement Plan Plan Plan Plan Actuarial present value of accumulated benefit obligation:

Vested $316,101 $ 7,576 $377,272 $ 8,748 Non-vested 10,867 943 13,902 1,409 Total (a) S326,968 $ 8,519 $391,174 S 10,157 Plan assets at fair value $331,299 $ 0 $358,572 $ 0 Projected obligation for service rendered to date (400,561) (9,199) (476,666) (11,036)

Projected benefit i obligation in excess of l plan assets (69,262) (9,199) (118,094) (11,036)

Unrecognized prior service j cost 11,238 9,436 12,283 10,223 j Ur.racognized net los s/ (gain) 78,8E3 (1,141) 82,935 252 Unrecognized net obligation 7,130 0 8,064 0 Additional minimum liability (b) 0 (7,615) (17,790) (9,596)

Net pension prepayment /

(liability) $ 27,959 $ (8,519) $(32,602) O flagjjd)

(a) The accumulated benefit obligation at December 31, 1995, includes

$13.5 million related to the enhanced retirement programs offered in 1995 as discussed in Note F to these Consolidated Financial Statements.

l (b) Statement of Financial Accounting Standards No. 87, Employers' Accounting l

l for Pensions (SFAS 87), requires the recognition of an additional minimum l liability for the excess of accumulated benefits over the fair value of l plan assets and accrued pension costs. In accordance with SEAS 87 we 39

recordeu additional minimum liabilities and corresponding intangible

~

assets of $7.6 million and $27.4 million on our consolidated balance sheets at December 31, 1996 and 1995, respectively.

We used the following assumptions for calculating the plans' year-end funded status:

1996 1995 Discount rate 7.75% 7.25%

Compensation increase rate 3.90% 3.90%

We also provide defined contribution 401(k) plans for substantially all our employees. We match a percentage of employees' voluntary contributions to the plans. We made matching contributions of $8 million in 1996, $9 million in '

1995 and $8 ndllion in 1994.

2. Other Postretirement Benefits In addition to pension benefits, we also provide health care and other benefits to our retired employees who meet certain age and years of service eligibility requirements. These postretirement benefits other than pensions (PBOPs) are accounted for in accordance with Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (SEAS 106). Our 1992 settlement agreement provided us with a phase-in to full expense of the PBOP costs incurred under SEAS 106. The 1992 settlement agreement allowed us to defer any costs in excess of the specified phase-in amounts to the extent that we funded an external trust. Our funding policy is to generally contribute 100% of PBOP costs to external trusts.

Therefore, we recorded $23 million and $17 million of PPOP costs in 1995 and 1994, respectively in accordance with the 1992 settlement agreement. In 1996 we recorded the full PBOP costs incurred under SEAS 106 of $26 million. The i net deferred PBOP costs of $15 million resulting from the delayed phase-in are  !

included in regulatory assets as these costs are expected to be recovered from l customers in future periods. l Net postretirement benefits cost consisted of the following components:

years ended December 31, (in thousands) 1996 1995 1994 Current service cost - benefits earned $ 4,616 $ 3,408 $ 4,978 Interest cost on accumulated benefit l

obligation 16,815 13,521 13,632 Actual return on plan assets (9,584) (7,151) (187) )

Amortization of transition obligation 9,151 9,151 9,151 j Net amortization and deferral 5,209 3,017 (2,581) i Net posttetirement benefits cost $264 207 $21,946 ((1329} l We used the follcwing assumptions for calculating postretirement benefits cost:

1996 199E 1994 Discount rate 7.25% 8.25% 7.00%

Expected long-term rate of return on assets 9.00% 9.00% 9.00%

Health care cost trend rate 7.00% 7.00% 9.00%

The health care cost trend rate is assumed to decrease by one percent in 1997 and 1998 and to remain at 5% in years thereafter. Changes in the health care cost trend rate will affect our cost and obligation amounts. A one percent increase in the assumed health care cost trend rate would increase the total 40

l l

t 8, l +

I :

service and interest cost components by 7.6% and would increase the accumulated benefit obligation at December 31, 1996, by 6.7%.

