ML050660024

Letter Transmitting, Seabrook Station, Guarantees of Payments of Deferred Premiums

ML050660024
Person / Time
Site:	Seabrook
Issue date:	02/28/2005
From:	Warner M Florida Power & Light Energy Seabrook
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
SBK-L-05056
Download: ML050660024 (113)

Text

0 FPL Energy Seabrook Station FPL Energy Seabrook Station RO. Box 300 Seabrook, NH 03874 (603) 773-7000 FES 2 8 2005 Docket 50-443 SBK-L-05056 U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555-0001 Seabrook Station Guarantees of Payments of Deferred Premiums Pursuant to IOCFR 140.21(e) and IOCFR 50.71 (b), FPL Energy Seabrook, LLC, on behalf of the licensees named in Facility Operating License NPF-86, provides the Annual Reports for 2003.

The Annual Reports demonstrate the collective ability of the licensees to meet their obligation for payment of deferred premiums.

Annual Reports for 2003 (containing certified financial statements) are enclosed for the following:

FPL Group (for subsidiary FPL Energy Seabrook)

Massachusetts Municipal Wholesale Electric Company Hudson Light and Power Department Taunton Municipal Lighting Plant (0.07% Ownership) has not completed its certified financial statements for 2003. The 2003 statements are anticipated to be completed by the end of March and will be submitted at that time. Taunton's 2002 certified financial statements are enclosed.

Ut f an FPL Group company

U.S. Nuclear Regulatory Commission SBK-L-05056 / Page 2 Should you have any questions regarding this matter, please contact Mr. James M. Peschel, Regulatory Programs Manager, at (603) 773-7194.

Very truly yours, FPL Energy Seabrook, LLC y'e r( E. W arn-e r

&xe Vice President cc:

(without enclosures):

S. J. Collins, NRC Region I Administrator V. Nerses, NRC Project Manager, Project Directorate I-2 G. T. Dentel, NRC Senior Resident Inspector Mr. Anthony J. Monteiro, Manager Hudson Light and Power Mr. Joseph M. Blain, Manager Taunton Municipal Lighting Mr. Joseph 0. Roy, Manager of Operating Projects, Massachusetts Municipal Wholesale Electric Co.

Mr. John J. Aubrecht, Business Manager, FPL Energy, LLC cc: (with enclosures):

U. S. Nuclear Regulatory Cormmission Director of Nuclear Reactor Regulation One White Flint North 11555 Rockville Pike Rockville, Maryland 20852-2738

ENCLOSURE TO SBK-L-05056

Financial Statements and Report of Independent Certified Public Accountants Taunton Municipal Lighting Plant December 31, 2002 and 2001

H2 CONTENTS Page 3

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS BALANCE SHEETS STATEMENTS OF OPERATIONS STATEMENTS OF RETAINED EARNINGS STATEMENTS OF CASH FLOWS NOTES TO FINANCIAL STATEMENTS 4

5 6

7 9

Grant Thornton fij Accountants and Business Advisors Report of Independent Certified Public Accountants Municipal Light Commission of the City of Taunton Taunton, Massachusetts We have audited the accompanying balance sheets of the Taunton Municipal Lighting Plant (a department of the City of Taunton) as of December 31, 2002 and 2001, and the related statements of operations, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Plant's management.

Our responsibility is to express an opinion on these financial statements based on our audits.

Except as discussed in the following paragraph, we conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan I1 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 our audits provide a reasonable basis for our opinion.

As discussed in Note G to the financial statements, the Plant records pension expense based on X

a formula determined by the City of Taunton, whereas generally accepted accounting principles require the use of actuarial methods in determining annual pension expense and certain disclosures required by the i

Governmental Accounting Standards Board relating to pensions have been omitted. The effect on the financial statements of not using actuarial methods has not been determined.

In our opinion, except for the effects of such adjustments noted in paragraph three above, if any, as might have been determined to be necessary had we been able to determine the effects of not using actuarial i

methods in determining pension expense and the omission of certain pension plan disclosures required by the Governmental Accounting Standards Board on the 2002 and 2001 financial statements, the financial statements referred to above present fairly, in all material respects, the financial position of the Taunton Municipal Lighting Plant as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A (13) to the financial statements, the accompanying 2001 financial i

statements have been restated.

• E Boston, Massachusetts March 12, 2004 226 Causeway Street Boston, MA 02114-2155 T 617.723.7900 F 617.723.3640 i

W www.grantthornton.com Grant Thornton LLP P

US Member of Grant Thornton International

Taunton Municipal Lighting Plant BALANCE SHEETS ASSETS December 31, 2002 2001 (As Restated)

UTILITY PLANT - AT COST Plant in service

$133,696,577

$129,804,846 Less accumulated depreciation 90.809.996 87,548 060 Net utility plant in service 42,886,581 42,256,786 Investment in Seabrook 2,132,515 2,260,028 Construction work in progress 8.509374 5,867,215 Total utility plant 53,528,470 50,384,029 DEPRECIATION FUND (including certificates of deposit of

$2,000,000 and $4,000,000 in 2002 and 2001, respectively) 3,187,512 5,694,715 SICK LEAVE TRUST FUND 5,050,959 5,130,468 OTHER ASSETS Investment in Hydro Quebec Project 280,959 265,396 Investment in Energy New England LLC 365,057 431,279 Due from Plant Retirement Trust 719,606 689,138 CURRENT ASSETS Cash 6,822,896 4,270,322 Customer deposits 1,172,188 872,850 Accounts receivable - purchase power cost adjustment 1,592,572 Accounts receivable, less allowance for doubtful accounts of

$1,247,203 and $1,785,420 respectively 5,782,314 4,933,255 Accounts receivable Internet 100,832 81,794 Materials and supplies inventory 2,785,609 5,791,430 Prepaid expenses 1,I29,123 1,386 856 Total current assets 17,792.962 18,929,079

$ 80,925.52~5

$ 8L.52AJ4,1 RETAINED EARNINGS AND LIABILITIES RETAINED EARNINGS Appropriated retained earnings Loans repayment S 25,852,000

$ 24,387,000 Construction repayment 32,434 32 434 25,884,434 24,419,434 Unappropriated retained earnings 30.845.397 33.113,370 Total retained earnings 56,729,831 57,532,804 LONG-TERM DEBT 5,690,032 7,278,386 COMMTIMENTS AND CONTINGENCIES CURRENT LIABILITIES Accounts payable 7,243,764 5,912,270 Customer deposits 751,877 554,626 Current maturities oflong-term debt 1,585,000 1,465,000 Accrued liabilities Sick leave 5,169,328 4,990,781 Pension fund 983,353 954,418 Vacation 845,881 806,099 Interest 336,966 347,474 Payment in lieu oftaxes 1,250,000 1,250,000 Purchased power cost adjustment 25,000 25,000 Payroll 194,126 254,092 Other 120,367 153.154 Total current liabilities 18.505,662 16,722,914

$ E0.925.25

$B1,52-4JDA The accompanying notes are an integral part of these statements.

4

Taunton Municipal Lighting Plant STATEMENTS OF OPERATIONS Years ended December 31, 2002 2001 (As Restated)

Operating revenues Sales of electricity Commercial and industrial Residential Sales for resale Municipal Other revenue Discount given

$32,985,363 21,826,683 4,699,166 3,152,746 280,322 (1 721,230) 61,223,050 37,502

$32,888,541 21,467,465 4,978,498 3,025,182 450,638 (1,611,998) 61,198,326 26,982 Internet operating loss - net Total operating revenues 61,260,552 61,225,308 Operating expenses Power production Transmission and distribution Customer accounting Administrative and general Depreciation and amortization Nuclear expense 40,576,357 6,680,094 2,260,871 5,374,861 3,791,872 287,256 39,208,847 6,264,538 1,583,243 4,994,408 5,121,803 229,175 57,402,014 Total operating expenses 58,971,311 Earnings from operations 2,289,241 3,823,294 Other expense (income)

Interest expense Interest income Other expense (income) 624,724 (56,993) 24,483 748,650 (267,824)

(724,976)

Total other expense (income)

(244,150) 4,067,444 Earnings before provision for payment in lieu of taxes 1,697,027 Provision for payment in lieu of taxes 2,500,000 2,430,000

$_1,637 444 NET (LOSS) EARNINGS The accompanying notes are an integral part of these statements.

$ (802 973) 5

Taunton Municipal Lighting Plant STATEMENTS OF RETAINED EARNINGS Years ended December 31, 2002 and 2001 Appropriated Retained Earnings Loan Construction Repayment Repayment Unappropriated Retained Earnings Balance at December 31, 2000 - as previously reported Less: prior period adjustment (see Note A (13))

Balance at December 31, 2000 - as restated Transfer for bond repayment Net earnings - as previously reported Less: prior period adjustment (see Note A (13))

Net earnings - as restated Balance at December 31, 2001 - as restated Transfer for bond repayment Net loss Balance at December 31, 2002

$23,037,000 23,037,000 1,350,000

$32,434 32,434

$34,528,633 (1,702,707) 32,825,926 (1,350,000) 2,625,026 (987,582) 1,637,444 33,113,370 (1,465,000)

(802,973)

$30 845 397 24,387,000 1,465,000 32,434

$25 852 000 The accompanying notes are an integral part of these statements.

6

Taunton Municipal Lighting Plant STATEMENTS OF CASH FLOWS Years ended December 31, 2002 2001 (As Restated)

Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities:

Net (loss) earnings Adjustments to reconcile net (loss) earnings to net cash and cash equivalents provided by operating activities:

Depreciation and amortization Amortization of bond premium Equity in losses of Seabrook investment Equity in losses (income) of Energy New England LLC investment Equity in income of Hydro Quebec Change in assets and liabilities:

Decrease (increase) in accounts receivable Increase in accounts receivable Internet Increase in due from Plant Retirement Trust Decrease (increase) in inventory Decrease in prepaid expenses Increase in accounts payable Increase in customer deposits (Decrease) increase in accrued liabilities (802,973) 3,791,872 (3,354) 127,513 66,222 (15,563) 743,513 (19,038)

(30,468) 3,005,821 257,733 1,331,494 197,251 144,003

$ 1,637,444 5,121,803 (3,354) 149,965 (216,201)

(240,826)

(27,419)

(13,422)

(4,042,712) 352,047 1,078,149 106,192 1,342,718 Net cash provided by operating activities Cash flows from investing activities:

Additions to utility plant, net of disposals Maturity of certificates of deposit - depreciation fund Decrease in Sick Leave Trust Fund 8.794,026 (7,063,826) 79,509 (6,009,186) 2,000,000

-- 76,440 Net cash used in investing activities (6,984,317) 3,932 746)

Cash flows from financing activities:

Payment of long-term debt, representing net cash used in financing activities (1 465,000)

(1.350.000)

Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 344,709 10,837,887 (38,362) 10,876,249 Cash and cash equivalents at end of year

$11.182.596 7

Taunton Municipal Lighting Plant STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 2002 2001 (As Restated)

Cash and cash equivalents at end of year is reflected on the balance sheets as follows:

Depreciation fund (exclusive of long-term investments)

Cash - operating Cash - customer deposit

$ 3,187,512 6,822,896 1,172,188

$ 5,694,715 4,270,322 872.850

$10,837887 Supplemental Disclosure of Cash Flow Information:

Cash paid during the year for interest 635,232 793,650 The accompanying notes are an integral part of these statements.

8

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS December 31, 2002 and 2001 NOTE A -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A summary of Taunton Municipal Lighting Plant's (the "Plant") significant accounting policies consistently applied in the preparation of the accompanying financial statements follows.

1. Nature of Business The Plant is a regulated municipal electric utility located in Taunton, Massachusetts. The Plant operates as an enterprise fund of the City of Taunton, Massachusetts, and produces, purchases and distributes electricity to approximately 33,000 customers in the City of Taunton and the surrounding areas. The Plant also operates an internet access business unit and provides services to approximately 3,500 customers.

The Department operates within the electric utility industry which is currently undergoing significant restructuring and deregulation.

In 1996, the Massachusetts Department of Telecommunications and Energy ("DTE") issued an electric industry restructuring plan, and the Massachusetts legislature created a special committee on electric industry restructuring. The financial impact the resultant changes in the industry will have on the Department is not yet known.

2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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 those estimates.

Estimates relating to the allowance for doubtful accounts and contingencies (see note F) represent the significant estimates included in the financial statements. Management bases their estimates of these items on historical experience, specific identification and future expectations.

3. Rates The Plant is under the charge and control of the Municipal Light Plant Commissioners in accordance with Chapter 164, Section 55 of the General Laws of the Commonwealth of Massachusetts. Electric power is both produced and purchased and is distributed to customers within their service area. The rates charged by the Plant to its customers are filed with the Department of Telecommunications and Energy ("DTE") (formerly the Massachusetts 9

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES - Continued Department of Public Utilities) and are subject to Chapter 164, Section 58 of the General Laws, which provide that prices shall be fixed to yield not more than 8% per annum on the cost of the plant after repayment of operating expenses, interest on outstanding debt, the requirements of any serial debt and depreciation.

4. Depreciation Pursuant to the DTE regulations, depreciation is calculated as a percentage of depreciable property at January 1. Depreciation is computed using a rate of 4% of the cost of depreciable property.

Depreciation Fund cash is used in accordance with state laws for replacements, enlargements and additions to the utility plant in service.

5. Pension Plan Substantially all employees of the Plant are covered by a contributory pension plan administered by the City of Taunton in conformity with State Retirement Board requirements (see note G).

6. Inventory Materials and supplies inventory is carried at cost, principally on the average cost method.

7. Sick Leave Trust Fund The Plant established a Sick Leave Trust Fund ("Trust") in 1982 for the financing of future sick leave payments. It is the Plant's intention that the Trust be funded to the extent of the Plant's sick leave liability and that future sick leave expense will be paid by the Trust once full funding is achieved. Full funding was achieved in 1999. The assets of the Trust are shown in the financial statements to provide a more meaningful presentation, as the assets of the Trust are for the sole benefit of the Plant.

In March 1997, the Governmental Accounting Standards Board issued Statement No. 31, "Accounting and Financial Reporting for Certain Investments and for External Investment Pools"

("GASB 31"). Under GASB 31, investments are required to be reported at fair value in the balance sheet, and investment income, including changes in fair value of investments, is required to be recognized as revenue in the operating statement.

The provisions of GASB 31 were adopted retroactively.

10

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES - Continued Realized gains and losses, and declines in value are included in the statements of operations.

Net investment income for the Trust was approximately $217,000 and $239,000 in 2002 and 2001, respectively. The net (income) expense for sick leave was approximately $742,000 and

$439,000 for the years ended December 31, 2002 and 2001, respectively.

8. Deferred Fuel Costs/Rate Stabilization The Plant's rates include a Purchased Power Cost Adjustment (PPCA) which allows an adjustment of rates charged to customers in order to recover all changes in power costs from stipulated base costs. The PPCA provides for a quarterly reconciliation of total power costs billed with the actual cost of power incurred.

9. Investment in Seabrook The Plant's Investment in Seabrook represents a 0.10034% joint ownership share. The Plant records annually depreciation computed at 4% of the initial investment in Seabrook. The Plant's percentage share of new plant additions are capitalized and their share of operating and maintenance expenses, and decommissioning expenses (see note C) are charged against earnings.

10. Cash Equivalents For purposes of the Statement of Cash Flows, the Plant considers certificates of deposit with maturities of three months or less to be cash equivalents.

11. Internet Revenue and expense for this business unit is presented in internet operating (loss) revenues in the statement of operations. The business unit leases certain assets from the Plant. For the years ended December 31, 2002 and 2001, other operating revenue for the Plant and internet expense includes approximately $106,000 and $77,000, respectively, relating to this lease.

This venture generated revenues of approximately $1,117,000 and $ 1,100,000 for the years ended December31, 2002 and 2001, respectively.

Expenses were approximately $1,087,000 and

$1,072,000 for the same periods.

11

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES - Continued

12. Reclassifications Certain reclassifications have been made to the 2001 financial statements in order to conform with current year's presentation.

13. Restatement In 2002, the Plant became aware of certain accounting errors and misstatements resulting mainly from purchased power invoices and other vendors invoices relating to 2001 and 2000 operations that were not recorded accordingly. Additional adjustments in 2001 and 2000 are mainly due to reconciliation adjustments to accounts payable, recognition of sale of fuel efficiency credits and amortization of certain prepaid expenses. These restatements resulted in reduction of net earnings of $987,582 and $1,702,707 in 2001 and 2000, respectively. The Plant conducted an inquiry and further review of these errors and misstatements. As a result of this process, the Plant, by means of this report, is restating its previously issued financial statements for the year ended December 31, 2001.

The following table reflects the net increase (decrease) of the restatements:

ASSETS Accounts receivable, net allowance for doubtful accounts Prepaid expenses RETAINED EARNINGS AND LIABILITIES Accounts payable Unappropriated retained earnings December 31, 2001

$465,000 (112.000)

$3,043,289 (2 690,289)

Year ended December 31, 2001 Total operating revenues Total operating expenses Earnings from operations

$ 27,056 (952,582)

(925,526)

Other expenses (62,056)

Net earnings

$(987.582) 12

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICES - Continued Years ended December 31, 2001 2000 Net earnings, as previously reported Prior period adjustment

$2,625,026 (987,582)

$2,120,068 (1,702,707)

Net earnings, as restated

$ 417,361 NOTE B - CASH AND CERTIFICATES OF DEPOSIT The Plant's cash is deposited with the City of Taunton Treasurer who commingles it with other City funds. The City invests the cash and credits the Plant each year with interest earned on the cash deposits.

Cash, certificates of deposit deposited and short term investments with the City of Taunton consists of the following at December 31:

2002 2001 Interest bearing pooled funds including restricted customer deposits of $1,172,188 and $872,850, respectively Certificates of deposit with rates of 2.55% maturing February 2002 Certificates of deposit with rates of 2.00% maturing January 2003 Certificates of deposit with rates of 3.00% maturing January 2002

$ 9,182,596

$ 6,837,887 2,000,000 2,000,000 2,000.000 Cash, certificates of deposit and short term investments at December 31, is reflected as follows:

2002 2001 Depreciation Fund - capital additions and replacements Depreciation Fund - Major overhaul Depreciation Fund - Unit 9 principal and interest Depreciation Fund - other Cash - including operating and rate stabilization fund Customer deposit - principal and interest fund

$ 270,705 567,318 1,620,805 728,684 6,822,896 1,172,188

$ 1,888,108 327,318 2,750,605 728,684 4,270,322 872,850

$11 182596

$10,837,887 13

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE B - CASH AND CERTIFICATES OF DEPOSIT - Continued Certain cash amounts have been designated as restricted for the purpose of a rate stabilization fund.

This fund is designated to offset potential future customer rate increases.

NOTE C - INVESTMENTS The Plant is a 0. 10034% joint owner of the Seabrook New Hampshire Unit 1.

The joint owners of Seabrook have established a Decommissioning Fund that is currently held by a Trustee. The Plant's share of the estimated decommissioning liability is approximately $556,000 as of January 1, 1998 (the most current valuation date). The Plant is currently contributing, based on a present value formula, $1,808 per month over 25 years.

Energy New England In 1998, the Plant, in conjunction with the Reading Municipal Light Department, the Braintree Electric Light Department and the Connecticut Municipal Electric Energy Cooperative, formed a new cooperative, Energy New England LLC, as allowed under Chapter 164 of the General Laws of the Commonwealth of Massachusetts. Each founding system invested $500,000 in order to initially fund the new corporation. Energy New England is an energy and energy services cooperative established to assist publicly owned entities to ensure their continued viability in the newly deregulated wholesale electric utility markets and to strengthen their competitive position in the retail energy market for the benefit of the municipal entities' customers. Energy New England functions as an autonomous, entrepreneurial business unit that is free from many of the constraints imposed on traditional municipal utility operations. Each founding member has one seat on the Board of Directors along with three outside Directors. Energy New England commenced the management of the founders power supply operations in the newly restructured NEPOOL wholesale markets as of May 1, 1999.

The Plant records this investment under the equity method. Included in other expense (income) is approximately $66,000 and $(216,000) of income for the years ended December 31, 2002 and 2001, respectively, representing the Plant's share of Energy New England's net (income) losses.

On January 15, 2003, Reading Municipal Light Department gave notice to withdraw from the cooperative effective after a year.

14

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE D - LONG-TERM DEBT Long-term debt is comprised of the following bonds:

2002 2001 Electric Loan Act of 1969 Interest rate - 8%, interest payable February 1 and August 1, due serially to February 1, 2006

$7,265,000

$8,730,000 Unamortized premium Less current maturities 10,032 7,275,032 1,585,000 13,386 8,743,386 1,465,000 Total long-term debt

$5.690.032

$7278386 Aggregate maturities of long-term debt at December 31, 2002, are as follows:

2003 2004 2005 2006 and thereafter

$1,585,000 1,750,000 1,890,000 2,040,000 NOTE E - CONTRIBUTION IN LIEU OF TAXES The Plant contributed $2,500,000 and $2,430,000 in 2002 and 2001 to the City of Taunton in lieu of taxes. All contributions to the City are voted by the Municipal Light Commission.