The PBOP program's funded status was as follows:

December 31, (in thousands) 1996 1995 l

Trust assets at fair value $ 72,702 $ 51,064 Accumulated obligation for service rendered to date from:

Retirees $(156,694) $(110,877)

Active employees eligible to retire (12,644) (31,980)

Active employees not eligible to retire (61,567) (230,905) (53,514) (196,371)

Accumulated benefit obligation in i

excess of trust assets (158,203) (145,307) l Unrecognized prior service cost (16,274) (17,889)

Unrecognized net loss 26,663 5,612 Unrecognized transition obligation 146,413 155,564 Net postretirement benefits liability S (1,401) $ (2,020)

The weighted average discount rates used to measure the accumulated benefit obligation were 7.75% in 1996 and 7.25% in 1995. The trust assets consist of equities, bonds and money market funds.

l l

h i

l r

I l

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i l

! - I Note H. Capital Stock December 31, j (dollars in thousands, except per share amounts) 1996 1995 1

, Common stock equity:

l Common stock, par value $1 per share, I l 100,000,000 shares authorized; 48,509,537 '

l and 48,003,178 shares issued and

(

outstanding: $ 48,510 $ 48,003 Premium on common stock 695,723 683,686 Retained earnings 291,786 257,344 Surplus invested in plant 405 405 )

Total common stock equity $1,036,424 $989,438 l l Dividends declared per share of common stock were $1.88, $1.835 and $1.775 in 1 1996, 1995 and 1994, respectively, j Cumulative preferred stock:

Par value $100 per share, 2,890,000 shares l

l '

l authorized; issued and outstanding:

l i Nonmandatory redeemable series:  ;

Current Shares Redemption l Series Outstandir.g Price / Share 4.25% 180,000 $103.625 $ 18,000 $ 18,000 1 1 4.78% 250,000 $102.800 25,000 25,000 l 7.75% 400,000 -

40,000 40,000 l

8.25% 400,000 -

40,000 40,000 123,000 123,000 )

Less: redemption and issuance costs (3,046) (3,323) j Total nonmandatory redeemable series _S 119,954 $119,677 Mandatory redeemable series:

Current Shares Redemption Series Outstanding Price / Share 7.27% 400,000 $102.910 $ 40,000 $ 44,000 8.00% 500,000 -

50,000 50,000 90,000 94,000 Less: redemption and issuance costs (6,535) (7,163) due within one year (2,000) (2,000) l Total mandatory redeemable series S 81,465 $ 84,837 l

l

1. Common Stock Common stock issuances in 1994 through 1996 were as follows:

l Number Total Premium on (in thousands) of Shares Par Value common Stock Balance at December 31, 1993 45,129 $45,129 $612,653 Dividend reinvestment plan 406 406 10,150 Balance at December 31, 1994 45,535 45,535 622,803 Dividend reinvestment plan 468 468 11,404 New issuances 2,000 2,000 49,479 Balance at December 31, 1995 48,003 48,003 683,686 Dividend reinvestment plan 507 507 12,037 Balance at December 31, 1996 48,510 $48,510 $695,723 42

--. _ _ - - - . - _ _ . _ . . . - .~. - .. .

2. Cumulative Mandatory Rede*mahle Preferred Stock The 400,000 shares of 7.27% sinking fund series cumulative preferred stock are currently redeemable at our option at $102.910. The redemption price declines annually each May to par value in May 2002. The stock is subject to a mandatory sinking fund requirement of 20,000 shares each May at par plus accrued dividends. We also have the noncumulative option each May to redeem additional shares, not to exceed 20,000, through the sinking fund at $100 per share plus accrued dividends. In 1996, 1995 and 1994, we redeemed, at par value, 40,000 shares, 20,000 shares and 20,000 shares, respectively. The redemptions in 1996 include 20,000 shares of optional redemptions.

We are not able to redeem any part of the 500,000 shares of 8% series cumulative preferred stock prior to December 2001. The entire series is subject to mandatory redemption in December 2001 at $100 per share, plus accrued dividends.

Note I. Indebtedness December 31, (in thousands) 1996 1995 Long-term debt:

Debentures:

5.125%, due March 1996 $ 0 $ 100,000 5.700%, due March 1997 100,000 100,000 5.950%, due March 1998 100,000 100,000 6.800%, due February 2000 65,000 65,000 6.050%, due August 2000 100,000 100,000 6.8s0%, due March 2003 150,000 150,000 ,

7.800%, due May 2010 125,000 125,000 '

9.875%, due June 2020 100,000 100,000 1 9.375%, due August 2021 115,000 115,000 j 8.250%, due September 2022 60,000 60,000 l 7.800h, due March 2023 200,000 200,000 1 Total debentures 1,115,000 1,215,000 Less: due within one year (100,000) (100,000)

Net long-term debentures 1,015,000 1,115,000 Sewage facility revenue bonds 34,100 35,700 Less: due within one year (667) (667) l Less: funds held by trustee (4,789) (4,810)

Net long-term sewage facility revenue bonds 28,644 30,223 Mascachusetts Industrial Finance Agency bonds:

5.M 0%, due Februar O O14 15,000 15,000 Total lona-term debt $1,058,644 S ig l,,6,0 nR 60 2 Short-term debt:

Notes payable:

Bank loans $ 129,631 $ 75,941 l Commercial paper 71,823 50,500

( Total notes payable $ 201,454 S IMJ1, 1

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1. Longr-Tem thebt The 9 7/8% debentures due 2020 are first redeemable in June 2000 at a redemption price of 104.4834, the 9 3/8% series due 2021 are first redeemable in August 2001 at 104.612%, the 8.25% series due 2022 are first redeemable in September 2002 at 103.790% and the 7.804 series due 2023 are first redeemable in March 2003 at 103.730%. No other series are redeemable prior to maturity.