NOTE F - COMMITMENTS AND CONTINGENCIES Hvdro-Ouebec Agreement In 1988, the Plant entered into an agreement with the Massachusetts Municipal Wholesale Electric Company and other New England Utilities to support the operation of a transmission line to permit the interchange of electricity between such utilities and Hydro-Quebec Electric Corporation (HydroQuebec). In connection with the agreement, the Plant advanced approximately $800,000 toward development of the project of which approximately $450,000 was returned after the project had obtained financing.

In 1991, the Hydro Quebec project was completed.

Upon completion of this 15

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE F - COMMITMENTS AND CONTINGENCIES - Continued project, each participant received stock in the New England Hydro Transmission Electric Company and The New England Hydro Transmission Corporation proportional to their advances. The investment is being accounted for on the cost basis. The stock received is not readily marketable, but gives the holder rights to purchase power at a percentage of the fossil fuel rate.

During the years ended December 31, 2002 and 2001, the Plant received dividends from the above noted companies of approximately $42,000 and $37,000, respectively.

Power Contracts The Plant has commitments under long-term contracts for the purchase of electricity from various suppliers. These wholesale contracts are generally for fixed periods and require payment of demand and energy charges.

The total costs under these contracts are included in purchased power in the statements of operations and are normally recoverable in revenues under cost recovery mechanisms mandated by the Commonwealth of Massachusetts. The status of these contracts is as follows:

Unit Fuel Type Fuel - Unspecified (fixed price contract)

Fuel - Methane Fuel - Methane Fuel - Methane Fuel - Methane 2002 KW Entitlements 10,000 3,800 6,650 6,700 1,630 Contract End Date 2005 2016 2019 2019 2016 Estimated Annual Minimum Payments

$5,986,000 2,784,000 3,815,000 2,800,000 811,000 Litigation and Other Matters

1. The Plant has a contract with Vermont Yankee and certain of its Sponsors for 0.4602 percent of the output of the Vermont Yankee Plant.

On June 22, 2000, the Department and the 21 Municipals filed a complaint with FERC, in which they asserted that they were entitled to refunds for transaction costs incurred in the sale of the Plant and for certain decommissioning contributions.

16

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE F - COMMITMENTS AND CONTINGENCIES - Continued In the fall of 2001, Vermont Yankee informed the Plant and the other purchasers that it had entered into a new contract for the sale of the Vermont Yankee plant to Energy Nuclear Vermont Yankee. Prior to new filings being made at the FERC for approval of this proposed transaction, the Plant and the other purchasers entered into negotiations that produced an agreement pursuant to which the Plant and the other purchasers agreed not to contest the plant sale in exchange for early termination of their Vermont Yankee contracts as of February 28, 2002. Absent that agreement, the contracts would have remained in effect through November 30, 2002. Notices of cancellation of the Vermont Yankee contracts for the Plant and the other purchasers were submitted to FERC on December 7, 2001, and accepted by FERC order dated February 26, 2002.

In 2002, the Vermont Yankee contracts were terminated.

2. The Plant is involved in various legal matters incident to its business, none of which is believed by management to be significant to the financial condition or the results of operations of the Plant.

3. The Plant is also involved in proceedings relating to environmental matters. Although it is difficult to estimate the liability, if any, of the Plant related to these environmental matters, the Plant believes that these matters will not have a material adverse effect upon its financial condition or the results of operations.

4. The Plant has a program for insurance coverage provided by the Massachusetts Municipal Utility Self-Insurance Trust Fund ("Trust"). The insurance coverage provided by the Trust is in excess of a

$50,000 self retention up to a maximum of $500,000 per occurrence. Additionally, coverage for certain environmental claims is provided by the Trust through a separate policy for which the plant is responsible for a $50,000 self-retention and the Trust covers the next $50,000.

NOTE G - PENSION PLANS The Plant contributes to the City of Taunton Retirement System (the "System"), a public employee retirement system that acts as the investment and administrative agent for the City.

All full-time employees participate in the System.

Instituted in 1937, the System is a member of the Massachusetts Contributory System and is governed by Massachusetts General Laws Chapter 32.

Membership in the System is mandatory upon the commencement of employment for all permanent, full-time employees.

The System provides for retirement allowance benefits up to a maximum of 80% of a member's highest three-year average annual rate of regular compensation. Benefit payments are based upon a member's age, length of creditable service, level of compensation and group classification.

17

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE G - PENSION PLANS - Continued Members of the System become vested after 10 years of creditable service. A retirement allowance may be received upon reaching age 65 or upon attaining twenty years of service. The System also provides for early retirement at age 55 if the participant (1) has a record of 10 years of creditable service, (2) was on the City's payroll on January 1, 1978, (3) voluntarily left City employment on or after that date, and (4) left accumulated annuity deductions in the fund. Active members contribute either 5%, 7%, 8%, or 9%

of their regular compensation depending on the date upon which their membership began. The System also provides death and disability benefits.

The System does not make a separate measurement of assets and the pension benefit obligation for the Plant. The pension benefit obligation is a standardized disclosure measure of the present value of pension benefits, adjusted for the effects of projected salary increases and step-rate benefits, estimated to be payable in the future as a result of employee service to date. The measure is intended to help users assess the funding status of the System on a going-concern basis, assess progress made in accumulating sufficient assets to pay benefits when due, and make comparisons among employers. The measure is the actuarial present value of credited projected benefits and is independent of the funding method used to determine contributions to the System. As of January 1, 2002 (the most current valuation date), the Plant's unfunded actuarial accrued liability is approximately $17,152,000.

The Plant has established a separate Employees Retirement Trust Fund ("Trust Fund") for the financing of future pension payments. The market value of the net assets at December 31, 2002 and 2001 was approximately $12,016,000 and $13,593,000, respectively. These funds are invested in money market funds, fixed income securities including government and corporate bonds and other equity securities.

The Plant has made no contributions to the Trust Fund in 2002 and 2001.

The Plant receives from the Trust Fund, over the next twenty-eight years, an amount equal to one hundred percent of the annual amortization of the unfunded pension liability.

The following represents the components of the Plant's recorded pension expense:

December 31, 2002 2001 Contributions to the System

$1,942,277

$1,890,456 Contributions from the Trust Fund (1384,609)

(1,340718)

Recorded pension expense 5$

549 738 18

Taunton Municipal Lighting Plant NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE G - PENSION PLANS - Continued Prior to 1993, the System's funding policy for the participating entities was not actuarially determnined.

The participating entities were required to contribute each fiscal year an amount approximating the pension benefits (less certain interest credits) expected to be paid during the year ("pay-as-you-go" method). Effective for fiscal year ends 1993 and beyond, the System has removed the "pay-as-you-go" method and will amortize the unfunded pension benefit obligation over thirty-two years. This change has been approved by Public Employees Retirement Association.

Accounting standards require certain related disclosures be made including the components of pension costs and the funded status of the System. The effect of omitting such disclosure on the accompanying financial statements has not been determined.

NOTE H - POST EMPLOYMENT BENEFITS In addition to the pension benefits described in note G, the Plant provides post employment health care benefits to retirees that meet certain requirements. Retirees of the Plant under age 65 are eligible for the same health benefits as active employees, while retirees over the age of 65 are eligible for MEDEX. The costs of the benefits provided to retirees are borne 75% by the Plant, and 25% by the retirees.

The Plant is charged their prorata portion of the "pay-as-you-go" cost of benefits based on an allocation by the City done annually. For 2002 and 2001, the costs allocated to the Plant were approximately

$486,000 and $599,000, respectively.

19

FPL.

E;RDUFP FPL Group, Inc.

700 Universe Boulevard Juno Beach, Flonda 33408

Td Ow; d~l:P 20 FRLibeN i

2! Fin ?5 ? and OparaIfP $~t~

?an 20.

22 iFirn??n[<<ISb

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a 0

a i

ABILITY TO...

DELIVER VALUE

Dear Shareholders:

hI 2(11)3 FPL *rnunp aian s roved that r las tit strategies attributes and top-nitnch teatn

$e tendled to addres sitccsfttly 'he challenges and opportunihies of our deynantih cMving industry.

Continuing a iong-m.te trend, nor financial perfrtrnatte For 2003 na strong.

• FPlL Croup provided a 13 percent Towtl shareholder return for the year. which enabled us to conuinue to ourperforn our peers and industry when vie-ned over [he last sno-year and five-year prrttti Iser, ch-on page 4).

• Net in-s e. using geterally accepted aueuntring prhieiples (GAAP), reached $890 million or $5.00 per share in 2003, crntpar.d snith $473 nmillion nrr

$2.73 per

-tarn its 2(002.

• Ott aOt adjusted basis, FPL Grottps 2003 earnings would htac been S871 I million or $4.89 per starei eon-pared snith $831 millitto or $4.80 per share in 2002, (Sen page I for a reconciiirtist nif net micotitc 3i to adjusted earuritngs atrd earttitgs per shan re adcjusted cantings pre slrat.)

• FPL Grottps tttanagement tises adjusted earnings ictrnalle for fittattcial pianning. fcsr reptrtittg of results, the btoiard of dirnctors and Iir thte Cntltesays itctttiee piatt. The cstttpaty also uses adjusted etrittgs when contnttticatintg its eartittgs_

outlook to attalysts and invcsrora. Management believes tlat adjusted carttings provide a tonre

-rttninngful repr-setsarionn of Fl'i.

Groups findamenral eamings powser.

I' No: income for Florida Power, & Light Com.pan.y.

els largest business and one of the narsoo top-perfborststg otilities. ncresed To $733 million Ur02003 finns 5717 otillian in 2002 ireoultiog in cacoinsy me shame contributions of $0. 12 iii 2003 and $4.14 init 21102. This solid performance seas doe priomarily to cootinord terotag geossab so costooter accounots and osage per cuttoerer as well os Otssttaodiieg operationt anod otnintessancccost perforeasace.

FPL GROUP COMPARATiVE TOTAL SHAREHOLDER RETURN Two-year rtooc 01101/02 - 12/31103 10% S&P 500 loden I-1% D.m Jone Utilities loden Flo-year robt. 01/01/99 - 12131/03

-Sn4 S&P 000 loden

• 4% Dem Jones Utilities loden I-Ncr incom on a GAAPt basis foe FF1.. Energe no seholerle energy ssbsidinry oporating norsido of Florida, seas $1 F9i million in 2003 or $1.09 pee chain, comnpared seith cls ssf$1S69 orillien or neaio$0.97 Poer vkas in 2100e2.

On an adjusted hark. FI'L Energa's earnings s-.aId have heets SI 75 msillion or $0.98 pee osare, cosopatd sidb $ 126 siillion or $0.7.3 per sham fete 2002. ISec page I ferna recosiciliatien of net io-cs so ad jested earningt anod esrnings pee thare en adjuosd eannsper thorn.; Focteses ceneribating to FPl. Encr&~s arrosg peftsneinclndcd: continued efficient, los.vose operations: portfolio additiont, includiog nearly 1.1110 tmegaseatts of nesossistd Foerspe na-ionss; strong

'esfirornase at, asid the foinl-y-sr i spact of osesing sThe strjesirie isttrms itt, tIa Saesaseok Statiors oncloan poseerplntse id ans tgoisg aset pniati-satioss aeriiris.

Employing the "suotainobilityi concept sAr FP11. Greop. se.sppnacb Otur bsisiec with a ong-tetm eics. One tf thc sea'sre chorr To ars rsige.sisd srseaeos r ses 1 sgmrs ostd csssst-sso sr crack rervad of castie...st.ly gessnisg ess....

ings is Is; esssplsyissg the

--tscpt s, ssanhir.

Ar its care. ssrtaissahilits' sqoiretl entoststeated ac-rcssss tar, and iaolessits.

sise hey areas ocossatic accosntabiity, eeiteosneotl strvardaship and ocmia mnpnnsibilirsy. While oste priary em~phasis is on ecnsovnrc aceeutssahility anod. ist particolar. geeseing alonretolert salon, see ecogssioe dline, to resole rltneeholdnt ealto cemotion nine eke lortg tet, see moate alto snceerd in mneting our erseir~noroencl and sociol msponsibilities As switl t ele ecosystmis fcanstcd tiacoughour ethis report.,

busihoasessr inutn sowive anod thrice anrisst a voriey of-eterel ennrtitonncie'o and forem. Like chore ecenrarorms.

we serie a; least for a porefo roenisteirce evitis otlaes, asid a tontoall;' hroefsial eelatiassrhip if psoile Wr acesosranle tasking artisrs F d

as-s':.ts. cop,~L ersIsasce aod sarecin nor insg-terss scale 1 assd vialsiliyf.

Fofliosiss is a eses of osaoy ef oor sseogpbc.

-atnrser and straegies asisg sh the eieesoessss, of this soisriaiebilioy corncept as a franersore.

Economic accenoesahbiict FITP Greop coreim-e so tchaiee strong financial pet~if-ma-co and grow shraraesolder e~en.

We hose a strong bolastce sheet. siccing credit raittgs, gand oasi flow' nod n di,,ciplitted approachs en deployissg copiesl. oW helie one finaticial strength and disciplisse differoociare -a them osose ofioo peers and ore strog cmapctieie adnotagr..

Dnaing the course of thre year, we waired $3.3 billion in the capital ni esassd throogh hank transactions, snabiseg on tOr nsnerr nral copleol -osliremonts refisnce eissirsng sigi-s-rt debt. signifi'aistlp etend oar debt osatoriy prosfile. inapsoce liqoidity' and sinanleaneonly Tedne net aggregate ens ofifsodistg.

locluded lit these troisnctinisi se-the fert-ee espital ninicernaocissg of vviid Projects and n basthF fsascisig of noasseal gas-fired posers plans order construction.

Both of armfinoncings 0-er recgnied by caioes project finance publiestions as ouesanding eraonsaceloois within else industry and ronived Deal ef the Year I5500w in severa eacegoties.

Osse finan.cing octiviies serem nill

-esoeestE swith the plaits -o isave previnosly-dtescrihod osrd helped as esoiirsin nor orn' strong cemdit ratings.

Boteb oftoer major hosinenses had ountoondisig years in 2003.

I-FVL bernefited Finro ran of gansee in one cortsnier saac and in oleesic arrage pee catssaner Thrar cr -snog thie aicthest safsa;' electric siiiW.Se csssTitissea asasndn per-cri-ial adss -

esar aefserasc srisa pf-ce on casssg rlise heat a iat, isidusery. We added macre diasi 1.0 soaeiaif g.-l ica is capacirs ssd ecosassded one iinfinstrncesre en moeat growing demiand, oand se foreitee itriproerd dhe reliability oF one electric system, One ewe urclear colts or St. Lod u

s'em gesaseed 20-sear licenssn "ereeions, by ekse Nucles Regnlatr.' Cointoission.

I, At FPL Biee-W; despite a difficult bosinmss essvimoisaeii, see contionaed to capitalize eon ouse rer-grias asnd gross ehe boniness. We~

added searly 3,000 naegoseotcs of natural gs-fired gencracion with projec additions in New Y-eb. Alahanso. 'liens and California.

SWa gres acne wveld-lediaah.sead bY'falrih nearly 1.000 segasvasis.

WeranapleIns 491; dias saf cisniisaasa np-6 :ad a~eod,ioeioa t.ags as sine Seahrook Stati~os sa-loa pissen plalns ii Nean F-Lasspashie.

WIXt coosisuend te add oonand reduce risk by actively hedoing nor inrhatportfolio.

Ise sacid many times thot.c n fthe halnnsarks of FPL Groop nod Ito high perftaeno-e ecotues iso dee~pls'-ingeaiiaed deive fear contistnuousitp mnt We ore -osotg the sop dcilo sir foarrile performine nac nina; key indesery mretrics. Even so, we rngolarly Ise-chaionak or proeses asad perforac gio st, die hint of one peces nod Ua.S. duindme oso asens. for idesitlyiog oppaTtoni-ir for barchetc i pssseeinen-.s WX-e rscinrain a relneiceIy low' eirk ptofile by focosieg on nor core buaiocs~s and Havoding ineestosec other compnies bane road, in "trends ofsbe don' SWe osanigato marcet risk by ooraccog a sigh p-renocge o)fepected fotore poivor earpot nod by hsedgitng oar ossoc.iceed bar1 mircn~i~esira.

W~e sni~iieaisi a di~eee foel tom at one Utilitsy arid at, FPL Eliergy. serem ay 11 diversified by, geegeiphry in well os by fool tape.

Lait ser in oy leter I articolated mysip -ron persossal communitorne tea tonqoccinoed intregrity and rnr'nwed a uit OF tagible actions see had taken TO ephold and banker serengelie oOr oueseanoding record of ot~geity asd ne-onosbility in corporate go-ennise matters. One eotpartys etopoesee g-vrnane praties ore nose ranked in, foe top 10 percent iii oar indasten cod iiirb tls op 15 pervert itt The S&P 500 Isa Iosmeoti-oaiol Siarerholdec Servces, o lmdioe indepeodeor appraiserc Aimother rating organisseaon.

Goncenncelveteicn laasernoiional, gsie FF1. Gcroup 9.0 nort of I0 possible points, again placing us owll aohve avoenge as compared to otianr U.S. companUie

'sod bettr Thin, most e-egs' parsdoces. As at doian,II on rr ar-asi eaf te ciioaopy, a ice ss'Unasirsile en s-se'.vr asal sane cirpesrale

.g(oveTtacac practaces wvMt' a anal nif;aislitg cte tsar

,eresi lertlane nis an peacasces aiss a-tnrlaaascr.

En,'irene tenealaeewodbihe Clean Liersse is a orajer i~cus ofnour business strategy 'l'Fhe tin majority OF the poseer rye generate is derived fsoio cleats mid rene-ohe fols. Aiaaong thr capnciey addicicits see heiougli onliate its Plorida lisiv yer win-a liseiiy at Saitfod sitar se "eepnw'eed's en replace older oil-fired genesraing noics with clean-or-niog and more effileinT nacural gas-fired uoins.

irer the world lcader in snind passer. We eoen nod opesce the -o largest snlsr bields in she sesssd and snore rhon. 20 Iseydraspaser ilriliies lIn 20113 dyso, see i-sceads noso than $1.6 hilioss isa dvvlpiag slo sesir,,esofeea awiresiesabl~ieonerga Tirsogli iso ess Sunshsiniie En~rige piganin FPL neidentiol cosroanes n00' lace on nyu055 T an pply a small rooothil' Pieiniis so joi ot in seppoeting claaier ol-ceicity-generationi, edsincig C~aenisio and helping hoild new' eseamble soisrces of electricity io Floridandsc sierrasinding tests.

Oro the pscrt docade. FP1 51G.. Uop s'nomarily bar noade iigsnificants revnetinas its p 1 ao ensissionrs.

'lerdo;;

no, roiassions rates ofcarbon dinnide, niernoon onide nod sulbar dioxide are aisong the lorese of ennpanies one sloe in the nlexerie power indostry. las Noceisab-oso he keyets of one poeticipation in LSPVs Climate Leaders pegan.se coniaicred to tedoc~ing otre geimehoasse gos emissions 'se by IS8 pescearc h,-eree 2003 ond 2003 coPared son 2001I baseline. FPI.

Cresip will chioew the I0 Peeren redacsi~oi

bossgh o sraints of efforts, incluiding

ciaoariiiing res evaoas focI nswitcltisg anid efbicieney isoproae-ieia nppssrrnralabs or FPP~ foss il-fool plants iiptointg the opnraiisg efficito-pofoer Seabroo' Utoclear poseer plant, osd inaoain its nutpot by' aboor ssiie perceite; boildiog or hoping power firom clean nacural gas-fired goanearioni en offset older, less efficient fiac~iiies; increasing pareicipacino of FPL cireeain enemy managemrear and -nseeeaiun progesnrnt; cnitinoing; expansiion of FPL Etergy's snoed-loodisig wind energy ponfolis:

and ioerndociisg cue Suitshine Energy progesars 1 refered en ealicer in ehir letter In nddition, rhine acioits seill pnsitinnon as eel in the evns that more streing-n air

-nissloits legislation bccoocs late.

SYocial reopernsibilix)'

Pleat and formost, see mnake -er effoec Tn encase the sfre,' tad scesrie ofnor easaplnyen and thtaio whao inteacr sich our lirople, facilities cud srie Th'ansks to a maijor biclaaces-lastd traissisg progr'asm cund a rafecy-iric asidsadt, safety ;terflisrsramcn -1 onrecornpany is0 an all-Closte high cud is no~pacachirag

thE bass in asic industry. Even errs injury iskeen rc raneIu huivev.sr se e vill eras 'orilnor.