There is no sinking fund requirement for any series of our debentures.

Sewage facility revenue bonds were issued by HEEC. The bonds are tax-exempt, subject to annual mandatory sinking fund redemption requirements and mature through 2015. In May 1995 a: d 1996, we redeemed $0.6 nullion and $1.6 ndllion, respectively, as scheduled. The weighted average interest rate of the bonds is 7.3%. A portion of the proceeds from the honds is in reserve with the trustee. If HEEC should have insufficient funds to pay for extraordinary expenses, we would be required to make additi,nal capital contributions or loans to the subsidiary up to a maximum of 41 million.

The 5.75% tax-exempt unsecured bonds due 2014 are redeemable beginning in February 2004 at a redemption price of 1024 The redemption price decreases to 101% in February 2005 and to par in February 2006.

The aggregate principal amounts of our long-term debt (including HEEC sinking j fund requirements) due through 2001 are $101.6 million per year in 1997 and 1992, $1.6 million in 1999, $166.6 million in 2000 and $1.6 ndllion in 2001.

2. Short-Tem Debt i

I We have arrangements with certain banks to provide short-term credit on both a l commitced and an uncommitted and as available basis. We currently have l regulatory authority to issue up to $350 ndllion of short-term debt.

)

l We have a $200 million revolving credit agreement with a group of banks. This I agreement is intended to provide a standby source of short-term borrowings.

Under the terms of this agreement we are required to maintain a common equity ratio of not less than 30% at all times. Ccmmitment fees must be paid on the unused portion of the total agreement amount.

Information regarding our short-term borrowings, comprised of bank loans and commercial paper, is as follows:

(dollars in thousands) 1996 1995 1994 Maximum short-term borrowings $272,500 $327,769 $268,100 Weighted average amount outstanding $208,914 $165,720 $214,640 Weighted average interest rates excluding commitment fees 5 .~ 6 5 % 6.21e 4.47%

Note J. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of securities for which it is practicable to estimate the value:

Nuclear decommissioning trust:

The cost of $132.1 ndllion approximatea fair value based cn quoted market prices of securities held.

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Cash and cash equivalents:

The carrying amount of $5.7 million approximates fair value due to the short-term nature of these securities.

Mandatory redeemable cumulative preferred stock, sewage facility revenue bonds and unsecured debt:

The fair values of these securities are based upon the quoted market prices of similar issues. Carrying amounts and fair values as of December 31, 1996, are as follows:

Carrying Fair (in thousands) Amount value Mandatory redeemable cumulative preferred stock S 83,465 $ 93,900 Sewage facility revenue bonds S 34,100 S 35,082 Unsecured debt $1,130,000 $1,131,363 Note K. New Accounting Pronouncement In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 96-1, Environmental Remediation Liabilities, effective in 1997. This statement contains authoritative guidance on specific ac :ounting issues that are present in the recognition, measurement, display and disclosure of environmental remediation liabilities. We do not believe this statement will have a material effect on our financial position or results of operations.

Note L. Conunittnents and contingencies

1. Contractual Comnitments At December 31, 1996, we had estimated contractual obligations for plant and equipment of approximately $8 million.

We have leases for certain facilities and equipment. Our estimated ndnimum rental commitments under both transmission agreements and noncancellable leases for the years after 1996 are as follows:

(in thousands) 1997 S 22,842 1998 20,042 lo99 17,568 2000 16,684 2001 12,067 Years thereafter 98,945 Sutal $188t l18 The total of future minimum rental income to be received under noncancellable subleases related to the above leases is $455,117.

We will capitalize a portion of these lease rentals as part of plant expenditures in the future. The total expense for both lease rentals and transmission agreements was $26.3 million in 1996, S24.5 million in 1995 and

$28.6 million in 1994, net of capitalized expenses of $2.9 million in 1996,

$2.7 million in 1995 and $2.4 million in 1994.

We also have various outstanding commitments for take or pay and throughput agreements, primarily to supply our New Boston generating station with natural 45 i

. I gas. The fixed and determinable portions of the obligations are $19.5 million in 1997, 1998 and 1999 and $14.6 million in 2000. We are also committed to '

purchase natural gas at market prices. The total expense under these  !

agreements was $49.5 million in 1996, $13.9 million in 1995, and $6.5 million l in 1994.