'Ilre ilhil ar our workforcn is borh r

hurnan issue arid a b-Sai-s issue. Oar eoisplu)'ecs hrav drasen grear bandfit firees, FPL WELL, our eworld-class healri, wollooses ard finress progran. Health care costs contriirue to ris howcever, and se're rakirrg acrioen to lknit further incicases yer rerain quality hcalrk case sass-ices for Ottr employses.

As l 2l'L. Group, w value wsrkplace diversity and siew is I.road.ly so include educarional hachkgerid, iriduistry lperienca and length of service. as -1i.rs I555I5 tradirional oresuores like otinicitY arid g-irdoc Tl-h diveesie of oir,sa.nagemener scan is quise isirprosice, arid sc also havc a strong supplier divetasin progrars.

Sacial responsibilit cxoends Sn collahbantaigvih srvhon-n...rl ard con-suityr groups on sonsitivc issues. lbs, gpnerh in our esrvics creirory pfi-ems challcongs ir siting one faceilitiss; despits using staro-of-she-ir, rcheelegy sir consrrur-and operate our fcilities.

pIople aseirt alas pleased tliat sicm elecdeie reirerri infrasrucrure erighr be uirder coisiderutirni fio uroit sseighb.rh,,od. Thras sehy we conduct public outreach prograsms prior ro com-oencing nsew irif-asteuorO irripr.eerrsars. 9:hila eve cant alwvays accorornodase rho espressed densir nbcnos-nuniv sembhes. ersoec coorosirtsd so lirstnirsg and to raking Their concerns into ccnisidcrsi-n in or p!annineg.

Cl.ans:e s

-r roost impnsari 5social ersperrribiliries see hieas nreirsidirg a val, relinlle and liss-c-ra srpply

,sf electricity so all of our cs n. iss-.alr. g svuuil grars casruisree aervic. irhe Calilorisia el-cricity crisis sfjnjusr re vram ago and the Aohgnsr

14. 2003 blackoar is parts of she ULS. aid Canada havc de nsoestred just hoav inspor-ant a reliabia elictric estio is to oh siF us. WoVve invesced moss than $5 billion beicwen 2000 and 2003 in our elecrric ysserc i&frastrrnctusre and plan so invest snore rhan $7 billioss between 2004 anid 2008 so suppoer projected greswth in our service teesirusy and irrigoisig reliability erhancemernrs.

In 2003. rhe averIge ariou(.r of rime an FPL customer,vas wistont poser -

a key irsseasc of reliability -

wes less than half idc national avosaga.

bVinrnirg top industry honors WVe consider each af ther srIee iep-ratins -

corronsrmiaccriisrrrobiiivc, es-irs-r-nal anesadsliil rnd social sesrrslisihiirs-h oirs daily svsiso rakisg aird eat lsergee-rarrsr sresrgv dovnlopsrrrt.

f'his past yeav. wse ore delighbrd ro bh psivaned eith rdie 20113 Edison seard. the elnctric possr irdustryIs highest honor Ir arunouncirrg the asard, tre Edisers Elicr rinstirne mid. -FPL Groups winning srrategy clearly denirsestraros chatr nveirnirerrral axcalleruce arid onistandirg financial parformance can go hand in hand. EPL Group's success is cbulesnasic of she iigenuiy' and vision thar arc thu halinsacks of our indusrry Is leadsrship and boldoeva.

and the abiliry so sret t liears ahbad in a constantly changing indostry re whar set rhem apart."

In Dece-ssror. PlMarrs, he -r.eigs infi-rmatiao aIl irrarakt sevices nin of The McGrase-Hill Comnpari,,a.

prerered FPL Grouap rith a 2003 Global Enrgy Award as "Receoablc Corspany of sie Year" for our clean rrergy po rfolio.

2004 and buyond Gamin foreard. we have high c"pocTati-os. sound strarogier anld

-rrirrg, tangible groaseis prr ipnatr. For 2004, sn expocr orenings per share for El. Group in trhe rngt of$')5 15 s 05 20. This includes enributioirs fbrir FL oa fSi 20 ro S4 a35 aid S1.05 to j$120 Ironsw FPL Eoergy assuming noraia veather, as wellI an an cxpeacnd nenaanii irpacs froee Corporate & Other of 50030 to 0 035 par share Iaegeiy de tso increasel interer espcnr -I bIer rjaigar eselodr rhe effcrs f adopaing ncs accroantrg stnundaeda and the eark-sa-market offeur nf non qi-qlrliopg hedgpa, eidser of lshich crs lie derorrirrird is shiv rrirr 'ea e-pe sr heeefir fresri cisriured 5estl5in cusonen acceunce and asage at FPL, oiginrf prrdaciisyi-y isrpsncrrre-rs as both FPL arid FPL ELorgya rIe full-year irepacs ofu resly 1.000 rmega-at of weid generasios added in 2003.

and ongoing nv-er opsimizaaion and risk oa-sgemin-t acreriesr as EPL Energyt Overall. our corporare stearegies call for supporring

-osinued geesvsh as EPL and FPL Energy with.

balanced Arraying plars, inverigaring oppoesuriies that uoline ear core strengths -

shore artoe of she comsipasey shere we have derrrorrsesred superior petfnr..aece -

and firnancing new in.ersmenss seith a balance of debr and equit We waem disappointed that C-nraess did nor pass an -cerps bill in 2003. The bill was net 1 rfect, bus slid isiclade a airshor of psreisions srearwuld rave boen fanable ro our voiripans, inoirdisig a seind energy prodrdror tax csrdir. Wo are hopefil Co gress vill take acsiao eady in 20Ui a sk is bill or, at a arshiiUaes, elact slr v-iid pd-ssiors -as ciediru 2004 PROJECTED EARNINGS CrDINTRIBUTION' Ors the s.r.ngsr of g carafuily deseleped straregy.

a rein of ven raleinsed employee ad a coe-nir--ner to cusislisnally raise trle bar an our pafoonsancc. se tPL Enoegy, eap-cs 2004 o be arnorher year of sirlid financi1a nird Corp. & Other opeerting peofourrannc foe FPL Grnup. We arn ec fide-r it vsill also be a year in wnich ve further enhance nor 169.

repuration as one of rhe boss companies in our briniras aird continue so be a powerful inverrrent.

Helping lcad is toward those goals is a grorip of'otussanding executive. Of note in 2003, Armanda Oliscera a saenred leader wirt niore than 31) years ofbepelient or onrecorpeny. s nanred president of Florida Power oc Light. Elected so che FPL G-vup noohdeoat as cool board of dirocru-last yvear was Michael H. Tliarra.r.

hndges.

arlher chlairman of she board arnd chief firarucial officer of Ovrerrs Corining, a wnorld leade, in building irsareilos and ceomposire sysrms. Akonrido Codina nird Wiilard OnicE-aO ora5 rpic osrcocaning aes thr aera-nisoi n'sec! et -os-nfayir/9 se/ain se solh

h.

Iadr or s IIrna At a rinse -han nia... companies are trying to correct their past soisTeps and find nere strtegies in a dihfieuli business crrvisonns..r, FPL Group cosinorre ro dor ronsrmre ir, ssrsi-abilir and its value as n.Ud larig-rem in-estm-nr.

Our bare brn/ses in sek anoid Oporasinilri aeicrrce a ad aesrirmer rarisbactisrs are -eassral so nor oelrneo and sea enjig reguiara-saahility ir our Florida ser~in sersi rsse X ro hs nor-rr 5.osngarto grouoth pnoerhi/

F)IL is armong she largess and fossest-geosing slectric riltires irs A ieser.ca AEEL Energy, we fully wepacs to achives c-nrierred growth -

particularly in sind nergy.

asassiling canrinu.d poblic polic sopprr -

and are srll pissiri.orrd for ia, rerny obseholae de arkess.

Wol hns-a oadrm r-iairafide More shu 81) perceri of oun expected 2004i earings sill be gerrrared by Florida Pow.-

nc Lighr aid enso than 00 p-rceti of she expected 200-i gross reergin from our wholesale generarino fleet at FPL Energy is nose protected frost fhul and poaser market enotrilitr We're weIl divorsified be region and by fuel source. OHr modest low-risk trading businees is focused ulmoss nclusively on reducing risk and extractinrg rnxiiaum vahsre fbom our assets And see beliwoe ear proactive approach no enviranrhrerrral anraragenrun has irisiiseleed our risk going fess-ard and is a susrainabie conpeirive advartag.

We havss heiefi ity noper-rnm opport-eitiesn.

We hasse a solid balance shact and strelig cash ftow.

Oar cuiltrre and values see sooner-snre, ansi direrplin/no We avoid investing in 'trends of rhe daye" Integrity non acdsCC etabiliry areas ar e vea core of ousr sanasrrtlenr plisoraphy

[)over rerrrrd a dircates in 2003 and eva shank rhar foir their s of dcdfdiceard

-sicde As alseres se appraciate +he soppors of)y",

our sharihnldlra as we nasiirn-sir ongeirrg parsurr of incroeasrig rharolhnsder sa ta-Le-se His Ill Clnironar., Prwsident and Chief Esecaive Officer Fburary 27-2004

ABILITY TO...

CAPITALIZE ON Florida Power & Light do tinled to denonstr-ite in 2003 the distinguishing charieteristics that inake it one of the uations premier electrio utilities and a solid example of sustafined success.

Anttng the ftcrrrs rhor set l'l. apart from most rTime high tf more than 103 million megawatt-houmrs of its peers are contittued strong growth nrh pcmritnal Since 1993 FPOl has areraged antoual total sales growthr excellence. superior caSt It-Frrrtnatce artd a constructive of 3.6 peectrr car paed to the most recently reported iegulators Invirrrrrrrreot

'his,sintring corbirratiotl 10--var indusrry average of 2.4 percert.

ares again. allored the compairy to deliner ouorstanding ealue T) cusraoiters arid FIL Gro-p sharcholdets.

Meeting Increased demands of growth Fil'L is rtecrtiig The oscreased dcnrairds of its Nation's fastest-growing utility c

bsromers hy xdmiio rits gerario-capacit and blt rtrther of,es.ttirs scrved, Fl'L is the iraritls iolrasrmortirs imwrosg irrs perarieig pertfsrtirvnec third largesr irressvr-rtwned electric tariliry :tid atinring atnd ertlincing cusron loyrltys the fastest grwxeitig. In 2003. the cornap:t ii G arags I're atiliry aldrd morer o

tah 1.4011 reegaearccs numirbih of fccouarS greee Ire rhartn 57.2000.

or 2.4 of g

-ierris urrrg 2003l ricreasiig rite capabilirs Percert, to neo, than lrr*i I srilliori. It sews rhe )rrsarerr rf its ge-,arzig ifleet to isre rdars 19'(00 irtcgattar.

uscri mcs greerlr eperic-ted by FPL sise 1 989. Ii The addirions ircluded 3l14 nmgasvrtts trcrir ter 2004. custoner groevrh is expected to be abortr ire sae.

peaking units at rhe F.ai \\'-s power plant and 957 Over the last rsrcc years. Florida's eace of popularion esegarvatrs Front the reposscring of Unir 4 as the Saittord grrs-trh hat hen Trhe highest among Tie nations largest porver plantt I'hc utilitrys (oral generating capability trtr. aod ire popilarion has increased by nearly oare incirding more than 3.000 rrregawatrs ofpurchas d million peple. Six of rhe 10 fascesr-gsowi-g rrrerrr areas p-ver -

gree to more rlare 22.0t)0 -rgawaers it trhe United Starer are it Florida. ard half ot those are located ii FPlI-s sen-ice Territory.

Flurrida's itcrease irs populatrion Irs created a record STEADY CUSTOMER GROWTH housirg boon. reprpesnring esore Tian II percerr Average.ustomer accounts (roillions) of The natnotnisosrsirrg starts in 2003. In addiriort so beirg drawn by Floridas climate and quality of life, re-idrlnrs are being aetacted by newe job opptrrinirics i

in an increasingly diverse market. In 20(13, iloridasI job ersist was rit higtesr it the trarion and greater tlan t elsa f tre ncxr four highcr stares corilbitred.

Thre eleerricirv usage af FPI!s co-rroee aist ccirti-rud tri rise it 20013, op 1I percent i~re die preeloar pecre.

Elctricity usage, by FPL~s residential crstorers1 is among tie IIghet in the irdsstrsv. lit fac, S's51.

ri.osesris mere r etail kilrow.rt-hoars rh;an any either rtuility in eke U.S. In 2003, totalt sales reached an all j

,c-s~

~

GROWTH

ABILIW TO!N TINEl r"

P, E RA I 0 N} A EXCELLENCE Crsn.rss-ionr also begart on expansion pjeeross as In addition to adding geresasion. FPL has inassed PL's Martin and M.ansroe poweer pialr sires. Thi two

'roe chars $3.3 billion its poiwg r delivers irlirast-cuoe projctls tell add about 1,900 m,,ganearc of generation since 1998 and exrpres To spetrd approxintsarelv $3.4 in 2005 at att irvestmens of over $1 billioes. This billion Through 200. 'Ine inoe Insens irtelodrs severa still provide enoegh power to mcent hb needs of osajor new transmission lines on both the southeast and appeoismately 400,000 new customers while helping southweser Florida coases.

maintaiss a 211 ptecene sca-e margin hor all FPL Upgradissg and addisg To its senosissioss apabilitie, custonsers Boah projects are urilizing nasural gas-fred.

ban helped l:PL annid ssansroisnirsn-relartd blackouts combined-vcle genrators hsas will be among she soci as That r-perietred troiughount sit Midwest arsd clraneac and n ost -ss-effectie in the state, rho Nnboeass in the s-uoss of 2003. Further safeguards FPL also plass to build. sssbjcrt to all stecessars agairst blackouas isslude the superior eperasions of FPi's re-iews and approvals, a,l100-megaswrt s.asoraed eleic syrsens assd rhe clsa cooperasion of Foridas gas-fired plant as its existing Finkv. Point plant sire uriliries regarding system steatise and operatiots. As a south of Miami. T'khe

,600 illino unie is cxpected peninsula. llorida has few inrer-csrmnerions ortside rbe so begin operation in 2007 and oill be capable of as-as nobich makes it easier fee FI'L end other esilitisa To peoviding ronogh elcteicisa so none 230r000 h-mies urraieer end ce.ntrl ch. O.o, F eleciciy in she satse

.rld b-ius--ee s. 'lir hlackey Pees wyara.s will ersable she cormrpaey co add seeded ger sire-im near Continued high performance tsn of irs osajor populationr greash retrese.

One uf sie hallmnarks of FPL is its stareeg nll-atunard Tfie added gesrssasiee was iderstifred rhseugh a operating perftrio-ner. assd The c-alsparsy corisrsea long-trcr planoing procesn thas sat enabled FP1L o so excel in airoually every area of irs operationes.

maintain an adequate supply of poacr sehile streetirg In 2003. she availability of FPls fossil power plasrts she dlralienge of-owrinossd groevth. Sinre rhc bcgilsnig resnainced above she industry average. Ihe conmpany s of this decade, the company baa added mor than 2.600 nuel.s platan-ailability of 9.9 percent was almo a s-ve she sosgawasts of gertceatuios at a cost ts'apprtxirtrasely 51.3 indsstry acersge. but down faron tihe psreious year Pahe billion. Gen ths seas fastr years, FPL expccts so invcen declisre as pritaris due vs reactor oes head irsperrions.

mere Thans $1 billioes sreTo irs ne-v generasiag faciliriex.

sndneed by Trhe Neclcar Regularosy C rr......nisie..

wirich eb eseded -noare plarneod refielirg enrages FPLs peowet plaers etics a diverse saissure of GROWING FASTER THAN INDUSTRY AVERAGE fuels to gerserate eltiri allowsig she consparry so Cumulative ktlnwatt-hou-gelMh lipo.eentI reinimize feul Costs and esaistrain greater operating 50 fcribilisy Dulring 2003. deln-buaroing nta-si gas a-rauntad for 34 pe-cens of the poeaer p-ovided Ibn qn

/PI Greershouse gas emissions-fiee sssideanr tosasl h 0

FPL 3,6%

feel source fee 21 percest, folleseed by purchasod po-ser at 20 pewerr oil at 19 Iercent and coal as 6 prcent.

= ~

i Sh-c lau-lhhug, majo, iwitiarive in 1997-PPIL

-seabilrts s

tinued to improve very yea.c In 2003.

cn

~

~

the astrage atnount ef srhne each of FPLTs cstrrosers

__e

.n-e awas without poster noas reduced so jetu 60 misesex-lees than halfrhe most reently reprted industrys'aerage.

tIP.~.j P~lt.

The freuertmeo ofimeoseepsien hot been Tedoced 20

ABILITY TO... ENHANCE percent Since 1997, and the duntarion of intecruptiotts Center for Cuetomur-Drivert Quality -

she only tlectric hls brett reduced 38 percen.

csilicy to be so honored. The nard places the cotnponys

'Ilic higl, degrec of reliabilirs' achiered during 2003 crutotner core cestrers at near world-dass status.

sas especially totable its light of the highly unusual weother esperienc-ld throughour tho company's seevice Delivering value to customers rto which includcd Florida's coldest wintrc since 1981.

Florida's peogressive rgtlatory esironment has llserc smrnbr of lightning strikes durinsg 2003 alto sas alluswed FPL so mairtairt a balanced focus on satisfying the highese est r eecerded bt FPL.

its custsrmers while matntaining financial viabilirt.

It addirionto W pidl resToritg power ts its a FPIl's eustens inttnrisn-based agr-eetnt avith The cusromers ustder rtrsnrgettcy conditions. FPL was atssong Florida Public Service Commission aord The Office of tit recipi-ttts tsf she Edion Eleerric lrstitur'sn "Etergercy Public Couarsel is it eififect uttil tie esd of 2005. The Assisrastce As~nrd."

The honor sas gistn its reognitioss compatny loeks forward to continued incenise-bused of FPLs r-ssorasior of poseer and assistance To customers rate agrrctttrists and die eare stability they brinsg.

Such of Ionirrion Virginia iowver in The wae ufemassivc agreements alilow 1PL so betrcr plan and manae irs damage caused by Hurricane Isabel.

bursiness, helping to ensrrre conrised reliability and loseer mrat Thain orhereise sssight exisr in less progeresivc Keeping costs low and customers satisfied reguatory rnvireo-memes.

FPL is an iduts'y leader in managitg cotss, Under FPHs rare ageenttrsn, rhe comupany has coe. as it expands and enhanrcs its electric scsetIr behen able so provide reliable power at reasoaabie prices.

arrd furrrer irrproers its operaritg perfoenasice The delicering added value so cessuners arrd shareltolders corstpary's operating and nsimeseinttce csts grees ontly alike. aes a result of nso base rase agreements se rssodesrly ir 2003 despise tie itrcectcd costs of nuclear first in 1999 shar cat rates by S350 million nerrly maine-nc, unsmpitoc benefits and insurance. I-PlEs and the second in 2002 rhat fintther reed rats by costs per kilosat-hot rcmain nssosriolly flis and wsel

$250 million -

PI. customers avill be saving fG00 below the irrsitry tstcrce.

milikr a y0Fr rirsrrrgh at least 20(1S.

Is r-cccr veats. I:PL has focused

-tt cnstsrmrr care Despite in-strsertcts rtf terhan Sh billiort

,1i5, aOt emphosis Ott impsooisrg service ottd tr'tceaeirg since 2000 irs capirtl enperrditnrrs so meet growtlh :srd cantaiter loyalty. iT. 20103. roo indepessdrnr studies erisarree eliability. FPLs rates rerstuin loIW crstrpared irrdicasrd tiat she corrtpany's ongaring eftot es ore ccr The sasiortal as-erage arrd tsther otilities in Florida.

prodsrcirg pcsitiee results.

F:PL was rared seclnd higihsss it tire sossthrrr region and IOth best ario-lly in overall costomor satisfaction DIVERSIFIED ENERGY MIX by ).1) Potree and Asseciares. Iheir annoral crlsrnrrer eased on kil-ate-h-s produced to 2003 strevey rfsIre. nantiote 77 largest electrc ustilities gore Fili. rnprcially high muarks i tire areas of price ad dite.

f billinig rnd payment. arrd comtpanty Firaga.

PPL ret.

raroked aboe the insdustr' areragc in overall cestottte f

sasistfction rach yrr siscr the J.D. Poaver sucrevs began It 1997, attd last year's results were the best yse.

in addition. F'L earned the prestigiors Certsir of iExcellenc cerrificaron from Pturdlue University's CUSTOMER SATISFACTION

SAFEGUARD THE ENVIRONMENT Extending benefits of nuclear generation Duting 2003, tucleas power --ctoeu d foe about 21 perceor of FPis generarion, and it is ass important part of the companv's cotntitmeer to a clean cn-ionni'tto.

It 2003, d: Noclar Regulatory Cosrmttmission issued operating license eensions foe te rtw urrits us the Sr. tLcik Nuelen poser plant on Hurcrinson Islarid fttr art addiri.-Ial 20 years. lhe Sr, Lucie license eroensions, were granted after a thror-year applicutitn and retiew process that included a cnsstprolsesssise sufert-attd e-seirnosnressral anralysis. tlt 20102, the NRC granted liceise exctessions of rice two ntsclear posecr risrirs at fI tLs lurkey l toint plant lncuted sotlth of Miami.

During 2003, FPL performnd exrensive inspections of the reactor vessel heads for Sr. Lutcie stio 2 and both Turkey Point units dtrring schodsled refuselintg ouruges.

'Twoutirror ceacu

-,rre idrotified and prmnptly repaited at Sr. Luce unir 2. No indications of cruckieg sore fouttd ar the Turkey Point nuclear ustirs. As a proacrice easur, te company has decided to replace the reactor vessel heads on each of irs nuclear units during scheduled refuelirg outtages ovcr a fotssr-year period begissisg is 2004.

Also, as part ofits commitment to eesltew stiperior operaring performance, rhe company plans to replaco stetrst gesretuss at Sr. Lscie utit 2 duritg rie head replacemnnt eutage scheduled ifr 2007.

Maintaining environmental leadership HlrL is onc Of rhe cleanest stiliries its the Uniled States swith ovorall ensissions rates that are among the l-rstess in rise itdussry, assd it has loirg beet commitkted to prscidisg power in alt essirrassnressrally respsosible nanter.

l)riesr bs tihe increasing deneastd far eltctriciry i itrs sersice terriuory. the company is rhe U.S. leader in wotpoweritsg' older oil-buring puwer plaustt, tlr is, cosreering them to rtute-ef-tle-rn rsattsrul gas npryesiotss.

Is doing so, Fl tL has beent able to significanttly ircrcuse the capacityf older platrs while ircreasing efficiency and riducing csstons.

'ire rrpnseering of exisritg older oil-fired plaster to larger gas-fired plastrs illustrates FPUs ability to apply tlse preper techsnologiers to address both irs enpastsion needs atsd ite environtmetrt. In 2003. the utility entered into agreements seiri tite Florida Depautlesrt of Essrironmenral Prorectiosa to install pollutiost prcenrios technology isat wrill substarrithly reduce emissions at both irs Manarec and Poet Everglades powcr plants.

FPI. Itads the nation it etrergy managemetst and cortseearios prags-.slts.

More thaur 1.7 rrillion ctsstcrssers hoer purricipated itlsrhe-psugrusor syor tirh ptat t-nt

decades, helphig to seduce elecricir-desstaesd bt trttrc thart 4.100 susrgawvurrs, osr ithe egqioleot of 10 sediuns-sired poQWC pliatss.

Early in 2001. F1lL istreoduced a "greet posecr" pseg-ans callesi Sutrslhe Ltrgy. whicn alkws cus-teorsrs so IILIP,,ppnr, fsnastciully the duvcelopmrot of ro~enecubl sources of energy genecration in Florida and natri-nside itsltssling sti si, solar tsr'di hisresrgy. CGrntinoirg irs tradirtim uf rneirrrrtnenral leadership, F'PL has cornmiresd to pcvidittg 150 kilossarts of solar capacity it Florida Fur os0ev 111.01100 c-utstrere mwt sslostaeily ersrsll ir the green essergy progras.

Looking forward. Fl' is strongly positioned for conoinued success with a growing demand for electrict.

high population grosvh, reasonable cuslomeer rates and o fieuruhle ragultory rn.ira. mesr.

ABILITY TO... OPTIMIZE FPL Energy ex:pti irscrie a rcarrl vrear (f

qfgvwth in 2003, stzrengthr'eiubt it!s rvS;t1;0) as <lre t thre naritron'S tap wholesalfe-ge eatirig (tmPa flpeieS 1One it kdileae,re wOno-F;?St pclollvdL'r of wleg. 7h. company siiif/icoanlt expandei its psi rtiilO, s rrin'nl{a' to u;I lo, e ab 0] ztS assets ai' snsfilv

-o edi qrirtty 7it11 5ontinu/ to

tiJrg, vrfai)iflrfl C.

DIVERSIFIED MARKETS Expanding portfolio During 2003, ihe company added nearly 1,000 negawatts to its world-leading wind portfolio oid co-itpleted ith coistrucri-is of four atu..i tas-fired power pl aits totaling nior, than 2.900 mrrgawanrts.

With a growing prosence in 24i states, PPL Energy has morn rhai I 1,000 ner operating megawrats in gerocraing capabiliry.

While other wholesale gencrart-rs we re rcernching

,nd refocusing in 2(0)3, FPI Enmigy continued to capitaline oni its streng-zhs to grow the busins. Among the keys to ins success were fuel and geographic diversir)s its abiliry to optinniwe euisting assess.

unoprecedented groswth 4, wsid assets aid tirhe firs full year impact of owsninig Seabrook Sration nuclear power plant.

FPlL Energy's generatiors is Firrd by a diverse mix of natural gas, wind, nuclear and hydro that makes it or

.f America's eleastest rerW providers. Ihe companys ais is rwgioInally diersified with 33 perceiit rEf irs operations in the Central region, 26 perceni ir tfre Nordiast, 18 pecrcent in the Mid.Adlrnric asid Ill percent ri rhe 'W'es,.

FPL Essrrst,' S.-

it wind ta-rwer dur-ig 2003 was rihe rrcarst vf.arv single company in the history of The indusari'. The craspany incrcased its share 'altire U.S. mind trarhcr ict 43 perccnt and stow has 42 s'ind facilirics in IS stares rotaling 2,71'9 mrgawarts.

'Company of the Year' in renewable energy FPI. Enrngys acsiesersents iii wirnd energy

-,-rird is rhe 20113 Plans loCiasl Ensergy As

,rd as The "Rerinsssahles Comtpanry of the Year." The compa sy wsas recognized for providing "solid commrrcial soluions that isakehe d-ram of.a wordd poawred by tritewabic energy a practical reality."

I PI. Frnrgtr crsirplsced stew wintl etrergy cenrers Totaling oriore than 800 ittegarwasrs i Nes irlexico, California, Oklahorna, North Dakota, South Dakota, Pennsylvania and Wino-iig. l addition, rhi c-rpasty compiered four wind acquisitions totaling 164 oscgativtt in California, iennsyivania and h'inensora Wind poswer is the fassr-grosvirg segment tf the global energy indrisry and prosider a number ofadvinrrtgcs to PPL Energy. allowving it to realize ariaer-e financial rerturns on fully con-rraed prrrjrcrs.

' Unlike other types of posner plants, wind facilities am quick to market and freqrretlly can h0 constriscted in jusr three to six itonths; b The cost of wind power is significantly reduccd from ur..nd 30 ceirts per kilorvan-hour ir the 19g0s To less than f.i..r cents per Lilosnart-hour, making it nsore conperiie swis other forms of power generatiors; W

Wind powc, offers trnrcendous en,,iroomeotal bhecfis. because it is reneseable, produces no amissiorts DIVERSIFIED PORTFOLIO PROVIDES BALANCE 11,041 net megawatts In up.ratun at 12J31103 "0

7Y Hydr 30.'

Othtr 2%

ABILITY TO... GROWV PROFITABLY or solid by-products. and does not deplrte natural techno logy has iproved anid the capacity oF miod resources such as coal, oil and gas:

turbines has ireroased. production costs save beer.

_ -o__'

irsusirrosscs ailddinig rd tsthe roir portfolios drairsaically reduced.

_,,iip dhsifi, dtr l

supply while n-6h 1 l -ncrgy is optimistic.hat Congrcss vill vxrei-d r_ itc P s and lbrrbhr enh-nc, rhe coofpcritivnrs rf cuscronrc elecricirn weds: and this industry segrornsa

! \\VYi,.l pur-vr is prri rresl bY r-grslatoey iriririves siri as least a dozen states havitrg iriiaive it pirc Fossil fleet poised for opportunity to ersilsge derarn errrrgy producriot.

AJrorut scir its vird scdiiis dsrring 2003. FPI Ertegy' placed ront thtan 2.9110 ret-itegasvstt of rem, Irhe ferdual svinrd production tax cisdit (11T,

high efficiency gas-fired gerrertion into opmrtisn at ss-hich it. tIe past has provided a credit ofapproximacely plants it Aiabama. Iexas, Nces York and Califorria.

_Il cents per kilosavrr-hsrrrr for the first rCn ysars I his substanrially completer a merbhant plant expansion of a facilityis operation. expired at rhe end olf20tl3.

ffors tie coroparty began sevcvrl years ngr.

While all facilities it ser-ice by the end of 20113 *viil lauring the first half sf2003. tir 668-mrgase-art i*receive or full I0 yars of producnsirin t:c credits, Calinosi plant in Alabama -atd the first the -r-ensiu rf rdie progrars is iporursr t for ted furdier of two 850 ret-rsergasvatt units at the Forrey planrr development of neo soind ficilkies.

rear Dallas erstered spetauii. It die second half of thi The PTCs have achiewed ihar Courgm-ss desigrrrd year, the 5 4 -mrtegawsm Jarstaica Bay plant orr Lssrrg Island trherr to do soroFirst irreluded as paet of the Emiegy in Noe, York. rtse se-oid Foreyes urnit ard thre 507-Policy Act in 1992, hich is to support trie developmrent negasvsrrt Blyhe I plant it California begar oprcstion.

crfteclrnology' arsd a oem indurstry en provide viable In 2004. the -opany, espects tsr finvish enrsrrrvisro rcncssblc energy sorurces at r-sosnblc costs As wind and bring saline rhr 744-cgasvtwu Mau, Hook f~acilirv near lihiladelphia. adding tsr irs cu-ren p.erfsrirs ssf fojssil-fiteler Facilities rlhar are regi~ntally risotto. lrsm GROWING OUR MARKET SHARE cost arrd svvli posirionsd fir upside potrnirril. Tire Marcu IN U.S. WIND GENERATION frr-gnw-its)

Hook projecs is our lust fossil-fueled rirec~larrt plarrt C FPL Eneeny under consttruction. Aks pact of irs 2002 restructurinrg, PTt Innustry ae sr rL Enrergy noted riat. with onlys f ew cprions,

- FL E-gya~k1 sareit would he exading the fossil-furleId erchant posse cm00 4A plant development business For rhe forateble fotitre.

6. n0 Unlocking value of assets Irr 2003, rhe company's po-ee u-rarkhing soo rgunizour capitalized on irnsuarkhe knowledge so better le-rge tre catnparys assen. TIns,scot oprirdirion group continued itt -cnrac rrstructurirrg activiies to

. ~ ~o ~

~nunlock bidders vaisre in contracts that were negotiated

~ > actc5&

• yC)A~b~

'I I a! r<

mane year ago in rmrrdi dilleretr irrrho corrdirioiss.

prr~-~

A ~ $

I he organi-tirn. alto, comrpiorrd highly sutc-evcbi I.nod-sr.

~~

fitilosing trersacrions, whiich require rtrctiong titiiiticsc fl5ttigdemands fir electricity' It alsts implrenrored 41 SE go as so el 9

99 110 i

o 02 03

new tools adlo ing she company To dispatch mornc eco-mically its generatiols resources in specific areas.

In, 0dditito, the cotttpa'y Teak advantage of opportunities to marker and sell its unconrracced plan!

output. Ar year-nod 2004, appenxirnacely 74 percen: of available capacity sas contracted for 2004. Additionally; store dia 90 percent of expected gross margins for 2004 are coreently hedged. FITL Eorgys hedging is

.lose-risk zrsvgsy ollosing is so sasieiee returns.

Creating value at Seabrook nuclear station

'Ikec perlfrssatce of rhe Sralraok Srasimoutrclessr power plant itl Nne Has hltite -

strasegicalli Ircastd just slot JI Bsros e-nceeded FPL Etscrt7&

expectatioass itt 2003. 'The successful incegsraiort of she station in its firsr full year as arl FPL Gtoop ucicear merchant pint seas made possible by the oussrassding cfiisrts.-f ssc Seabrook ream.

Ihe facility operated more mliably Than anticipated attd beoesid fent stertgyr tlass a... iipaseri ptssver masers.

litr cr-.ing sigsificgass alue fibr itle company. FPL Fnrgy acqaited 88.2 perce-tr of the plans in 21021. epresentitsg 1,02-1 megasearrs ofthe l.lf-mrgastfacility.

Seabrook complered a record run of 490 days of caniontuos operetiona and its shor-se-cv refueling ar.sge of just over 25 days. 'Ikhe station also achieved its highest performance rating ever based upan khe Wrreld Assacioriso oF Nsvclear Operators performance index.

App-avinatcly 97 percent of Seeabeok's 2004 expctcd gesserasing output is under cosstract so be sold. Additiosnal 5-airr from Seabrook is expected sith site potesrii of a l00-megawat plant oparaing arsd rentsal of ele plaists operatsig liceste fee ass additiossal 20 years.

2004 and beyond In 20011 and beyond. she comp.ny sill consiusse so foces sn grossing its bessitess, parictrlasy in svwid and ets cussoter neiginosrios.

shilc reslmaissing a los-coss Ptrtvidvv Isl addisins. PI'L Etlorgy especcs to saistaois its eotttfattdittg oill-nliotlsst pet fortisat-cc asd oaptimrize it, sssnrcisarr porrfoliu. Also kcy to she company:s perfemsarrce is its ability so manage consissensly she risks inhercnt it she shvolesale gcerasisrg business.

While th industry ensironmere conrinues so be challenging Il'L lineegy is oprimistic abour its furmrt prospects and cottfiden-c sis is nill continua so pertsvj in h, atroutgh ssker.

FPL FiberNet is a ssehsisialY oqfFPL Group that provisies wholesale fiber-opic services andrfiher-optic cias/e to Internetservice prtsvidess alnd lssOwl, Iongr-distancc aend uire/ess tey eomunesuications eosspanies in Floridn.

Since being fo-nsed in 2000. IPL FiberNes has

-ccrsrfidiy added to in, inter-ciy fiber-optic stermork asnid cempieted iTem-iy networks in roost of the stares rsoairrr stteseopolisan areas. During 2003. the corstpatry added the latest petrevariro of Ether..es services for any rstcrprise nirhitrg co upgrade their existing tclvcommlOOunicatio.t netvorfl Aithougrh rlse tdecltrssrsricatriorss sector has bace dcpressvd for seime rime. I-l'L YiherNer remains ill a

'trong pasiriss :ss benefit from a markes rebstvid tl faturn gerreerh irs -ssica aed dst:s crmmustsnitfcatisros.

in~.-.asu.

FPI FiteneNet outwork Inteo... n...tto u eeuent Q Metro netorirs

4,539

.1,926 i3'12t (379)

.31

.42

7T:.42

)

270)

"IZ248

1,93 926,935 i,967 1,291 369

$ 5.91

$10.02),:

S5S.010

$ 0.02 6(0,02)

$ 5.00:

52.40

• 177.5

1;0~60 A

588 (188)

(133J)

(41) 2,254.

(1l383):;

(1 481)

(42)

(8)-':

( 17 3 j

.v-c

Board of Directors.

H. dense Arnielle

-James L. Camnarnn Of Cecenel, Woimble. Cerlle.

Chirmaran and Chief fixecufive Sendridge & Rice (Few here)

Officer, Uft-inis, Ire. (wafer uhIlites)

Direnfnrsinice 1990. 9,erber OD-rcfer since 2002. Mernfbs finan~ce

& inveafhnanf cnnrrrfed, conmpensaficrn eeammiffee.

finance gomni~nnce cnnnniffee:

& nvenfnrnnf coermiffee.

sherry, S. Barret-Alaxandler W, Dreyfoas, Jr.,

Cfa-mn annerd Chfef Elxecutive Owner end Chirmain, The Dreyinns Oflcir Nohen heresTw Beck af GreapiPhefa EecfreonlmCarpcrafien Oa1fferere NA. (cnmmercial bank)

(elecfronece eqelpmnreel..

dence)

Direcfer seenc 9998. Member nadit Direcftor fieee 1997. Memrber nedin ceminntfee goeeerance, comrniffee cqefmneffee, fie n& innetenfrre compensation cormriff enzi

.- ereefekvmncd commdtee.:

Robert M Beal, It LewislHay, Ill Chainean end Chief Eabenfive Offie ChadirnareeP Freni i and Chieif Berln fe.

(dpanlrree staes)

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Paul R, Tregurthia Chairmer, end Chieif Exnecutive Officer, hfnreac, Marine Omaup.

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7001 Urresein Bica P.C fine f4000f lineofnasfi. FL 33408f-0420l EXCHANGE LISTINGS Cnrrrern Stucki New Ynrii flinch EVngrnn icker Slyisf-e: fFPL MEaliy Onir New York Stfackr Exchangle Ticher Syichnin:

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REGISTRAR, TRANSFER AND PAYING AGENTS FPL Greep Commnn Slocki and FPL Preferrd Slack FPL Greap. Ins.

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DIRECT DEPOSIT OF DIVIDENDS Cas, dinidendis Cray br dnpesid direcfiy In pewrroai acceanfsat afinencief iesftafntins.

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ELECTRONIC PROXY MATERIAL Regaftered sharnf-oiders mayreis pinny minevelsei elneteroiaiy by necessirrg finenficral shiarehniders synaitd ended their irrkerege firrr In determine Ike -aaiiahility of eiecrreie preny materiel dlisf-ibutinn.

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ANNUAL MEETING May 21, 2004-f 16c.m.

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Table of Contents 1

In The Past Year...

2 Message From Management:

A Joint Action Revival 4

Power Supply Initiatives 6

Regional and Federal Issues 8

Financial and Risk Management 10 Operating Projects: A Solid Foundation 12 Directors, Officers and Managers 13 Financial Statements December 31, 2003 and 2002 36 Members and Project Participants Note: Information included in this report, excluding the Financial Statements and Notes to the Financial Statements, covers the period through March 31, 2004.

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Massachusetts Municipal Wholesale Electric Company Financial Statements December 31, 2003 and 2002 Report of Independent Auditors To the Board of Directors and Members of Massachusetts Municipal Wholesale Electric Company:

In our opinion, the accompanying statements of financial position and the related statements of operations and of cash flows present fairly, in all material respects, the financial position of Massachusetts Municipal Wholesale Electric Company at December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 5 to the financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," on January 1, 2003.

March 12, 2004 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 1 3

Statements Of Financial Position December 31, 2003 anrd 2002 (in Thousands) 2003 2002 ASSETS Electric plant in service (Note 5)

S1,295,900

$1,256,118 Accumulated depreciation (668,461)

(634,239) 627,439 621,879 Construction work in progress 6,538 2,226 Nuclear fuel - net of amortization 9,926 11,438 Total electric plant 643,903 635,543 Special funds (Notes 2, 4 and 6) 230,944 237,895 Current assets Cash and temporary investments (Note 6) 4,850 2,256 Accounts receivable 6,774 7,836 Unbilled revenues (Note 3) 7,490 7,107 Inventories 16,978 14,475 Prepaid expenses 7,859 6,614 Total current assets 43,951 38,288 Total special funds and current assets 274,895 276,183 Deferred charges Amounts recoverable under terms of the power sales agreements (Note 2) 187,423 244,388 Unamortized debt discount and expenses 10,555 13,166 Nuclear decommissioning trusts 35,572 29,816 Other 3,921 5,328 237,471 292,698 S1,156,269

$1,204,424 LIABILITIES Long-term debt (Note 4)

S 888,691

$ 965,095 Current liabilities Current maturities of long-term debt (Note 4) 68,970 64,735 Short-term debt (Note 4) 9,753 15,591 Accounts payable 9,168 9,639 Accrued expenses 37,529 38,733 Member and participant advances 29,582 49,123 155,002 177,821 Asset retirement obligation (Note 5) 76,770 Other liabilities 35,806 61,508 Commitments and contingencies (Note 9)

S1,156,269

$1,204,424 The accompanying notes are an integral part of these financial statements.

14 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Statements Of Operations Years Ended December 31, 2003 and 2002 an IThosands) 2003 2002 Revenues (Note 3)

$295.114

$249,504 Interest income 6,522 7,944 Total revenues and interest income 5301,636

$257,448 Operating and service expenses:

Fuel used in electric generation Purchased power Other operating Maintenance Depreciation Taxes other than income S 38,10-4

$ 31,549 78.434 60,992 39.239 37,400 10,470 11,177 25,636 46,048 3,988 3,790 195,871 190,956 Interest expense:

Interest charges 36,827 40,032 Interest charged to projects during construction (Note 2)

(77)

(64) 36.750 39,968 Total operating costs and interest expense 232.621 230,924 Cumulative effect of change in accounting principle 12,964 Total costs and expenses 245,585 230,924 Decrease in amounts recoverable under terms of the power sales agreements (Note 2) 5 6,0 51 26,524

$301,636

$257,448 The accompanying notes are an integral part of thesefinancial statements.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 1 5

Statements Of Cash Flows Year s Ended Decenaber 31, 2003 and 2002 (n Thaottsa3ic) 2003 2002 Cash flows from operating activities:

Total revenues and interest income S 301,636

$ 257,448 Total costs and expenses, net (232,621)

(230,924)

Adjustments to arrive at net cash provided by operating activities:

Depreciation and decommissioning 25,636 48,314 Amortization of debt discount and nuclear fuel 3,625 391 Change in assets and liabilities:

Accounts receivable 1,062 758 Unbilled revenues (383)

(386)

Inventories (2,503) 4,795 Prepaid expenses (1,245)

(60)

Accounts payable (471.)