2. Hydro-Quebec We have an approximately 11% equity ownership interest in two companies which own and operate transmission facilities to import electricity from the Hydro-Quebec system in Canada. As an equity participant we are required to guarantee, in addition to our own share, the total obligations of those participants who do not meet certain credit criteria. At December 31, 1996, our portion of these guarantees was approximately $18 million.

3. Yaukee Atomic We have a 9.5% equity investment of approximately $2 million in Yankee Atomic Electric Company (Yankee Atomic). In 1992 the board of directors of Yankee Atomic decided to permanently discontinue power operation of the Yankee Atomic nuclear generating station and decommission the facility.

Yankee Atomic received approval from the FERC to continue to collect its investment and decommissioning costs through 2000, the period of the plc.nt's operating license. The estimate of our share of Yankee Atomic's investment and costs of decommissioning is approximately $16.5 million as of December 31, 1996. This estimate is recorded on our consolidated balance sheet as a power contract liability and an offsetting regulatory asset as we continue to collect these costs from our customers in accordance with our 1992 settlement agreement.

4. Connecticut Yankee On December 4, 1996, the board of directors of Connecticut Yankee Atomic Power Company (CYAPC), which owns and operates the Connecticut Yankee nuclear electric generating unit (Connecticut Yankee), unanimously voted to retire the Had;im Neck, Connecticut unit. The decision was based on an economic analysis of the costs of operating the unit through 2007, the period of its operating license, compared to the costs of closing the unit and incurring replacement power costs for the same period. We have a 9.5% equity investment in CYAPC of approximately $10 million.

The current estimate of the sum of future payments for the closing, decommissioning and recovery of the remaining investment in Connecticut Yankee is approximately $763 million, our share of these remaining estimated costs is $72.5 million.

On December 24, 1996, CYAPC filed its cost estimate along with certain amendments to its power contracts with the FERC. The power contract amendments are designed to clarify the obligations of CYAPC's power purchasers, including Boston Edison, following the decision to cease power production. Based upon regulatory precedent, CYAPC believes it will continue to collect from its power purchasers its decommissioning costs, the owners' unrecovered investments in CYAPC and other costs associated with the permanent closure of the unit over the remaining period of the unit's operating license.

We expect that we will continue to be allowed to recover our share of such costs from our customers and, therefore, have recorded our share of these costs on our consolidated balance sheet as a regulatory asset with a corresponding power contract liability.

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5. Nuclear Insurance The federal Price-Anderson Act currently provides approximately $8.9 billion of financial protection for public liability c3tims and legal costs arising from a single nuclear-related accident. The first $200 million of nuclear liability is covered by commercial insurance. Additional nuclear liability insurance up to approximately 08.7 billion is provided by a retrospective assessment of up to $79.3 million per incident levied on each of the 110 nuclear generating units currently licensed to operate in :he United States, with a maximum assessment of $10 million per reactor pe- accident in any year.

We have purchased insurance from Nuclear Electric Insurance Limited (NEIL) to cover some of the costs to purchase replacement power during a prolonged accidental outage and the cost of repair, replacement, decontamination or decommissioning of our utility property resulting from covered incidents at Pilgrim Station. Our maximum potential total assessment for losses which occur during current policy years is $10.4 million under both the replacement power and excess property damage, decontamination and decommissioning policies.

6. Hazardous Waste We own or operate approximately 40 propertiec where oil or hazardous materials were previous]y spilled er released. We are required t: clean up these properties in accordance with a timetable developed by the Massachusetts Department of Enviror. mental Protection and are continuing to evaluate the costs associated with their cleanup. There are uncertainties associated with these costs due to the complexities of cleanup technology, regulatory requirements and the particular characteristics of the different sites. We also continue to face possible liability as a potentially responsible party in the cleanup of approximately ten multi party hazatdous waste sites in Massachusetts and other states where we are alleged to have generated, transported or disposed of hazardous waste at the sites. At the majority of these sites we are one of many potentially responsible parties and currently expect to have only a small percentage of the potential liability. Through December 31, 1996, we have accrued approximately $7 million related to our cleanup liabilities. We are unable to fully determine a range of reasonably possible cleanup costs in excess of the accrued amount, although based on our assessments of the specific site circumstances, we do not believe that it is probable that any such additional costs will have a material impact on our financial condition. However, it is reasonably possible that additional provisions for cleanup costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term.

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7. Litigation We were named as a party in lawsuits by Subaru of New England, Inc. and Subaru Distributors Corporation. The plaintiffs claimed certain automobiles stored on lots in South Boston suffered pitting damage causea by emissions from our New Boston Station generating unit. In February 1997, we settled the lawsuit brought by Subaru Distributors Corporation. The settlement did not have a material impact on our financial position or results of operations. The Subaru of New England, Inc. lawsuit is still pending.