(56)

Accrued expenses and other 164 4,920 Other liabilities 4,592 679 Member and participant advances and reserves (19,541])

(1,661)

Net cash provided by operating activities 79,9 51 84,218 Cash flows from investing activities:

Construction expenditures and purchases of nuclear fuel (8,132)

(17,828)

Interest charged to projects during construction (77)

(64)

Net (increase) decrease in special funds 5,3 3 (12,589)

Decommissioning trust payments (3,898)

(2,374)

Other 52 Net cash investing activities (6,784)

(32,803)

Cash flows from financing activities:

Payments made on long-term debt (64,735)

(44,730)

Payments made on short-term debt (16,122)

(5,025)

Net proceeds from short-term borrowings 7,153 56 Proceeds from issuance of short-term debt 3,131.

Payments for bond issue costs (12)

Net cash used for financing activities (70,573)

(49,711)

Net increase in cash and temporary investments 2,594 1,704 Cash and temporary investments at beginning of year 2,256 552 Cash and temporary investments at end of year S

4,850 2,256 Cash paid during the year for interest (Net of amount capitalized as shown above)

$ 42,997

$ 30,551 The accompanying notes are an integral part of these financial statements.

1 6 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Notes To Financial Statements (1)

Nature of Operations The Massachusetts Municipal Wholesale Electric Company (MMWEC) is a public corporation and a political subdivision of the Commonwealth of Massachusetts (Commonwealth) formed to be a joint action agency and to develop a bulk power supply for its member Massachusetts municipal electric systems and other utilities. Among other things, MMWEC is authorized to construct, own, or purchase ownership interests in, and to issue revenue bonds to finance electric facilities secured by revenues received by MMWEC in each of its Projects. A Project is MMWEC's ownership interest in electric generation facilities (Note 5). Project revenues are derived, in part, from Power Sales Agreements (PSAs) with MMWEC's members and other utilities who are Participants in a Project. The bulk power supply program consists of power purchase arrangements, power brokering services, planning and financial services, and the Projects relating to generating facilities either built and operated by MMWEC or other regional utilities.

A Massachusetts city or town having a municipal electric system, authorized by majority vote of the city or town, may become a member of MMWEC by applying for admission and agreeing to comply with the terms and conditions of membership as the MMWEC By-Laws may require. As of December 31, 2003, twenty-four Massachusetts municipal electric systems were members. Termination of membership does not relieve a system of its PSA or other power purchase obligations.

(2)

Significant Accounting Policies MMWEC presents its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) as promulgated by the Financial Accounting Standards Board (FASB). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates.

Interest Charged to Projects During Construction MMAWEC capitalizes interest as an element of the cost of electric plant and nuclear fuel in process. A corresponding amount is reflected as a reduction of interest expense. The amount of interest capitalized is based on the cost of debt, including amortization of debt discount and expenses, related to each Project, net of investment gains and losses and interest income derived from unexpended Project funds.

Nuclear Fuel Nuclear fuel, net of amortization, includes MMWEC's ownership interest in spent fuel, fuel in use, in stock and in process for both Millstone Unit 3 and Seabrook Station. The cost of nuclear fuel is amortized to fuel used in electric generation for each nuclear unit based on the relationship of energy produced in the current period to total expected energy production for fuel in the reactor. A provision for fuel disposal costs is included in fuel used in electric generation based upon disposal contracts with the Department of Energy (DOE). In addition, fuel used in electric generation includes the annual assessment, under the Energy Policy Act of 1992, for the cost of decontamination and decommissioning of uranium enrichment plants operated by the DOE. Billings from the DOE will occur over the next four years. At December 31, 2003, MMWECs share of Millstone Unit 3 and Seabrook Station unbilled assessments was

$152,000 and $232,000, respectively These amounts are included in accrued expenses and other liabilities on the Statements of Financial Position. MMWEC, along with all of the other joint owners of both Millstone Unit 3 and Seabrook Station, has filed claims against the DOE in the United States Court of Claims for partial breach of the disposal contracts with the DOE.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 17

Special Funds In accordance with the General Bond Resolution (GBR) pursuant to which MMWEC issued its long-term debt, numerous special funds are required. The special funds, other than certain working capital funds and other funds, are invested in accordance with the provisions of the GBR. The composition of special funds is as follows:

(In Thousands) 2003 2002 Fund Bond Fund Interest, Principal and Retirement Account to pay principal and interest on bonds 5 33,635

$ 52,849 Bond Fund Reserve Account set at the maximum annual interest obligation to make up any deficiencies in the Bond Fund Interest, Principal and Retirement Account 59,067 59,911 Reserve and Contingency Fund to make up deficiencies in the Bond Funds and pay for repairs and extraordinary costs 23,959 26,705 Revenue Fund to receive revenues and disburse them to other funds 67,722 61,177 Working Capital Funds to maintain funds to cover operating expenses 16,827 27,399 Other Funds 9,734 9,854 Total Special Funds 5230,941-l

$237,895 Cash and Temporary Investments Certain cash and temporary investment amounts used for power purchases and working capital requirements of MMWEC are not subject to the provisions of the GBR. In addition to the investment securities delineated in the GBR, MMWEC may invest in repurchase agreements with banks where MMWEC has established accounts. Temporary investments have maturities of less than ninety days.

Inventories Fuel oil and spare parts inventory are recorded and accounted for by the average cost method. At December 31, 2003 and 2002, total fuel oil inventory was valued at $8.7 and $4.7 million, and spare parts inventory amounted to

$8.3 and $9.8 million, respectively Amounts Recoverable Under Terms of the Power Sales Agreements Billings to Project Participants are structured to recover costs in accordance with the PSAs, which generally provide for billing debt service, operating funds and reserve requirements. Expenses are reflected in the Statements of Operations in accordance with GAAP The timing difference between amounts billed and expensed is charged or credited to amounts recoverable under terms of the PSAs. Such amounts will be recovered through future billings or an expense will be recognized to offset credit balances. The principal differences include depreciation, fuel amortization, costs associated with canceled Projects (or assets abandoned within a Project), asset retirement obligations, Cost of refinancing, billing for certain interest, reserves, net unrealized gains or losses on securities available for sale and other costs. Individual Projects have a cumulative deferral of costs which total $192.0 and $246.0 million and have cumulative billings in excess of costs which total $4.6 and $1.6 million at December 31, 2003 and 2002, respectively In accordance with the PSAs, these amounts have been offset in the Statements of Financial Position.

The December 31, 2003 and 2002 balances of $187.4 and $244.4 million, respectively, reflect the Statements of Operations net decrease of $56.1 and $26.5 million for the years then ended, the change in net unrealized gain (loss) on securities available for sale and minimum pension liability adjustments of $.9 and ($2.9) million for 2003 and 2002, respectively, that would otherwise be recorded as other comprehensive income.

1 8 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Depreciation Electric plant in service is depreciated using the straight-line method. The aggregate annual provisions for depreciation averaged 2% and 4% of the original cost of depreciable property for 2003 and 2002, respectively In 2003, the asset lives used in the estimate of depreciation for Millstone Unit 3 and Seabrook Station were increased to correlate with an anticipated license extension for each of these plants.

Nuclear Decommissioning Trusts As required by the Nuclear Regulatory Commission (NRC) and respective state statutes and regulations, MMWEC has funded trust funds maintained by external trustees to provide for the decommissioning activities of Millstone Unit 3 and Seabrook Station. The December 31, 2003 Millstone Unit 3 and Seabrook Station balances of $14.8 and $20.8 million, respectively, are stated at market value and are included as part of the deferred charges and amounts recoverable under terms of the PSAs on the Statements of Financial Position. In 2003, MMWEC recorded these trust fund earnings as interest income on the Statements of Operations.

Member and Participant Advances and Reserves MMWEC maintains numerous operating reserves and advances from its Members and Project Participants in accordance with the PSAs, Power Purchase Agreements (PPAs) and related broker arrangements. Member and Participant advances for 2003 and 2002 were $29.6 and $49.1 million, respectively, and are included in member and participant advances on the Statements of Financial Position. Other member and participant reserves for 2003 and 2002 were $34.8 and $30.5 million, respectively, and are included in other liabilities on the Statements of Financial Position.

New Accounting Standards In 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Deivative Instruments and Hedging Activities (SFAS 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. MMWEC was required to comply with SFAS 149 beginning in 2003. However, the implementation of this standard has not had an impact on its operations or financial position.

The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulleting No. 51 (Interpretation) during 2003. The Interpretation addresses consolidation by business enterprises of variable interest entities and is effective for MMWEC in 2004. The application of this Interpretation is not expected to materially impact MMWECs operations, financial position or cash flows.

Reclassifica tions Certain reclassifications of prior years' data have been made to conform with the current year presentation. These reclassifications primarily consisted of classifying certain current liabilities as other liabilities.

(3)

Revenues and Unbilled Revenues Revenues include electric sales for resale provided through MMWEC's bulk power supply program. Revenues consist of billings under the PSAs, PPAs, and related power brokering arrangements. MMWEC also provides its members with power supply planning and related services which are billed pursuant to the MMWEC Service Agreement, or the All-Requirements Bulk Power Sales Agreement as service revenues. Amounts that are not yet billed are included in unbilled revenues on the Statements of Financial Position. Revenues are comprised of the following:

(In Thousands) 2003 2002 Revenues Electric sales for resale

$292.788

$248,022 Service 2,326 1,482 Total Revenues S295,114

$249,504 MASSACHUSETrS MUNICIPAL WHOLESALE ELECTRIC COMPANY 1 9

4)

Debt General Bond Resolution MMWEC issued separate issues of Bonds for each of the eight Projects, which are payable solely from, and secured solely by, the revenues derived from the Project to which such issue relates, plus available funds pledged under the GBR, with respect to the Bonds of such issues. The revenues derived from each Project are used solely to provide for the payment of the Bonds of any Bond issue relating to such Project, and to pay MMWECs cost of owning and operating such Project, and are not used to provide for the payment of the Bonds of any Bond issue relating to any other Project. Pursuant to all of the Project PSAs, each Project Participant is obligated to pay its share of the actual costs relating to the Project's generating unit(s), and raise their rates sufficiently to pay such costs. These obligations are not contingent upon the operational status of the Projects unit(s).

Power Supply System Revenue Bonds MMWEC's issuance of debt, other than obligations with a maturity of less than one year, requires authorization by the Massachusetts Department of Telecommunications and Energy.

Bonds payable consist of serial and variable-rate bonds and are comprised of the following issues:

Net Interest December 3 1, (III Thousands)

Cost 2003 2002 Issue Stony Brook Peaking Project, Series A 3.1%

S 8,930

$ 13,345 Stony Brook Intermediate Project, Series A 3.5%

49,805 59,645 WE Wyman Unit No. 4 Project, Series A 3.5%

2,485 2,940 Nuclear Mix No. 1, Series A 4.0%

78,230 85,210 Nuclear Project No. 3, Series A 4.2%

47,930 47,930 Nuclear Project No. 4, Series A 4.3%

11.2,695 112,695 Nuclear Project No. 5, Series A 4.2%

42,]170 42,170 Project No. 6, Series A 4.2%

327,050 347,535 Nuclear Project No. 3, Series B 4.9%

511320 60,160 Nuclear Project No. 4, Series B 4.5%

31,510 41,175 Nuclear Project No. 5, Series B 3.8%

2,365 5,510 Project No. 6, Series B 3.5%

910 Nuclear Mix No. 1, Series One Variable

.1,350 11,350 Nuclear Project No. 3, Series One Variable 62,975 62,975 Nuclear Project No. 4, Series One Variable 35,325 35,325 Nuclear Project No. 5, Series One Variable 9,025 9,025 Project No. 6, Series One Variable 52,100 52,100 Bonds payable 925,265 990,000 Unamortized premium 32,396 39,830 Less: Current maturities (68,970)

(64,735)

Total long-term debt

$888,691

$965,095 20 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

The Series A Bonds maturing on and prior to July 1, 2011 and the Series B Bonds are not subject to redemption prior to maturity at the option of MMWEC. The Series A Bonds maturing on and after July 1, 2012 are subject to redemption prior to maturity at the option of MMWEC at 101% of the principal amount from January 1, 2012 to December 31, 2012 and at 100% from January 1, 2013 and thereafter.

The Series One Bonds of each issue are subject to redemption at the option of MMWEC, in whole or in part, at a redemption price of 100% of the principal amount.

Long-term debt maturities are as follows:

an Thousoids)

Series A Series B Series One Total 2004

$ 46,305

$22,665

$ 68,970 2005 50,125 21,175 71,300 2006 51,465 18,895 70,360 2007 62,465 10,540 73,005 2008 60,285 11,100 71,385 Thereafter 398,650 820 170,775 570,245

$669,295

$85,195

$170,775

$925,265 The interest rates on the Series One variable rate Bonds may be converted at the option of MMWEC to a daily, weekly, flexible, term or fixed mode. The interest rate on the Series One variable rate Bonds during 2003 and 2002 was.9% and 1.3%, respectively.

Net Revenue Available for Debt Service In accordance with the provisions of MMWECs GBR, MMWEC covenants that it shall fix, revise and collect rates.

tolls, rents and other fees and charges sufficient to produce revenues to pay all operating and maintenance expenses and principal of, premium and the interest on the Bonds and to pay all other obligations against its revenues for each Project.

Revenues for each Project, which include applicable interest earnings from investments, are required to equal 1.10 times the annual debt service for each contract year ending June 30, after deduction of certain operating and maintenance expenses and exclusive of depreciation. For the contract years ended June 30, 2003 and 2002, MMWEC met the GBR debt service coverage requirements for all of MMWECs Projects.

Contract Year Ended June 30, (in Thousands) 2003 2002 Debt Service Coverage:

Revenues S195,638

$170,879 Other Billings 581.

587 Reserve and Contingency Fund Billings 10,753 11,116 Total 206,972 182,582 Less: Operating & Maintenance Expenses (88,691)

(60,307)

Available Revenues Net of Expenses 5118,281

$122,275 Debt Service Requirement S107,527

$111,159 Coverage (110% Required) 110%

110%

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 21

Short-Term Debt MMWEC maintains a $5 million revolving line of credit to finance temporarily certain power purchases made by MMWEC for resale under power purchase contracts. Borrowings outstanding under the line of credit were $233,000 and $56,000 as of December 31, 2003 and 2002, respectively During 2003 and 2002, the maximum outstanding balance under the line of credit was $1.6 and $0.4 million, respectively Interest charged on borrowings under the line of credit is at minus one percent of the bank's prime rate (3.0% at December 31, 2003). In addition, a commitment fee of one quarter of 1% per annum is charged on the unused portion of the line based on the average daily principal amount of the borrowing outstanding. This line of credit expires June 30, 2004, at which time MMWEC expects to be able to renew the line for an additional year.

In 2003, The MMWEC Board of Directors adopted a resolution which created the Stony Brook Intermediate Fuel Oil Project, Special Project 2003-A (SB Intermediate Fuel Oil Project) for the purposes of financing purchases of fuel oil and selling such fuel oil to the Intermediate Project. Under the resolution, MMWEC entered into a $10 million revolving line of credit with a bank. Borrowings under the line of credit are secured by a lien on and/or security interest in all proceeds of any borrowings prior to disbursement by MMWEC, all amounts payable by the Intermediate Project to the SB Intermediate Fuel Oil Project for fuel oil, and all earnings from MMWECS investments of any such proceeds and amounts payable to the bank. Borrowings outstanding under the line of credit were $9.5 million as of December 31, 2003. During 2003, the maximum outstanding balance under the line of credit was $9.9 million. The interest rate for the borrowings under this line of credit is at MMWEC's election prior to the last day of any interest period of either the Libor rate plus 1.25% per annum or at a variable rate which is the prime rate minus 1% per annum. If no such selection is made, the variable rate is in effect. Interest charged on the borrowings under the line of credit was 2.4% at December 31, 2003.

The Series B Power Purchase commercial paper program notes were a special obligation of MMWEC payable solely from the revenues and other monies as specified in the Series B Power Purchase Resolution. The commercial paper notes matured in 2003. The December 31, 2003 and 2002 outstanding balances of commercial paper program notes were $0 and $15.5 million, respectively (5)

Electric Generation Facilities and Financing MMWEC's power supply capacity includes ownership interests in the Stony Brook Peaking and Intermediate Units, both of which it operates. MMWEC is a nonoperating joint owner in the WF Wyman Unit No. 4, Millstone Unit 3 and Seabrook Station. Electric plant in service also includes MMWEC's service operations which totaled $2.6 and $2.7 million in 2003 and 2002, respectively The following is a summary of Projects included in electric plant in service and construction work in progress, as well as MMWECs share of capability in megawatts (MW).

Facility and MMWEC Amounts as of December 31, (in Thotisatids)

Share of Capability in MW 2003 2002 Projects Peaking Project Stony Brook 170.0 S

56,829 56,671 Intermediate Project Stony Brook 319.5

[165,391 165,044 Wyman Project WE Wyman No. 4 22.7 7,41.9 7,387 Nuclear Project No. 3 Millstone Unit 3 36.8 135,949 131,045 Nuclear Mix No. 1 Millstone Unit 3 18.4 54,477 52,017 Nuclear Mix No. 1 Seabrook Station 1.9 9,160 8,651 Nuclear Project No. 4 Seabrook Station 49.8 274,132 260,585 Nuclear Project No. 5 Seabrook Station 12.6 74,708 71,279 Project No. 6 Seabrook Station 69.0 521,773 503,011 S1,299,838

$1,255,690 22 MASSACHUSETrS MUNICIPAL WHOLESALE ELECTRIC COMPANY

In January 2004, Dominion Nuclear Connecticut, Inc. (DNCI), a subsidiary of Dominion Resources, Inc., filed an application with the NRC to renew the operating license of Millstone Unit 3 for an additional 20 years. The license currently will expire in 2025.

On November 1, 2002, an indirect subsidiary of FPL Group Inc., FPL Energy Seabrook, LLC, completed the purchase of an approximately 88% ownership interest in Seabrook Station from all of the joint owners of Seabrook Station, except MMWEC and two other owners.

Asset Retirement Obligations Effective January 1,2003, MMWEC adopted SFAS No. 143, Accountingfor Asset Retirement Obligations (STAS 143),

which provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. MMWEC has identified certain asset retirement obligations (ARO) that are subject to the SFAS 143 and which are primarily associated with the decommissioning of MMWECs ownership interest in Millstone Unit 3 and Seabrook Station. MMWEC's AROs, other than those associated with nuclear decommissioning AROs, were not significant.

Upon adoption of SFAS 143, MMWEC recorded an ARC of approximately $73.1 million, capitalized a net asset related to the ARO of approximately $30.6 million, and reversed the approximately $29.5 million it had previously recorded in deferred credits on the Statements of Financial Position. The difference, approximately $13.0 million, was recorded as a cumulative effect of a change in accounting principle on the Statements of Operations. MMWEC recorded accretion expense of approximately $3.7 million for the year ended December 31, 2003 which increased the ARC to

$76.8 million at December 31, 2003. No other adjustments were made to MMWECs ARO during the year ended December 31, 2003.

AROs are recognized at fair value, as incurred, and capitalized as part of the cost of the related tangible long-lived assets. In the absence of quoted market prices, MMWEC estimated the fair value of AROs using present value techniques, involving discounted cash flow analysis. Measurement using such techniques is dependent upon many subjective factors, including the selection of discount and cost escalation rates, identification of planned retirement activities and related cost estimates, and assertions of probability regarding the timing, nature and costs of such activities. Inputs and assumptions are based on the best information available at the time the estimates are made.

However, estimates of future cash flows are highly uncertain by nature and may vary significantly from actual results.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 23

(6)

Investments and Deposits All bank deposits are maintained at one financial institution. Such deposits amounted to $1.7 million at December 31, 2003, and are included in both cash and temporary investments and special funds. The Federal Deposit Insurance Corporation currently insures up to $100,000 per depositor. At December 31, 2003 and 2002, investments are classified as available for sale and reported at market value with unrealized gains of $683,000 and $2.4 million, respectively, and unrealized losses of $278,000 and $1,000, respectively The net losses and gains are excluded from earnings and are reported as a component of amounts recoverable under the terms of the PSAs on the Statements of Financial Position. At December 31, 2003, all securities underlying repurchase agreements, and all other investments, were held in MMWECs name by custodians consisting of the Bond Fund Trustee (as defined in the GBR) or MMWECs depository bank. Investments, representing the special funds and cash and temporary investments, as well as certain additional amounts disbursed but available for investment, and accrued interest, are presented below:

2003 2002 Amortized Market Amortized Market An Thousands)

Cost Basis Value Cost Basis Value Type of Investment Cash Equivalents 65 65 399 399 Other Investments U.S. Treasury bills 92,526 92,529 91,948 91,951 U.S. Treasury notes 1.6,.904 1.7,256 26,033 27,212 U.S. Agency bonds 104.51.9 104.892 100,873 102,045 U.S. Agency discount notes 1.9,274 19,272 17,488 17,487 Total Other Investments 233,223 233,949 236,342 238,695 Total Investments 233,288 234,014 236,741 239,094 Invested Cash 1,779 1,779 1,057 1,057 Total Cash and Investments

$235,067 5235,793

$237,798

$240,151 During 2003 and 2002, the proceeds from the sale of securities available for sale were $340.2 and $386.0 million, respectively, resulting in gross realized gains of $428,000 and $395,000, respectively, and gross realized losses of

$63,000 and $31,000, respectively The basis on which cost was determined in computing realized gain or loss was specific identification. The average contractual maturity of the investments in debt securities at December 31, 2003 and 2002 was 657 and 593 days, respectively.

Due to seasonal cash flows during 2003 and 2002, MMWEC, from time-to-time, invested in repurchase agreements with its depository bank that were collateralized by securities in MMWEC's name held by the depository bank.

(7)

Fair Values of Financial Instruments The estimated fair value of MMWECs financial instruments are as follows:

200.3 2002 Carrying Estimated Carrying Estimated (In Thousan ds)

Value Fair Value Value Fair Value Long-Term Debt, excluding current maturities

$ 888,691

$930,300

$ 965,095

$ 998,001 The fair value of long-term debt is estimated based on quoted market prices for the same or similar issues.

The carrying amounts for cash, accounts receivable, notes payable and accounts payable approximate their fair value due to the short-term nature of these instruments.

24 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

(8)

Benefit Plans MMWEC has two non-contributory defined benefit pension plans covering substantially all full-time active employees. One plan covers union employees (union plan) and the other plan covers non-union employees (non-union plan). The amount shown below as the benefit obligation for MMWEC is a standardized disclosure measure of the present value of pension benefits, adjusted for the effect of projected salary increases, estimated to be payable in the future as a result of employee service to date. The measure is the actuarial present value of credited projected benefits and is independent of the funding method used to determine contributions to the plans.

The benefit obligation was determined by an actuarial valuation performed as of January 1 of each of the years presented below. Significant actuarial assumptions used in the valuation include a weighted-average discount rate of 6.25% in 2003 and 6.5%/ in 2002 and projected salary increases of 4.0%/ in 2003 and 2002, respectively The benefit obligation, plan assets, funded status, amounts recognized in the statements of financial position and components of net periodic benefit cost for both plans are as follows:

Amounts as of December 31, On Thousands) 2(!03 2002 Changes in benefit obligation Benefit obligation at beginning of year 5 l22679

$10,307 Service cost 565 465 Interest cost 83 1 730 Actuarial loss 8:33 1,261 Benefits paid (610)

(84)

Benefit obligation at end of year S14,30)1

$12,679 Change in plan assets Fair value of plan assets at beginning of year

$ 7, )8.1

$ 8,227 Actual return on plan assets 1]582 (761)

Employer contribution 70)2 623 Benefits paid

(.610)

(84)

Expenses (32)

(31)

Other (5) 7 Fair value of plan assets at end of year S 9.618 S 7,981 Funded status S (4.68 3)

S (4,698)

Unrecognized net actuarial loss 5.187 5,541 Unrecognized prior service cost 50 9 595 Unrecognized transition obligation 34 58 Prepaid pension cost S 1.1117

$ 1,496 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 25

Amounts as of December 31, (In Thotsands) 2003 2002 Amounts recognized in the Statements of Financial Position consist of:

Accrued benefit liability

$ (769)

$(1,113)

Intangible asset 544 653 Amounts recoverable under terms of the Power Sales Agreements 1,272 1,956 Net amount recognized

$.1,047

$ 1,496 Information for pension plans with an accumulated benefit obligation in excess of plan assets Projected benefit obligation

$14,301

$12,679 Accumulated benefit obligation 10.387 9,094 Fair value of plan assets 9,618 7,981 Components of net periodic benefit cost Service cost S

565 465 Interest cost 834 730 Expected return on plan assets (699)

(721)

Amortization of transition obligation 15 15 Amortization of prior service cost 70 70 Recognized net actuarial loss 365 171 Net periodic benefit cost

$ 1,i50 9

730 The following indicates the weighted average asset allocation percentage of the fair value of total Plan assets for each major type of Plan asset as of December 31, 2003 and 2002, respectively Amounts as of December 31, 2003 2002 Asset Category Equity securities 64"%

57%

Debt securities 21%

20%

Other 15%

23%

Total 100%,

100%

26 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

The primaly investment goal of the plan is to achieve a total annualized investment return of 8.5% over the long-term while mitigating overall portfolio risk. The expected long-term rate of return on the plan assets reflects the average rate of earnings expected on the funds invested or to be invested to provide the benefits included in the projected benefit obligation. The assets are diversified by both asset class (i.e., equities, bonds) and within class (i.e., capitalization, growth, value, international) to minimize unsystematic risk so that no single security or class of securities will have a disproportionate impact on the plan. Portfolio performance and risk are regularly evaluated and compared to like investment options to provide oversight and adherence to the stated plan objectives.

Annual contributions to the pension plans were $702,000 and $623,000, for the years ended December 31, 2003 and 2002, respectively. The union plan uses the aggregate actuarial cost method and the non-union plan uses the frozen initial liability actuarial cost method in determining pension expense. In addition to the actuarial assumptions outlined above, the assumed long-term rate of return used in determining pension expense was 8.5% in 2003 and 2002, respectively Pension costs applicable to prior years' service are amortized over thirty years. MMWEC expects to contribute approximately $730,000 to its pension plans in 2004.

MMWEC contributes to an employee savings plan administered by an insurance company All full-time employees meeting the service requirements are eligible to participate in this defined contribution plan. Under the provisions of the plan, MMWEC's contributions vest immediately MMWEC contributed $124,000 and $115,000, while the employees contributed $207,000 and $190,000 during the years ended December 31, 2003 and 2002, respectively (9)

Commitments and Contingencies Power Purchases MMWEC entered into agreements for participation in the transmission interconnection between New England utilities and the Hydro-Quebec electric system near Sherbrooke, Quebec (Phase 1), which began commercial operation in October 1986. The New England portion of the interconnection was constructed at a total cost of about $140 million, of which 3.65% or $5 million is MMWECs share to support Phase 1. MMWEC also entered into similar agreements for participation in the interconnection between New England utilities and the Hydro-Quebec electric system for the expansion of the Hydro-Quebec interconnection (Phase 11), which went into commercial operation in November 1990. MMWECs Phase 11 equity investment approximates 0.6% or $3.3 million. MMWEC has corresponding agreements with certain of its Members and another utility to recover MMWECs share of the costs associated with the Phase 11 interconnection.

On a limited basis, MMWEC may enter into agreements providing financial assurance to third parties. At December 31, 2003, outstanding guarantees consisted of $0.5 million related to its equity interest in the Hydro-Quebec transmission companies. Management believes the likelihood MMWEC would be required to perform or otherwise incur any significant losses associated with this guarantee is remote.

MMWEC has entered into a contract for a long-term purchase of 21.2 MW from an independent power producer.

The table below reflects MMWECs minimum commitments as of December 31, 2003.

(In Thoisands)

Amount 2004

$ 8,255 2005 8,489 2006 8,765 2007 9,041 2008 9,338 Thereafter 51,420 Total

$95,308 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 27

Legal Actions MMWEC is involved in various legal actions. Based on bond counsel's opinions regarding the validity of the PSAs and legal counsel's representations regarding the litigation, discussions with such counsel and other considerations, management believes that the ultimate resolution of litigation in which MMWEC is currently involved will not have a material, adverse effect on the financial position of MMWEC.

Nuclear Insurance The Price-Anderson Act (the Act), a federal statute, mandates an industry-wide program of liability insurance for nuclear facilities. The Act now provides approximately $10.9 billion for public liability claims from a single incident at a nuclear facility The $300 million primary layer of insurance for the liability has been purchased in the commercial market. Secondary coverage is to be provided through an approximately $100.6 million per incident assessment of each of the currently licensed nuclear units in the United States. The maximum assessment is $10 million per incident per unit in any year. Under the Act, MMWECs ownership interests in Millstone Unit 3 and Seabrook Station could result in a maximum assessment of $4.8 and $11.7 million, limited to payments of $.5 and $1.2 million per incident per year, respectively Renewal of the Act, which expired on December 31, 2003, is currently being considered by Congress.

Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover the cost of repair, replacement, decontamination or premature decommissioning of utility property resulting from insured occurrences at Millstone Unit 3 and Seabrook Station. The NEIL insurance is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. MMWEC is potentially subject to a $1.0 and $2.1 million assessment for its participation in Millstone Unit 3 and Seabrook Station, respectively, for excess property damage, decontamination and premature decommissioning.

Environmental and Other Issues MMWEC is not currently covered under gradual pollution liability insurance related to MMWEC's Stony Brook power plants. Nothing has come to management's attention concerning any material pollution liability claims made during 2003 or outstanding as of December 31, 2003.

MMWEC has established a trust fund to enhance its Directors' and Officers' liability coverage. The purpose of the trust fund is to make available funds for the purchase of Directors' and Officers' liability insurance and/or indemnifi-cation of the Directors or Officers.

MMWEC has a guaranty with ISO New England, Inc. (ISO-NE) with respect to certain MMWEC members' financial assurance obligations to ISO-NE.

28 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Report of Independent Auditors On Accompanying Consolidating Information To the Board of Directors of Massachusetts Municipal Wholesale Electric Company:

The report on our audit of the consolidated financial statements of Massachusetts Municipal Wholesale Electric Company as of December 31, 2003 and for the year then ended appears on page 1 of this document. That audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole.

The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual companies. Accordingly, we do not express an opinion on the financial position, results of operations and cash flows of the individual companies. However, the consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.

March 12, 2004 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 29

Project Statements Of Financial Position December 31, 2003 Nuclear Nuclear Nuclear (In Thousands)

Service Mix 1 Proj. 3 Proj. 4 Assets Electric plant In service

$ 2,600

$ 62,896

$134,597

$ 272,447 Accumulated depreciation (2,309)

(30,926)

(68,361)

(117,597) 291 31,970 66,236 154,850 Construction work in progress 741 1,352 1,685 Nuclear fuel-net of amortization 943 1,685 2,753 Total electric plant 291 33,654 69,273 159,288 Special funds Bond funds Interest, principal and retirement account 5,461 7,045 9,147 Reserve account 4,470 7,979 9,135 Reserve and contingency fund 3,228 3,791 5,096 Revenue fund 5,394 9,323 9,421 Working capital funds 16,838 Other funds 9,734 26,572 18,553 28,138 32,799 Current assets Cash and temporary investments 4,833 1

Accounts receivable 6,275 9

3 67 Unbilled revenues 7,490 Inventories 7,347 56 1,492 Advances to (From) projects 1,976 (48)

(72)

(93)

Prepaid expenses 236 728 1,300 2,019 Total current assets 28,157 745 1,231 3,486 Total special funds and current assets 54,729 19,298 29,369 36,285 Deferred charges Amounts recoverable (payable) under terms of the power sales agreements (176) 44,535 71,639 12,988 Unamortized debt discount and expenses 967 1,845 2,111 Nuclear decommissioning trusts 5,235 9,853 7,765 Other 540 94 127 823 364 50,831 83,464 23,687

$55,384

$103,783

$182,106 S 219,260 LIABILITIES Long-term debt

$ 85,704

$155,723

$ 174,400 Current liabilities Current maturities of long-term debt 7,195 9,215 11,085 Short-term debt 9,753 Accounts payable 3,611 151 165 1,822 Accrued expenses 9,100 2,237 2,633 6,700 Member and participant advances 8,589 3,102 5,395 1,502 31,053 12,685 17,408 21,109 Asset retirement obligation 5,358 8,908 23,693 Other liabilities 24,331 36 67 58 Commitments and contingencies

$55,384

$103,783

$182,106

$ 219,260 The accompanying notes are an integral part of this supplemental schedule.

30 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Schedule I Nuclear Project Hydro Quebec Proj. 5 No. 6 Peaking Intermediate Wyman Phase II Total

$ 74,282

$ 519,439

$ 56,829

$ 165,391

$7,419

$ 1,295,900 (32,207)

(228,070)

(47,500)

(136,013)

(5,478)

(668,461) 42,075 291,369 9,329 29,378 1,941

-627,439 426 2,334

-6,538 699 3,846 9,926 43,200 297,549 9,329 29,378 1,941

-643,903 2,846 19,81 1 2,608 6,437 280

-53,635 2,771 30,868 653 3,086 105

-59,067 1,338 7,795 860 1,597 254

-23,959 2,377 16,004 7,459 16,396 1,348 67,722 (1 1) 16,827 9,734 9,332 74,478 11,580 27,516 1,987 (1 1) 230,944 2

1 4 4,850 1 7 93 3

43 178 86 6,774 7,490 378 2,066 2,093 3,359 187 16,978 (31)

(156) 163 (1,720)

(19) 512 2,797 34 69 164 7,859 876 4,802 2,293 1,751 510 100 43,951 10,208 79,280 13,873 29,267 2,497 89 274,895 7,996 54,003 (3,570) 683 204 (879) 187,423 628 4,598 36 352 18 10,555 1,965 10,754 35,572 208 1,139 I

111

-8 79 3,921I 10,797 70,494 (3,534) 1,146 222 237,471

$ 64,205

$ 447,323

$ 19,668

$ 59,791

$ 4,660

$ 89

$1,156,269

$ 52,136

$ 373,070 S 4,320

$ 41,305 S 2,033

$ 888,691 3,455 22,450 4,770 10,330 470

-68,970 9,753 461 2,524 16 391 27 9,168 1,852 12,758 231 1,908 110 37,529 289 3,627 1,604 4,840 572 62 29,582 6,057 41,359 6,621 17,469 1,152 89 155,002 5,997 32,814 76,770 15 80 8,727 1,017 1,475 35,806

$ 64,205 S 447,323

$ 19,668

$ 59,791

$ 4,660

$ 89

$1,156,269 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 33 1

Project Statements Of Operations Year Faded December-31, 2003 Nuclear Nuclear Nuclear (in Thousands)

Service Mix 1 Proj. 3 Proj. 4 Revenues

$94,813

$15,183

$21,953

$30,196 Interest income 508 541 1,075 1,028 Total revenues and interest income

$95,321

$15,724

$23,028

$31,224

Operating and service expenses:

Fuel used in electric generation 673 1,226 S

1,670 Purchased power 77,958 Other operating 2,108 2,648 4,567 7,914 Maintenance 53 368 589 1,919 Depreciation 18 747 1,554 3,523 Taxes other than income 3

164 276 691 80,140 4,600 8,212 15,717 Interest expense:

interest charges 135 3,524 5,799 7,225 Interest charged to projects during construction (3)

(7)

(25) 135 3,521 5,792 7,200 Total operating costs and interest expense 80,275 8,121 14,004 22,917 Cumulative effect of change in accounting principle (805)

(2,054) 5,998 Decrease in amounts recoverahle under terms of the power sales agreements 15,046 8,408 11,078 2,309

$95,321

$15,724

$23,028

$31,224

• Allocation between maintenance and other operating is not available.

The accompanying notes are an integral part of this supplemental schedule.

32 32 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Schedule 11 Nuclear Project Hydro Quebec Proj. 5 No. 6 Peaking Intermediate Wyman Phase 11 Total

$8,787

$56,540

$10,944

$52,995

$3,262

$441

$295,114 290 1,972 315 675 53 65 6,522

$9,077

$58,512

$11,259

$53,670

$3,315

$506

$301,636

$ 424

$ 2,334

$ 3,256

$26,484

$2,037

$ 38,104 476 78,434 2,053 11,122 2,014 6,288

• 525 39,239 486 2,657 379 4,019 10,470 958 6,639 2,323 9,635 239 25,636 175 957 415 1,145 162 3,988 4,096 23,709 8,387 47,571 2,963 476 195,871 2,124 15,394 387 2,139 100 36,827 (6)

(36)

(77) 2,118 15,358 387 2,139 100 36,750 6,214 39,067 8,774 49,710 3,063 476 232,621 1,518 8,307 12,964 1,345 11,138 2,485 3,960 252 30 56,051

$9,077

$58,512

$11,259

$53,670

$3,315

$506

$301,636 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 3 3

Project Statement Of Cash Flows Year Ended December 31, 2003 Nuclear Nuclear Mix 1 Proj. 3 (hn Thousands)

Service Cash flows from operating activities:

Total revenues and interest income

$ 95,321 Total costs and expenses, net (80,275)

Adjustments to arrive at net cash provided by operating activities:

Depreciation 18 Amortization of debt discount and nuclear fuel 57 Change in assets and liabilities:

Accounts receivable 31 Unbilled revenues (383)

Inventories (7,347)

Prepaid expenses (33) 515,724 (8,121) 747 301 (7)

$ 23,028 (14,004) 1,554 1,324 (3)

Nuclear Proj. 4

$ 31,224 (22,917) 3,523 1,934 (12) 10 82 202 282 (505)

Accounts payable (477)

(213)

(430) 180 Accrued expenses and other 1,084 (38)

(235)

(468)

Other liabilities 4,608 Member and participant advances and reserves (14,312)

(687) 797 (1,722)

Net cash provided by (used for) operating activities (1,708) 7,798 12,233 11,519 Cash flows from investing activities:

Construction expenditures and purchases of nuclear fuel (98)

(935)

(1,721)

(1,920)

Interest charged to projects during construction (3)

(7)

(25)

Net (increase) decrease in special funds 10,244 576 (830) 1,079 Decommissioning trust payments (456)

(835)

(988)

Net cash provided by (used for) investing activities 10,146 (818)

(3,393)

(1,854)

Cash flows from financing activities:

Payments made on long-term debt (6,980)

(8,840)

(9,665)

Payments made on short-term debt (16,122)

Net proceeds from short-term borrowings 7,153 Proceeds from issuance of short-term debt 3,131 Net cash used for financing activities (5,838)

(6,980)

(8,840)

(9,665)

Net increase in cash and temporary investments 2,600 Cash and temporary investments at beginning of year 2,233 Cash and temporary investments at end of year

$ 4,833 S

1 Cash paid during the year for interest (Net of amount capitalized as shown above) 113

$ 4,075

$ 5,930

$ 7,857 The accompanying notes are an integral part of this supplemental schedule.

34 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

Schedule III Nuclear Project Hydro Quebec Proj. 5 No. 6 Peaking Intermediate Wyman Phase 11 Total

$ 9,077 (6,214) 958 338 (3) 71 (127) 47 (150)

S 58,512 (39,067) 6,639 555 (17) 390 (700) 232 (1,074)

$11,259 (8,774) 2,323 (159) 15 180 (1) 218 366 (13)

$ 53,670 (49,710) 9,635 (728) 1,246 3,991 1

131 800 (3)

$ 3,315 (3,063) 239 3

(142)

(80)

(164)

(163)

(91)

$ 506 (476)

$ 301,636 (232,621) 25,636 3,625 (46) 4 (30) 1,062 (383)

(2,503)

(1,245)

(471) 164 4,592 (508)

(2,941) 175 (424) 37 44 (19,541) 3,489 22,529 5,589 18,609 (109) 2 79,951 (486)

(2,659)

(34)

(247)

(32)

(8,132)

(6)

(36)

(77) 398 2,930 (1,140)

(8,522) 596 (8) 5,323 (250)

(1,369)

(3,898)

--_ --_ - -_ _ _ _ _ _ _ _ _-_ _ -__ -_ _-_ _ _ _-_. -_.. _ - -. -_-.. _ _ _ _ _- _. _...- _. - -_ - -_ --_ -I_ - -_ - -. --_ --_ --_ - -_-.-_.

(344)

(1,134)

(1,174)

(8,769) 564 (8)

(6,784)

(3,145)

(21,395)

(4,415)

(9,840)

(455)

(64,735)

(16,122) 7,153 3,131 (455)

(70,573)

(3,145)

(21,395)

(4,415)

(9,840)

(6) 2,594

.2 20 2,256 2

$ 14 4,850

$ 2,446

$ 18,732 645

$ 3,095 104

$ 42,997 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY 35

Members' anld,Project Participants MMWEC Member Utilities AshburnhamMunicipal Light Plant Belmont Municipal [Light Departmenti Boylston Municipal Lighf Department.:^*t'< 'y; -!