In 1991 we were named in a lawsuit alleging discriminatory employment practices under the Age Discrimination in Employment Act of 1967 concerning employees affected by our 1988 reduction in force. In December 1996, we reached a settlement of this lawsuit under which there is no finding or admission of discriminatory employment practices. We anticipate full recovery from our insurance carrier for this settlement.

In the normal course of our business we are also involved in certain other legal matters. We are unable to fully determine a range of reasonably possible litigation costs in excess of amounts accrued, although, based on the information currently available, we do not believe that it is probable that ,

any such additional costs will have a material impact on our financial condition. However, it is reasonably possible that additional litigation costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term.

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t Note M. Long-Term Power Contracts

1. Long-Term Contracts for the Purchase of Electricity We purchase electric power under several long-term contracts for which we pay a share of the generating unit's capital and fixed operating costs through the contract expiration date. The total cost of these contracts is included in purchased power expense on our consolidated income statements. Information relating to these contracts as of December 31, 1996, is as follows:

proportionate share (in thousands)

Units of Debt Contract Capacity

• Minimum Outstanding Expiration Purchased Debt Through Cont. Annual Generating Unit Date i MW Service Exp. Date Cost Canal Unit 1 2002 25.0 141 $ 1,415 $ 5,373 $ 24,399 Mass. Bay Trans-portation i Authority - 1 2005 100.0 34 - -

1,999 i Connecticut Yankee Atond e 2007 9.5 -

2,427 12,519 (b)

Ocean State Power -

Unit 1 2010 23.5 68 4,487 20,447 23,689 Ocean State Power -

Unit 2 2011 23.5 67 3,538 16,529 24,091 Northeast Energy Associates (c) (cl 219 - -

124,730 L' Energia (d) 2013 73.0 63 - -

30,920 MassPower 2013 44.3 117 11,738 76,524 50,322 Mass. Bay Trans-portation Authority - 2 2019 100.0 34 - -

371 Total 743 $23,605 $131,392 $280,521 (a) The Northeast Energy Associates contract represents 6% of our total ,

system generation capability. The remaining units listed above represent 1 1

14.5% in total.

(b) Connecticut Yankee permanently ceased operation in 3996. Refer to Note L.4. to these Consolidated Financial Statements for more details.

(c) We' purchase approximately 75.5% of the energy output of this unit under two contracts. One contract represents 135MW and expires in the year i 2015. The other contract is for 84MW and expires in 2010. We pay for l this energy based on a price per kWh actually received. We do not pay a l

proportionate share of the unit's capital and fixed operating costs. I

, (d) We pay for this energy based on a price per kWh actually received.

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Our total fixed and variable costs for these contracts in 1996, 1995 and 1994 were approximately $281 million (excludirig Connecticut Yanb e Atomic), $283 million and $286 million, respectively. Our minimum fixe: " ants under these contracts for the years after 1996 are as follows:

(in thousands) 1997 $ 85,429 1998 87,540 1999 88,401 2000 88,927 2001 91,089 Years thereafter 1,047,479 7 Total S1,488,,815 Total _p, resent value S 797,683

2. Long-Term Power Sales ,

In addition to wholesale power sales, we sell a percentage of Pilgrim Station's output to other utilities under long-term contracts. Information relating to these contracts is as follows:

Contract Expiration Units of Capacity Sold Contract Customer Date e MW Commonwealth Electric Company 2012 11.0 73.7 Montaup Electric Company 2012 11.0 73.7 Various municipalities 2000(a) 3.7 25.0 Total 2_S . 7 172.4 (a) Subject t e, certain adjustments.

Under tha*- contracts, the utilities pay their proportionate share of the costs of operating Pilgrim Station and associated transmission facilities.

These costs include operation and maintenance expenses, insurance, local taxes, depreciation, decommissioning and a return on capital.

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Selected Consolidated Quarterly Financial Data (Unaudited)

(in thousands, except earnings per share)

Balance Available Earnings Operating Operating Net for Common Per Average Revenues Inccme Income Stock Common Share

1996 First quarter $387,849 S 52,093 S25,203 $21,313 $0.44 Second quarter 389,756 55,232 27,926 24,086 0.50 Third quarter 497,968 105,353 80,011 76,194 1.58 Fourth quarter 390,730 35,252 8,406 4,588 0.09 1995 First quarter $379,678 $ 47,610 $20,202 $16,300 $0.36 ,

Second quarter 380,828 55,683 26,137 22,247 0.48 l Third quarter 498,554 102,695 " 72,368

• 68,478

• 1.46 * !

Fourth quarter 369,443 21,412'; (6,397)* (10,286) * (0.21)*

l (a) Based on the weighted average number of common shares outstanding during  !

each quarter.

(b) As discussed in Note F to the Consolidated Financial Statements, we incurred a $34 million nonrecurring pre-tax charge related to our corporate restructuring over the third and fourth quarters of 1995.

Amounts excluding the restructuring charge were as follows:

Balance Available Earnings Operating Net for Common Per Average Income Income Stock Common Share 1995 Third quarter $107,779 $77,452 S73,562 $1.57 Fourth quarter 36,991 9,182 5,293 0.11 Item 9. Changes in and Disagreements with Accountants on Accounting and l Finar.cial Disclosure I

Not applicable. I 1

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Part III Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors See " Election of Directors - Information about Nominees and Incumbent Directors" on pages 7 through 9 of the definitive proxy statement dated March 26, 1997, incorporated herein by reference.

(b) Identification of Executive Officers The information required by this item is included at the end of Part I of this Form 10-K under the captien Executive officers of the Registrant.

(c) Identification of Certain Significant Employees Not applicable.

(d) Family Relationships Not applicable.

(e) Business Experience For information relating to the business experience during the past five years and other directorships (of companies subject to certain SEC requirements) held by each person nominated to be a director,'see " Election of Directors -

Information about Nominees and Incumbent Directors" on pages 7 through 9 of the definitive proxy statement dated March 26, 1997, incorporated herein by reference.

For information relating to the business experience during the past five years of'eac;. person who is an executive officer, see Executive officers of the Registrar.t in t'ais Form 10-K.

(f) Involvement in Certain Legal Proceedings Not applicable.

(g) Promoters and Control Persons Not applicable.

Item 11. Executive Compensation See " Executive Compensation" on pages 27 through 33 of the definitive proxy statement dated March 26, 1997, incorporated herein by reference.

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I (a) Security Ownership of Certain Beneficial Owners i

To the knowledge of management, no person owns beneficially more than five t

! percent of the outstanding. voting securities of the Company.

l (b) Security Ownership of Management See " Stock ownership by Directors and Executive Officers" on pages 9 through 10 of the definitive proxy statement dated March 26, 1997, incorporated herein by reference.

(c) Changes in Contr,31  ;

Not applicable.

Item 13. Certain Relationships and Related Transactions i

Not applicable. ^

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i Part IV i

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1 i

(a) The following documents are filed as part of tnis Form 10-K: t

1. Financial Statements:

Page Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 28 Consolidated Statements of Retained Earnings for the ,

years ended December 31, 1996, 1995 and 1994 28 Consolidated Balance Sheets as of December 31, 1996 and 1995 '

29 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 30 L I

Notes to Consolidated Financial Statements 31 Selected consolidated Quarterly Financial Data (Unaudited) 51 h Report of Independent Accountants 65 l

2. Financial Statement Schedules:

No financial statement schedules are included as they are either not required or not applicable. '

3. Exhibits:

Refer to the exhibits listing beginning on the following page.

(b) Reports on Form 8-K:

A Foam 8-h dated December 20, 1996, was filed during the fourth quarter of I isso announcing that the Company reached a settlement ag.eement with the  ;

Massachusetts Attorney General and the Massachusetts Division of Energy Resources.

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Exhibit SEC Docket Exhibit 3 Articles of Incorporation and By-Laws Incorporated herein by reference:

3.1 Restated Articles of Organization 3.1 1-2301 Form 10-Q for the quarter ended June 30, 1994 3.2 Boston Edison Company Bylaws 3.1 1-2301 April 19, 1977, as amended Form 10-Q January 22, 1987, January 28, 1988, for the May 24, 1988 and November 22, 1989 quarter ended June 30, 1990 Exhibit 4 Instruments Defining the Rights of Security Holders, Including Indentures Incorporated herein by reference:

4.1 Medium-Term Notes Series A - Indenture 4.1 1-2301 dated September 1, 1988, between Form 10-0 Boston Edison Company and Bank of for the Montreal Trust Company quarter ended September 30, 1988 4.1.1 First Supplemental Indenture 4.1 1-2301 dated June 1, 1990 to Form 8-K Indenture dated September 1, 1988 dated ,

with Bank of Montreal Trust Company - June 28, 1990 9 7/8% debentures due June 1, 2020 4.1.2 Indenture of Trust and Agreement among 4.1.26 1-2301 the City of Boston, Massachusetts Form 10-K (acting by and through its Industrial for the Development Financing Authority) and year ended Harbor Electric Energy Company and December 31, Shawmut Bank, N.A., as Trustee, dated 1991 November 1, 1991 4.1.3 Votes of the Pricing Committee of the 4.1.27 1-2301 Board of Directors of Boston Edison Form 10-K l Company taken August 5, 1991 re for the 9 3/8% debentures due August 15, 2021 year ended December 31, 1991 55