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Village of Morrisviile ofater and Light Department (v. -

>4 36~

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRICCOMPANY

Copies of this report and supplemental financial information can be obtained, free of charge, by writing to:

Corporate Communications/Public Affairs Office, Massachusetts Municipal Wholesale Electric Company, RO. Box 426, Ludlow, MA 01056.

Phone: (413) 589-0141 Fax: (413) 589-1585 E-mail: mmwec~mmwec.org Internet: www.mmwec.org All requests for information about MMWEC should be directed to this office. ©IMMWEC 2004.

Rev. 92 Page I of I

HUDSON LIGHT AND POWER DEPARTMENT Financial Statements December 31, 2003 and 2002

HUDSON LIGHT AND POWER DEPARTMENT TABLE OF CONTENTS DECEMBER 31, 2003 AND 2002 Page Independent Auditors' Report 1

Management's Discussion and Analysis 2-4 Financial Statements:

Operating Fund:

Statements of Net Assets 5,6 Statements of Revenues, Expenses and Changes in Net Assets 7

Statements of Cash Flows 8-10 Rate Stabilization Trust Fund and Retirement Trust Fund:

Statements of Net Assets 11 Statements of Revenues, Expenses and Changes in Net Assets 12 Statements of Cash Flows 13 Notes to Financial Statements 14-28 Supplemental Information:

Independent Auditors' Report on Supplemental Information 29 Schedules of Operating Revenues 30 Schedules of Operations and Maintenance Expenses 31,32

Goulet, Salvidio & Associates, RC.

Certified Public Accountants James F. Goulet, CPA, MST Michael A. Salvidio, CPA Catherine A. Kuzmeskus, CPA James R. Dube, CPA INDEPENDENT AUDITORS' REPORT The Board of Commissioners Hudson Light and Power Department We have audited the accompanying financial statements of Hudson Light and Power Department of Hudson, Massachusetts, as of and for the years ended December 31, 2003 and 2002, as listed in the table of contents. These financial statements are the responsibility of the Department's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Hudson Light and Power Department as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The Management's Discussion and Analysis on pages two through four is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurements and presentation of the supplementary information. However, we did not audit the information and express no opinion on it.

Goulet, Salvidio & Associates, P.C.

3Di25Slid DSX Ha.

Worcester, Massachusetts April 20, 2004 Nine Irving Street Worcester, MA 01609 Tel: 508-757-5957 Fax: 508-753-0948

• E-mail: admin@gsamycpa.com The m)

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i MANAGEMENT'S DISCUSSION AND ANALYSIS Within this section of the Hudson Light and Power Department's annual financial report, management provides narrative discussion and analysis of the financial activities of the Hudson Light and Power Department for the year ended December 31, 2003 and 2002. The Department's performance is discussed and analyzed within the context of the accompanying financial statements and disclosures following this section.

Overview of the Financial Statements:

The basic financial statements include (1) the statements of net assets (2) the statements of revenues, expenses and changes in net assets (3) the cash flow statements and (4) notes to the financial statements.

The Statements of Net Assets are designed to indicate our financial position as of a specific point in time. At December 31, 2003, it shows our net worth has decreased compared to the year ended December 31, 2002. This decrease is due to the Department's appropriation of net assets to the rate stabilization find.

The Statements of Revenues, Expenses and Changes in Net Assets summarizes our operating results and reveals how much of a profit was earned for the year. As discussed in more detail below, our net profit for December 31, 2003 and 2002 was $559,768 and $1,247,129, respectively.

The Statements of Cash Flows provides information about the cash receipts and cash payments during the accounting period. It also provides information about the investing and financing activities for the same period.

Summary of Net Assets - Operating Fund 2003 2002 Current Assets Noncurrent Assets

$ 9,794,693 11,497,814 Total Assets

$ 21,292,507 Current Liabilities Noncurrent Liabilities Total Liabilities Net Assets:

Restricted for Debt Service Invested in Capital Assets, Net of Related Debt Unrestricted Total Net Assets Total Net Assets and Liabilities 1,696,302 658,145 2.354,447 1,925,000 6,680,596 10.332.464 18.938,060

$ 21,292.507

$ 10,833,193 11,546,861

$ 22,380,054

$ 2,026,229 731,722 2.757.951 1,925,000 5,392,630 12.304,473 19,622,103

$ 22,380,054 2

Summary of Changes in Net Assets - Operating Fund 2003 2002 Operating Revenues Operating Expenses

$ 31,579,604 31,314,414

$ 31,773,059 30,918,501 Operating Income Nonoperating Revenues 265,190 294,578 854,558 392.571 Income Before Contributions and Transfers 559,768 1,247,129 Transfers Out - Payment in Lieu of Taxes (252,408)

Transfers Out - Rate Stabilization Trust Fund (1,000,000)

Transfers Out - Retirees' Medical Insurance Premiums (24,033)

Transfers Out - Refund of Customer Overpayment (5,698)

Transfers In - Restricted for Capital Projects 2,100 Claims and Judgments 36,228 Net Assets, January 1 19.622,103 (225,000)

(2,409,987) 0 0

0 1,678,883 19,331,078 Net Assets, December 31

$ 18,938,060

$ 19,622,103 Financial Highlights:

Operating revenues decreased by $193,455 in 2003. This decrease in revenues can be attributed primarily to the rate reduction of 14% in August of 2002 remaining in effect for the entire year of 2003. There was also a 3% increase in power consumption.

Operating expenses increased by $395,913 in 2003. This increase in expense can be attributed to the increase in energy and transmission costs.

Utility Plant and Debt Administration:

Utility Plant Net utility plant increased by $1,287,966 from 2002. This increase is the difference between the current year additions of $1,934,428 and the annual depreciation (3%) write off of $622,611 and amortization of nuclear fuel of $23,851. During 2003, the Department upgraded the transmission and distribution system for approximately $1,747,161, which accounted for 91% of current year additions and the additions to the general plant accounted for approximately 9% of which $114,649 was for a new storage yard.

In December 2001, the Department approved a substation redesign to improve reliability by taking advantage of a second transmission line being built by National Grid. The substation redesign started in 2002 and will be completed in 2004.

Debt Administration The Hudson Light and Power Department remains a vertically integrated utility, as do all Municipal Light Departments in Massachusetts. This means that we are allowed under the Massachusetts Utility Restructuring Laws to retain our ownership and control over our electrical generation assets. Investor owned utilities, such as Massachusetts Electric Company, have been required to sell their generation assets as a result of the same restructuring laws.

3

Debt Administration - Continued The generation assets, which we have a vested interest in through a Purchase Sales Agreement along with the other municipal electrical systems in New England, are financed through municipal bonds.

The collective debt service owed under these bonds stand at approximately $1.2 billion, of which Hudson Light and Power Department's share is just over $137 million.

In an effort to ensure stable costs for electricity in future years the Hudson Light and Power Department, worked with the Massachusetts Municipal Wholesale Electric Company, on a bond refinancing in 2001. This refinancing is expected to save the Hudson Light and Power Department approximately $15 million in interest over the life of the bonds.

Though we will not gain any immediate benefit from the refinancing, it is part of a longer-term, strategic effort to maintain the competitive rates and reliable electric service into the future. The bulk of the savings from the refinancing program will be used to stabilize our power costs beginning in 2010. During this timeframe competition in the power markets is expected to intensify, and reduced debt service will place us in a better position to control costs.

Significant Balances and Transactions:

Retirement Trust Fund The Retirement Trust Fund's purpose is to directly reimburse the Town of Hudson for retirement costs attributable to the Hudson Light and Power Department's retirees for whom the Town of Hudson is assessed annually by the Middlesex County Retirement System, and to satisfy the Department's anticipated future pension liabilities for it's current employees.

Rate Stabilization Trust Fund The Rate Stabilization Trust Fund's purpose is to fund future power supply costs for which the department is presently obligated to make, so as to eliminate or reduce future power supply costs, in order to remain competitive within the electric industry and for other supply-related issues which the Trustees designate by vote.

Depreciation Fund Hudson Light and Power Department maintains a depreciation fund, which is managed by the Town of Hudson Treasurer. This fund is used to pay for large capital investments such as new trucks and other long-term assets. Items such as these would be purchased from the operating funds, which would then be replenished by funds transferred from the depreciation fund. The depreciation fund is required by state statute. We set aside 3% of our cost of plant annually to be used for capital improvements and additions.

Purchased Power Working Capital The purchased power working capital is an amount held by Massachusetts Municipal Wholesale Electric Company (MMWEC), our power supply agent. MMWEC requires that they hold a set amount of capital from which it may pay our power obligations when they are due. They replenish the fund as needed from our monthly invoice payments.

4

XI HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF NET ASSETS DECEMBER 31, 2003 AND 2002 OPERATING FUND ASSETS 2003 2002 CURRENT ASSETS:

Funds on Deposit with Town Treasurer Operating Fund Petty Cash Customer Accounts Receivable Other Receivables Materials and Supplies Purchased Power Prepayments Purchased Power Working Capital Deferred Debit - Fuel Charge TOTAL CURRENT ASSETS 4,947,973 500 2,883,475 56,666 927,233 150,475 629,799 198,572 9,794,693 6,349,867 500 2,850,356 27,854 812,520 162,297 629,799 0

10,833,193 NONCURRENT ASSETS:

Funds on Deposit with Town Treasurer Depreciation Fund Customer Deposits Insurance Escrow Reserve Investment Utility Plant Assets, Net TOTAL NONCURRENT ASSETS TOTAL ASSETS 4,067,129 532,738 149,413 67,938 6,680,596 11,497,814 21,292,507 5,207,245 705,038 160,000 81,948 5,392,630 11,546,861 22,380,054 See Accompanying Notes to Financial Statements 5

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF NET ASSETS DECEMBER 31, 2003 AND 2002 OPERATING FUND LIABILITIES 2003 2002 CUFRRENT LIABILITIES:

Accounts Payable Miscellaneous Current and Accrued Liabilities Insurance Escrow Reserve Deferred Credit - Fuel Charge TOTAL CURRENT LIABILITIES 1,574,97 98,32 23,OC 78 1,317,441 A4 509,183

)0 23,000 0

176,605 12 2,026,229 1,696,30 NONCURRENT LIABILITIES:

Customer Deposits Customer Advances for Construction Insurance Escrow Reserve TOTAL NONCURRENT LIABILITIES TOTAL LIABILITIES 531,732 0

126,413 658,145 2,354,447 592,622 2,100 137,000 731,722 2,757,951 NET ASSETS Restricted for Debt Service Invested in Capital Assets, Net of Related Debt Unrestricted 1,925,000 6,680,596 10,332,464 1,925,000 5,392,630 12,304,473 19,622,103 22,380,054 TOTAL NET ASSETS 18,938,060 TOTAL LIABILITIES AND NET ASSETS 21,292,507 See Accompanying Notes to Financial Statements 6

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 OPERATING FUND 2003 2002 OPERATING REVENUES 31,579,604 31,773,059 OPERATING EXPENSES:

Operations and Maintenance Depreciation Expense 30,691,803 622,611 30,287,407 631,094 30,918,501 854,558 TOTAL OPERATING EXPENSES 31,314,414 OPERATING INCOME 265,190 NONOPERATING REVENUES (EXPENSES):

Interest and Dividend Income Interest Expense 294,578 0

392,587 (16) 392,571 TOTAL NONOPERATING REVENUES (EXPENSES) 294,578 Income Before Contributions and Transfers 559,768 1,247,129 NET ASSETS - JANUARY 1 19,622,103 19,331,078 Transfers Out - Payment in Lieu of Taxes Transfers Out - Rate Stabilization Trust Fund Transfers Out - Retirees' Medical Insurance Premiums Transfers Out - Refund of Customer Overpayment Transfers In - Restricted for Capital Projects Claims and Judgments (252,408)

(1,000,000)

(24,033)

(5,698) 2,100 36,228 (225,000)

(2,409,987) 0 0

0 1,678,883 NET ASSETS - DECEMBER 31 18,938,060 19,622,103 See Accompanying Notes to Financial Statements 7

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 OPERATING FUND CASH FLOWS FROM OPERATING ACTIVITIES:

Cash Received from Customers Cash Paid to Suppliers and Employees Cash Paid for Benefits Payment in Lieu of Taxes Cash Received for Claims and Judgments Net Cash Provided (Used) by Operating Activities 2003 31,708,622 (30,632,610)

(958,889)

(252,408) 36,228 (99,057) 2002 32,471,440 (28,888,195)

(848,052)

(225,000) 1,678,883 4,189,076 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Interest Expense 0

(16)

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:

Purchases of Utility Plant Assets Purchases of Nuclear Fuel (1,919,990)

(14,438)

(738,180)

(19,382)

(757,562)

Net Cash Used in Capital and Related Financing Activities (1,934,428)

CASH FLOWS FROM INVESTING ACTIVITIES:

Rate Stabilization Reserve Interest and Dividend Income Net Proceeds from Maturities (Purchases) of Investments Net Cash Provided (Used) by Investing Activities (1,000,000) 294,578 2,050,585 1,345,163 (2,409,987) 392,587 (1,261,687)

(3,279,087)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT (688,322) 152,411 CASH AND CASH EQUIVALENTS - JANUARY 1 CASH AND CASH EQUIVALENTS - DECEMBER 31 8,065,159 7,376,837 7,912,748 8,065,159 See Accompanying Notes to Financial Statements 8

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 OPERATING FUND RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Operating Income Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities:

Depreciation Amortization of Nuclear Fuel Payment in Lieu of Taxes Retirees' Medical Insurance Premiums Refund of Customer Overpayment Cash Received for Claims and Judgments Changes in Assets and Liabilities:

(Increase) Decrease in:

Customer Accounts Receivable Other Receivables Materials and Supplies Purchased Power Prepayments Deferred Debit - Fuel Charge Increase (Decrease) in:

Accounts Payable Customer Deposits Tax Collections Payable Deferred Credit - Fuel Charge Miscellaneous Current and Accrued Liabilities Insurance Escrow Reserve 2003 265,190 2002 854,558 622,611 23,851 (252,408)

(24,033)

(5,698) 36,228 631,094 22,234 (225,000) 0 0

1,678,883 (33,119)

(28,812)

(114,713) 11,822 (198,572) 519,836 198,480 131,996 93,502 0

(34,190) 174,184 13,330 0

(29,831) 160,000 257,537 (60,890) 0 (176,605)

(410,859)

(10,587)

Net Cash Provided (Used) by Operating Activities (99,057) 4,189,076 See Accompanying Notes to Financial Statements 9

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 OPERATING FUND SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

The following amounts are considered to be cash or cash equivalents for the purpose of the statements of cash flows:

2003 2002 Operating Fund Petty Cash Depreciation Fund Depreciation Investment Fund (Note 8)

Insurance Escrow Reserve Customer Deposits 4,947,973 500 1,740,554 5,659 149,413 532,738 6,349,867 500 413,455 436,299 160,000 705,038 7,376,837 8,065,159 See Accompanying Notes to Financial Statements 10

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF NET ASSETS DECEMBER 31, 2003 AND 2002 RATE STABILIZATION TRUST FUND ASSETS 2003 NONCURRENT ASSETS:

2002 Funds on Deposit with Town Treasurer Cash and Cash Equivalents Investments TOTAL ASSETS 1,490,462 8,897,331 10,387,793 906,093 10,114,649 11,020,742 NET ASSETS NET ASSETS - Restricted 10,387,793 11,020,742 RETIREMENT TRUST FUND ASSETS 2003 NONCURRENT ASSETS:

2002 Funds on Deposit with Town Treasurer Cash and Cash Equivalents Investments 1,084,183 7,031,831 3,020,403 4,166,661 TOTAL ASSETS 8,116,014 7,187,064 NET ASSETS NET ASSETS - Restricted 8,116,014 7,187,064 See Accompanying Notes to Financial Statements 11

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 RATE STABILIZATION TRUST FUND NONOPERATING REVENUES (EXPENSES):

Interest Earned on Invested Funds Accrued Interest Paid at Purchase Gain (Loss) from Security Redemption Annual Contribution (to) from Operations 2003 364,687 (829) 3,192 (2,000,000) 2002 378,352 (21,484) 0 501,521 NET INCOME (LOSS)

(1,632,950) 858,389 NET ASSETS - JANUARY 1 11,020,743 7,752,366 Transfers In - Operating Fund 1,000,000 2,409,987 11,020,742 NET ASSETS - DECEMBER 31 10,387,793 RETIREMENT TRUST FUND 2003 2002 NONOPERATING REVENUES (EXPENSES):

Interest Earned on Invested Funds Accrued Interest Paid at Purchase Gain (Loss) from Security Redemption Management Fee Annual Contribution from Operations Annual Pension Expense Unrealized Gain on Investments 278,653 (10,618)

(1,538)

(2,329) 896,093 (461,368) 230,057 338,711 (43,858) 2,000 0

414,913 (458,596) 0 NET INCOME 928,950 253,170 NET ASSETS - JANUARY 1 7,187,064 6,933,894 7,187,064 NET ASSETS - DECEMBER 31 8,116,014 See Accompanying Notes to Financial Statements 12

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 RATE STABILIZATION TRUST FUND 2003 2002 CASH FLOWS FROM INVESTING ACTIVITIES:

Net Interest Income Net Proceeds from Maturities (Purchases) of Investments Gain (Loss) on Security Redemption Appropriation from Net Assets - Operating Fund Annual Contribution from Operations Net Transfer to Operations 363,858 1,217,319 3,192 0

0 (1,000,000) 356,868 (4,836,567) 0 2,409,987 501,521 0

INCREASE IN CASH AND CASH EQUIVALENTS 584,369 (1,568,191)

CASH AND CASH EQUIVALENTS - JANUARY 1 CASH AND CASH EQUIVALENTS - DECEMBER 31 906,093 1,490,462 2,474,284 906,093 RETIREMENT TRUST FUND 2003 2002 CASH FLOWS FROM INVESTING ACTIVITIES:

Net Interest Income Net Proceeds from Maturities (Purchases) of Investments Gain (Loss) on Security Redemption Management Fee Annual Contribution from Operations Annual Pension Expense 268,035 (2,635,113)

(1,538)

(2,329) 896,093 (461,368) 294,853 388,860 2,000 0

414,913 (458,596)

INCREASE IN CASH AND CASH EQUIVALENTS (1,936,220) 642,030 CASH AND CASH EQUIVALENTS - JANUARY 1 CASH AND CASH EQUIVALENTS - DECEMBER 31 3,020,403 1,084,183 2,378,373 3,020,403 See Accompanying Notes to Financial Statements 13 L.

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies of Hudson Light and Power Department are as follows:

Reporting Entity The Hudson Light and Power Department is a component unit of the Town of Hudson, Massachusetts. The Department purchases power from various sources and sells it to the ultimate customers at rates submitted to the Massachusetts Department of Telecommunications and Energy (DTE). The Municipal Light Board appoints a manager of municipal lighting who shall, under the direction and control of the Municipal Light Board, have full charge of the operation and management of the Department.

Regulation and Basis of Accounting The Town of Hudson complies with Generally Accepted Accounting Principles (GAAP). The Town's reporting entity applies all relevant Governmental Accounting Standards Board (GASB) pronouncements. Proprietary funds and similar component units apply Financial Accounting Standards Board (FASB) pronouncements and Accounting Principles Board (APB) opinions issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements, in which case GASB prevails.

The Department uses the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred.

The Department adopted the provisions of Governmental Accounting Standards Board (GASB)

Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis -

for State and Local Governments in 2001.

Under Massachusetts law, electric rates of the Department are set by the Municipal Light Board and may be changed not more often than once every three months. Rate schedules are filed with the Massachusetts Department of Telecommunications and Energy (DTE). While the DTE exercises general supervisory authority over the Department, the Department's rates are not subject to DTE approval.

Depreciation The general laws of Massachusetts allow utility plant to be depreciated at an annual rate of 3%.

In order to change this rate, approval must be obtained from the Department of Telecommunications and Energy. Changes in annual depreciation rates may be made for financial factors relating to cash flow rather than for engineering factors relating to estimates of useful lives. The Department used a depreciation rate of 3% for 2003 and 2002.

The Department charges maintenance to expense when incurred. Replacements and betterments are charged to utility plant.

14

r HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Revenues Revenues from sales of electricity are recorded on the basis of bills rendered from monthly readings taken on a cycle basis. The revenues are based on rates established by the Department which are applied to the customers' consumption of electricity.

The Department rates have a power adjustment charge (power costs in excess of amounts recovered through base rates) which are billable to customers. The Department records estimated unbilled power adjustment charge revenue at the end of accounting periods.

Materials and Supplies Materials and supplies are valued using the average cost method.

Taxes The Department is exempt from federal and state income taxes. Although also exempt from property taxes, the Department pays amounts in lieu of taxes to the Town of Hudson and the Town of Stow. Taxes are paid to the State of New Hampshire resulting from ownership in the Seabrook, New Hampshire Nuclear Power Plant.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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 those estimates.