. . . . .-. -.- -.- -. . - - . . - - . - . - . _ - - _ ~ . . . . - ,

Exhibit SEC Docket

4. 1. 4 Revolving Credit Agreement dated 4.1.24 1-2301 f February 12, 1993 Form 10-K for the ycar ended December 31, i 1992 1

4.1.4.1 First Amendment to Revolving Credit 4.1.10 1-2301 Agreement dated May 19, 1995 Form 10-K  !

for the year' ended i December 31, #

1995 4.1.5 Votes of the Pricing Committee of the 4.1.25 1-2301 Board of Directors of Boston Edison Form 10-K Company taken September 10, 1992 re for the 8 1/4% debentures due September 15, 2022 year ended i December 31,  !

1992 4.1.6 Votes of the Pricing Committee of the 4.1.26 1-2301 Board of Directors of Boston Edison Form 10-K- l Company taken January 27, 1993 re for the  !

6.80% debentures due February 1, 2000 year ended December 31, l 1992 4.1.7 Votes of the Pricing Committee of the 4.1.27 1-2301  :

Board of Directors of Boston Edison Form 10-K Company taken March 5,1993 re for the 5 1/8% debentures due March 15, 1996, year ended l 5.70% debentures due March 15, 1997, December 31, 5.95% debentures due March 15, 1998, 1992 '

6.80% debentures due March 15, 2003, 7.80% debentures due March 15, 2023 4.1.0 Votes of the Pricing Committee of the 4.1.23 1-2301 Board of Directors of Boston Edison Form 10-K Company taken August 18, 1993 re for the 6.05% debentures due August 15, 2000 year ended December 31, 1393 4.1.9 Votes of the Pricing Committee of the 4.1.9 1-2301 Board of Directors of Boston Edison Form 10-K Company taken May 10, 1995 re for the 7.80% debentures due May 15, 2010 year ended December 31, 1995 l

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i The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any agreements or instruments defining the rights of holders of any long-term debt vnose authorization does not exceed 10% of the Company's total assets.

Exhibit SEC Docket Exhibit 10 Material Contracts Incorporated herein by reference:

10.1 Key Executive Benefit Plan 10.1 1-2301 Standard Form of Agreement, May Form 10-0 1986 for the quarter ended June 30, 1986 10.1.1 Key Executive Benefit Plan 10.3.1 1-2301 Standard Form of Agreement, May Form 10-K 1986, with modifications for the year ended December 31, 1991 10.2 Executive Annual Incentive 10.5 1-2301 Compensatien Plan Form 10-K for the year ended December 31, 1988 10.3 1991 Director Stock Plan 10.1 1-2301 Form 10-Q for the quarter ended '

March 31, 1991 l

i 10.4 Boston Edison Company Deferred 10.11 1-2301 Fee Plan dated January 14, 1993 Form 10-K  ;

for the year ended December 31, 1992 '

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Exhibit SEC Docket 10.5 Deferred Compensation Trust 10.10 1-2301  ;

between Boston Edison Company Form 10-K and State Street Bank and for the Trust Company dated year ended February 2, 1993 December 31, 1992

! 10.5.1 Amendment No. I to Deferred 10.5.1 1-2301

! Compensation Trust dated Form 10-K i March 31, 1994 for the year ended December 31, ,

1994 10.6 Directors Petirement Benefit 10.8.1 1-2301 (1993 Plan) Form 10-K i for the year ended December 31,

1993 l

l 10.7 Performance Share Plan, Amendment 10.8 1-2301 l

and Restatement dated October 24, 1994 Form 10-K j for the

year ended l December 31,

, 1994 t

t 10.8 Boston Edison Company Deferred 10.9 1-2301 i Compensation Plan, Amendment and Form 10-K Restatement dated January 31, 1995 for the year ended December 31,  ;

1994 )

10.9 Employment Agreement applicable to 10.10 1-2301 Ronald A. Ledgett dateo April 30, 1987 Form 10-K for the year ended f

i December 31, 1994 10.10 Retentien Agreement applicable to 10.1 1-2301 Ronald A. Ledgett dated May 15, 1996 Form 10-0 for the quarter ended June 30, 1996 3

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? l l Exhibit SEC Docket 10.11 Change in Control Agreement applicable 10.2 1-2301 l to Thomas J. May dated July 8, 1996 Form 10-Q l for the quarter ended June 30, 1996 l

10.l? Form of Change in Control Agreement 10.3 1-2301 applicable to Ronald A. Ledgett, Form 10-Q E. Thomas Boulette, L. Carl Gustin, for the '

John J. Higgins, Douglas S. Horan quarter ended and certain other officers dated June 30, 1996 July 8, 1996 i Filed herewith:

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10.13 Retention Agreement applicable to Douglas S. Horan dated May 15, 1996 I

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Exhibit SEC Docket Exhibit 12 Statement re Computation of Ratios ,

Filed herewith:

12.1 Computation of Ratio of Earnings to Fixed Charges for the Year Ended December 31, 1996 t i

12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock

. Dividend Requirements for the Year  ;

Ended December 31, 1996 Exhibit 21 Subsidiaries of the Registrant 21 1 Harbor Electric Energy Ccmpany (incorporated in Massachusetts),  ;

a wholly owned subsidiary of Boston i Edison Company  ;

21.2 Boston Energy Technology Group, Inc.

{ incorporated in Massachusetts),  !

a wholly owned subsidiary of Boston Edison Company '

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Exhibit SEC Docket Exhibit 23 Consent of Independent Accountants Filed herewith:

23.1 Consent of Independent Accountants to incorporate by reference their opinion included with this Form 10-K in the Form S-3 Registration Statements filed by tl.e Company on February 3, 1993 (File No. 33-57840),

May 31, 1995 (File No. 33-59693) and in the Form S-8 Registration Statements filed by the Company on October 10, 1985 (File No. 33-00810), July 28, 1986 (File No. 33-7558), December 31, 1990 (File No. 33-38434), June 5, 1992 (33-48424 and 33-48425),

March 17, 1993 (33-59662 and 33-59682) and April 6, 1995 (33-58457) and in the Form S-4 Registration Statement filed by Boston Edison Holdings, currently known as BEC Energy, on March 17, 1997 (File No.

333-23439)

Exhibit 27 Financial Data Schedule Filed herewith:

27.1 Schedule UT Exhibit 99 Additional Exhibits Incorporated herein by reference:

99.1 MDPU Settlement Agreement with 28.1 1-2301 Boston Edison Company dated Form 8-K October 3, 1989 dated October 3, 1989 39.2 Settlement Agreement between Boston 28.1 1-2301 Edison Company and Commonwealth Form 8-K -

Electric Company, Montaup Electric dated Company and the Municipal December 21, Light Department of the Town of 1989 Reading, Massachusetts, dated January 5, 1990 61

0 *

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Exhibit SEC Docket i

99.3 Pilgrim Outage Case Settlement between 28.2 1-2301 Boston Edison Company and Reading Form 8-K Municipal Light Department regarding dated Contract Demand Rate, dated December ~ December 21, 21, 1989 1989 1

99.4 Settlement Agreement Between Boston 28.2 1-2301 Edison Company and City of Holyoke Form 10-Q Gas and Electric Department et. al., for the f

dated April 26,'1990 quarter ended March 31, 1990 99.5 Information required by.SEC Form 1-2301 11-K for certain Company employee Form 10-K/A benefit plans for the years ended Amendments to December 31, 1995, 1994 and 1993 Form 10-K for the years ended i December 31, 1995, li94 and 1993 dated ,

June 27,1996, June 29, 1995 and June 30, -

1994, respectively '

99.6 MDPU Settlement Agreement with. 28.2 1-2301' Boston Edison Company, dated Form 10-Q October 23, 1992 for the quarter ended .

September 30, l 1992 i

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6.

t 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.

BOSTON EDISON COMPANY By: /s/ James J. Judge James J. Judge Senior Vice President and Treasurer (Principal Financial Officer)

Date: March 27, 1997 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 indicated on the 27th day of March 1997.

/s/ Thomas J. May Chairman of the Board, President Thomas J. May and Chief Executive Officer

/s/ Robert J. Weafer, Jr. Vice President - Finance, Robert J. Weafer, Jr. Controller and Chief Accounting Officer

/s/ William F. Connell Director William F. Connell

/s/ Gary L. Countryman Director Gary L. Countryman

/s/ Thomas G. Dignan, Jr. Director Thomas G. Dignan, Jr.

/s/ Charles K. Gifford Director Charles K. Gifford

/s/ Nelson S. Gifford Director Nelson S. Gifford

/s/ Matina S. Horner Director Matina S. Horner 63

.m. .- _ _ _ _ . _ _ _

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/s/ Sherry H. Penney Director Sherry H. Penney

/s/ Herbert Roth, Jr. Director l Herbert Roth, Jr.

Director Stephen J. Sweeney l

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5 Report of Independent Accountants To the Stockholders and Directors of Boston Edison Company:

We have audited the consolidated financial statements of Boston Edison company and subsidiaries (the Company) listed in Item 14(a) of this Form 10-K. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1996 and 1995, and the consolidated results of its cperations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts January 23, 1997 1

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