Cash and Cash Equivalents For purposes of the statements of cash flows, the Department considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Advertisina The Department expenses advertising costs as incurred. At December 31, 2003 and 2002, advertising expense was $4,593 and $2,481, respectively.

Reclassification Certain amounts in the 2002 financial statements have been reclassified to conform with the 2003 presentation with no effect on previously reported net income.

Compensated Absences In accordance with Town and Light Department policies, employees are allowed to accumulate sick days up to a maximum of 960 hours0.0111 days <br />0.267 hours <br />0.00159 weeks <br />3.6528e-4 months <br />. Upon termination of employment with the Light Department, the employee will not be paid for accumulated sick days. Upon retirement, employees are paid up to 50% of their accumulated sick time at their regular rate of pay. The percentage is based on employee's age and number of years of service with the Light Department.

15

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Compensated Absences (continued)

Employees are permitted to carry vacation time from one year to the next. Upon termination of employment with the Light Department, the employee will be paid for unused vacation time based on the employee's base rate of pay at the time of termination. Union employees have to use their vacation by April of the following year.

Accounts Receivable The Light Department carries its accounts receivable at cost. On a periodic basis, the Department evaluates its accounts receivable. The Department's policy is to consider an invoice past due if payment has not been received by the Department within 60 days. Letters are sent out requesting payment. If payment is still not received, a shutoff process is started.

Allowance for Doubtful Accounts Accounts are charged to bad debt expense as they are deemed uncollectible based upon a periodic review of the accounts. At December 31, 2003 and 2002, no allowance for uncollectible accounts was considered necessary.

NOTE 2 - UNBILLED REVENUE:

No recognition is given to the amount of sales to customers which are unbilled at the end of the accounting period.

NOTE 3 - CONCENTRATION OF CREDIT RISK:

The Hudson Light and Power Department's deposits with the Town Treasurer are commingled and invested with deposits from other Town funds. The Light Department's funds on deposit with financial institutions are subject to the insurance coverage limits imposed by the Federal Deposit Insurance Corporation (FDIC) and the Deposit Insurance Fund of Massachusetts (DIF).

Deposits in excess of FDIC limits are collateralized by the banks' investment in government securities.

NOTE 4 - INVESTMENT:

The Department owns shares of Hydro Quebec Phase II stock. The securities are stated at cost.

Fair market value approximates stated value.

16

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 5 - DEPRECIATION FUND:

Pursuant to provisions of the Commonwealth General Laws, cash in an amount equivalent to the annual depreciation expense is transferred from unrestricted funds to the depreciation fund.

Interest earned on the balance of the fund must also remain in the fund. Such cash may be used for the cost of plant, nuclear decommissioning costs, the costs of contractual commitments, and deferred costs related to such commitments which the Municipal Light Board determines are above market value.

NOTE 6 - PURCHASED POWER WORKING CAPITAL:

The purchased power working capital is an amount held by Massachusetts Municipal Wholesale Electric Company (MIMWEC), our power supply agent. The implementation of the Working Capital Program began August 1, 1985. MMVDAEC Participants approved certain working capital amendments to the various power purchase agreements. MMWEC requires that they hold a set amount of capital from which it may pay our power obligations when they are due. They replenish the fund as needed from our monthly invoice payments. The income earned is returned monthly to the Department. The balance in the fund is $629,799 as of December 31, 2003 and 2002.

NOTE 7 - MAJOR CUSTOMER:

The Department's revenues include approximately $12,733,265 and $13,136,600 billed to one major customer during 2003 and 2002, respectively. Amounts due from this customer included in accounts receivable were $958,298 and $983,152 at December 31, 2003 and 2002, respectively.

NOTE 8 - CASH EQUIVALENTS:

The Department's cash, cash equivalents and investments are held by the Hudson Town Treasurer. The Department's investments are classified as held to maturity and are recorded at unamortized cost plus accrued interest paid at purchase. The Depreciation Investment Fund is allocated between investments and cash equivalents as follows:

2003 2002 Investments 2,320,916

$ 4,357,491 Cash Equivalents 5.659 436.299 Total 2.3 236,575 4,793,790 The gross unrealized holding gains on the U.S. Treasury Notes were $16,386 and $25,745 at December 31, 2003 and 2002, respectively.

17

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 9 - UTILITY PLANT ASSETS:

Balance January 1, 2003 Balance December 31, 2003 Increases Decreases Capital Assets Not Being Depreciated:

Land Intangible Plant Construction in Progress 60,557 3,880 31,399 0

0 0

0 1,139,065 60,557 3,880 1,170,464 0

Total 95,836 1,139,065 0

1,234,901 Capital Assets Being Depreciated:

Production Plant Nuclear Fuel Transmission Plant Distribution Plant General Plant 6,565,847 393,938 1,458,209 10,363,795 2,364,454 23,363 14,438 80,539 527,558 149,465 (59,207) 0 (40,269)

(465,023)

(14,103) 6,530,003 408,376 1,498,479 10,426,330 2,499,816 Total 21,146,243 795,363 (578,602) 21,363,004 Less Accumulated Depreciation For:

Production Plant Nuclear Fuel Transmission Plant Distribution Plant General Plant Total Accumulated Depreciation Capital Assets Being Depreciated, Net Utility Plant Assets, Net (5,441,897)

(339,964)

(1,360,158)

(7,144,631)

(1,562,799)

(15,849,449) 5,296,794 5,392,630 (144,676)

(23,851)

(11,766)

(321,916)

(144,253)

(646,462) 148,901 1,287,966 59,207 0

40,269 465,023 14,103 578,602 0

S 0

(5,527,366)

(363,815)

(1,331,655)

(7,001,524)

(1,692,949)

(15,917,309) 5,445,695 6,680,596 18

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 10 - INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT:

2003 2002 Cost of Capital Assets Acquired

$ 22,597,905

$ 21,242,079 Less: Accumulated Depreciation 15,917,309 15.849,449 Invested in Capital Assets, Net of Related Debt

$ 6,680,596

$ 5,392,630 NOTE 1 1 - CLAIMS AND JUDGMENTS:

The Massachusetts Municipal Utility Trust reimbursed the Department $36,228 during 2003 for an oil spill clean up. The MNEvfWEC Board of Directors voted in 2002 to refund $1,378,709 of decommissioning reserves that were deemed unnecessary for the Millstone 3 and Seabrook Projects. The Department also received $231,278 in 2002 from the Vermont Legal Settlement,

$60,171 in 2002 from New England Power for adjustment of deferred taxes and ICAP Final Settlement Adjustment of $8,725.

NOTE 12 - RELATED PARTY TRANSACTIONS:

In the ordinary course of business, the Department sells electricity to various town departments.

During the years ended December 31, 2003 and 2002, sales to these departments totaled

$916,502 and $840,000, respectively. At December 31, 2003 and 2002, the amounts due from these departments were $48,339 and $56,893, respectively.

The Department reimburses the town for various employee benefits and services, including health insurance and retirement. During the years ended December 31, 2003 and 2002, the total amount paid for these services was $918,843 and $860,990, respectively. The amounts payable to the town as of December 31, 2003 and 2002 were $1,497 and $1,872, respectively.

NOTE 13 - CONSTRUCTION IN PROGRESS:

The Hudson Light and Power Department is managing a project to construct a substation upgrade to take advantage of a second transmission line connection with National Grid. The project is in the final phase and is to be completed in 2004. The Department has incurred costs totaling $1,170,464 as of December 31, 2003. Total cost of the project is approximately

$1,400,000.

19

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 14-RISK MANAGEMENT:

Self Insurance Trust Hudson Light and Power Department participates in Mass Municipal Self Insurance Trust (the Trust) with 17 other municipal light departments for the purpose of sharing excess liability and officers' liability risks. Hudson Light and Power Department is commercially insured for

$500,000 per occurrence, with a $50,000 deductible that would be paid by the Trust. Each participating light department contributes to the Trust based on its share of the group's total kilowatt-hour sales. In 2003 and 2002, the Trust required no contributions from its members as the Trust was overfunded and experienced favorable claims experience. Payments for claims under the deductible limit are funded by trust assets or, if required, additional contributions from the participants.

NOTE 15 - MMWBEC PARTICIPATION:

Town of Hudson acting through its Light Department is a Participant in certain Projects of the Massachusetts Municipal Wholesale Electric Company (MMWEC).

MMWEC is a public corporation and a political subdivision of the Commonwealth of Massachusetts created as a means to develop a bulk power supply for its Members and other utilities. M]V1WEC is authorized to construct, own or purchase ownership interests in and to issue revenue bonds to finance electric facilities (Projects). MMIWEC has acquired ownership interests in electric facilities operated by other utilities and also owns and operates its own electric facilities. MIMIWY\\EC sells all of the capability (Project Capability) of each of its Projects to its Members and other utilities (Project Participants) under Power Sales Agreements (PSAs).

Among other things, the PSAs require each Project Participant to pay its pro rata share of MMWIEC's costs related to the Project, which costs include debt service on the revenue bonds issued by MMWEC to finance the Project, plus 10% of MMIWEC's debt service to be paid into a Reserve and Contingency Fund. In addition, should any Project Participant fail to make any payment when due, other Project Participants of that Project may be required to increase (step-up) their payments and correspondingly their Participants' share of that Project's Project Capability to an additional amount not to exceed 25% of their original Participants' share of that Project's Project Capability. Project Participants have covenanted to fix, revise, and collect rates at least sufficient to meet their obligations under the PSAs.

Hudson Light and Power Department has entered into PSAs and Purchase Power Agreements (PPAs) with MMWEC. Under both the PSAs and PPAs, the Department is required to make certain payments to MIMWEC payable solely from Department revenues. Under the PSAs, each Participant is unconditionally obligated to make payments due to MV4WEC whether or not the Project(s) is completed or operating and notwithstanding the suspension or interruption of the output of the Project(s).

20 A:

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 16 - PENSION PLAN:

The Department is a member of the Middlesex Retirement System, which, in turn is a member of the Massachusetts Contributory Retirement System, which is governed by M.G.L. c.32 of the Massachusetts General Laws. Membership in the plan is mandatory immediately upon the commencement of employment for all permanent, full-time employees. The plan is a contributory defined benefit plan for all county employees and employees of participating towns and districts except those employees who are covered by the teachers retirement board.

Massachusetts Contributory Retirement System benefits are uniform from system to system. The System provides for retirement allowance benefits up to a maximum of 80% of a member's highest three year average annual rate of regular compensation. Benefit payments are based upon a member's age, length of creditable service, level of compensation, and group classification.

A $30,000 salary cap, upon which members' benefits were calculated, was removed by the Middlesex Retirement System effective January 1, 1991. Members become vested after ten years of creditable service. A superannuation retirement allowance may be received upon the completion of twenty years of service or upon reaching the age of 55 with ten years of service.

Normal retirement for most employees occurs at age 65 (for certain hazardous duty and public safety positions normal retirement is at age 55).

A retirement allowance consists of two parts: an annuity and a pension. A member's accumulated total contributions and a portion of the interest they generate constitute the annuity. The differential between the total retirement benefit and the annuity is the pension. The average retirement benefit is approximately 80-85% pension and 15-20% annuity.

Active members contribute either 5, 7, 8, or 9% of their gross regular compensation. The percentage rate is keyed to the date upon which an employee's membership commences.

Members hired after 1978 contribute an additional 2% of annual pay above $30,000. These contributions are deposited in the Annuity Savings Fund and earn interest at a rate determined by the Public Employees' Retirement Administration's Commission (PERAC's) actuary. When a member's retirement becomes effective, his/her deductions and related interest are transferred to the Annuity Reserve Fund.

Members who become permanently and totally disabled for further duty may be eligible to receive a disability retirement allowance. The amount of benefits to be received in such cases is dependent upon several factors, including: whether or not the disability is work related, the member's age, years of creditable service, level of compensation, veterans' status, and group classification. Employees who resign from service and who are not eligible to receive a retirement allowance or are under the age of 55 are entitled to request a refund of their accumulated total contributions. In addition, depending upon the number of years of creditable service, such employees are entitled to receive either zero (0%) percent, fifty (50%) percent, or one hundred (100%) percent of the regular interest which has accrued upon those contributions.

21

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 16 - PENSION PLAN (continued):

Survivor benefits are extended to eligible beneficiaries of members whose death occurs prior to or following retirement.

The Town of Hudson is assessed annually for its share of the current year pension payments which includes the retired employees of the Town of Hudson Light and Power Department. The Department then reimburses the Town for the Department's share of this assessment. The Department paid to the Town $461,368 in 2003, $458,596 in 2002 and $500,215 in 2001.

The Plan's separately issued financial statements can be obtained by contacting Middlesex Retirement System at 25 Linnell Circle, Billerica, MA 01865.

The Department is making provisions for their share of the Town of Hudson's unfunded actuarial liability by setting up the Town of Hudson Light and Power Department Employees' Retirement Trust to which they make contributions as deemed necessary by an actuary hired every two years to analyze the trust's estimated actuarial liability and assets. In addition to its annual town assessment, the Department has set aside amounts totaling $7,885,957 and $7,187,064 as of December 31, 2003 and 2002, for the Department's anticipated future liabilities for its current employees.

NOTE 17 - RETIREMENT TRUST FUND:

The Department's cash equivalents and investments are held by the Hudson Town Treasurer. The Department's U.S. Treasury Notes and Certificates of Deposit are classified as held to maturity, and are recorded at unamortized cost plus accrued interest paid at purchase. Investments in equity securities with readily determinable fair values are reported at their fair value on the statements of net assets. Fair values are based on the quoted market price of the investments.

At December 31, 2003, the gross unrealized holding gains on the U.S. Treasury Notes were

$18,840. The gross unrealized holding gains on Certificate of Deposits were $3,265. The unrealized gain on investments of $230,057 is reflected in the statements of revenues, expenses and changes in net assets.

At December 31, 2002, the gross unrealized holding gains on the U.S. Treasury Notes were

$42,420. The gross unrealized holding gains on Certificate of Deposits were $6,115.

NOTE 18 - RATE STABILIZATION TRUST FUND:

The Hudson Light and Power Board of Comnnissioners voted (January 11, 1997) to establish a Rate Stabilization Trust Fund for the purpose of providing the necessary funds to meet future power supply costs. Under the terms of the trust any assets remaining after the final payment of Power Sales Agreement obligations will revert back to the Department.

22

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 18 - RATE STABILIZATION TRUST FUND (continued):

The Department's cash equivalents and investments are held by the Hudson Town Treasurer. The Department's investments are classified as held to maturity and are recorded at unamortized cost plus accrued interest paid at purchase.

At December 31, 2003 there were no U.S. Treasury Notes. The gross unrealized holding gains on Certificates of Deposit were $6,412.

At December 31, 2002, the gross unrealized holding losses on the U.S. Treasury Notes were

$54,962. The gross unrealized holding gains on Certificates of Deposit were $14,698.

NOTE 19 - COMMITMENTS AND CONTINGENCIES:

Environmental Matters Hudson Light and Power Department is subject, like other electric utilities, to evolving standards administered by federal, state and local authorities relating to the quality of the environment.

These standards affect the siting of electric property, ambient air and water quality, plant safety and other environmental factors. These standards have had an impact on Hudson Light and Power Department's operations in the past and they will continue to have an impact on future operations, capital costs and construction schedules, Mirant and Taunton Purchase Power Commitments Hudson Light and Power Department has entered into a purchase power contract with Mirant Americas Energy Marketing, LP to purchase a minimum of 5 MW of power through June 1, 2006. The power purchase contract calls for Hudson Light and Power Department to make monthly payments based on the amount of energy supplied.

Hudson Light and Power Department has entered into a unit contract with Taunton Municipal Light Plant for power through life of the Cleary 9 unit (2012). The power purchase contract calls for Hudson Light and Power Department to make certain monthly payments based on their percent share of the operations of the unit, regardless of actual energy generated.

The estimated contract entitlements required are as follows:

For years ended December 31, 2004 2,430,320 2005 2,424,800 2006 1,243,520 2007 410,000 2008 410,000 2009-2012 1.640,000 Total 8,558,640 23

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 19 - COMMITMENTS AND CONTINGENCIES (continued):

MMWEC Commitments and Litigation Through its participation in MMWAEC, the Hudson Light and Power Department is contingently liable on the various Projects in which they participate as detailed below.

MMWEC has issued separate issues of bonds for each of the eight Projects, which are payable solely from, and secured solely by, the revenues derived from the Project to which the bonds relate, plus available funds pledged under the Amended and Restated General Bond Resolution (GBR) with respect to the bonds of that Project. The MMWEC revenues derived from each Project are used solely to provide for the payment of the bonds of any bond issue relating to such Project and to pay MMWEC's cost of owning and operating such Project and are not used to provide for the payment of the bonds of any bond issue relating to any other Project.

MMWEC operates the Stony Brook Intermediate Project and the Stony Brook Peaking Project fossil-fueled power plants. MM'ATEC has a 3.7% interest in the W.F. Wyman Unit No. 4 plant, owned and operated by FPL Energy Wyman IV, a subsidiary of FPL Energy, Inc. and a 4.8%

ownership interest in the Millstone Unit 3 nuclear unit operated by Dominion Nuclear Connecticut, Inc. (DNCI) a subsidiary of Dominion Resources, Inc. In addition to Millstone Unit 3, DNCI also is the owner of Millstone Unit 2. DNCI has requested and received an exemption from the NRC enabling them to submit an application earlier than 20 years before the expiration of the operating license for Unit 3 so that DNCI could submit its application for license renewal for Unit 2 and Unit 3 at the same time. In January 2004, DNCI filed an application with the NRC to renew the operating license. The license currently will expire in 2025.

A substantial portion of MMWIEC's plant investment and financing program is an 11.6%

ownership interest in the Seabrook Station nuclear generating unit operated by FPL Energy Seabrook, LLC, an indirect subsidiary of FPL Group Inc. FPL Energy Seabrook, LLC plans to file an application with the NRC to recapture the period 1986 to 1990 during which time Seabrook had a license, but did not operate and to extend the Seabrook Unit license, which currently will expire in 2026.

Pursuant to the PSAs the MMWEC Seabrook and Millstone Project Participants are liable for their proportionate share of the costs associated with decommissioning the plants, which costs are being funded through monthly Project billings. Also the Project Participants are also liable for their proportionate share of the uninsured costs of a nuclear incident that might be imposed by the Price-Anderson Act. In February 2003 Congress extended the Price-Anderson Act through the end of 2003. Further extension is being considered by Congress as part of comprehensive energy legislation.

24

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 NOTE 19 - COMMITMENTS AND CONTINGENCIES (continued):

In November 1997, the Commonwealth of Massachusetts enacted legislation effective March 1, 1998 to restructure the electric utility industry. MVMfWEC and the municipal light departments, including the Massachusetts Project Participants, are not specifically subject to this legislation.

However, it is management's belief that industry restructuring and customer choice promulgated by the legislation will have an effect on MMWEC and the Participant's operations.

MIMWEC is involved in various legal actions. In the opinion of MMWEC management, the outcome of such litigation or claims will not have a material adverse effect on the financial position of the Department.

As of December 31, 2003, total capital expenditures amounted to $1,506,203,000, of which

$163,359,000 represents the amount associated with the Department's Project Capability.

MIMWEC's debt outstanding for the Projects includes Power Supply System Revenue Bonds totaling $925,265,000, of which $102,149,000 is associated with the Department's share of Project Capability. As of December 31, 2003, MIMWEC's total future debt service requirement on outstanding bonds issued for Projects is $1,204,191,000, of which $137,070,000 is anticipated to be billed to the Department in the future.

The estimated aggregate amount of Hudson Light and Power Department's required payments under the PSAs and PPAs, exclusive of the Reserve and Contingency Fund billings, to MIVIWEC at December 31, 2003 and estimated for future years is shown below.

ANNUAL COSTS For years ended December 31, 2004 11,343,000 2005 11,341,000 2006 11,343,000 2007 11,349,000 2008 11,324,000 2009 to 2013 47,248,000 2014 to 2018 32,101,000 2019 1,021.000 TOTAL 137,070,000 In addition, the Department is required to pay its share of the Operation and Maintenance (O&M) costs of the Projects in which they participate. The Department's total O&M costs including debt service under the PSAs were $16,094,000 and $16,450,000 for the years ended December 31, 2003 and 2002, respectively.

25

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (000)

PERCENTAGE SHARE TOTAL PROJECT EXPENDITURES TO DATE PARTICIPANTS SHARE DEBT ISSUED

& OUTSTANDING 12/31/03 TOTAL DEBT SERVICE ON BONDS OUTSTANDING PARTICIPANTS SHARE PARTICIPANTS SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. l-SBK Nuclear Mix No. I-MILS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL 57,416 163,066 15,098 513 111,915 3,803 139,022 2,224 315,545 13,348 86,181 1,604 7,595 703 610,365 141,164 1,506,203 163,359 OPERATION &

MAINTENANCE PARTICIPANTS 12/31/02 SHARE 10,592 46,889 1,807 61 14,955 508 24,370 390 30,830 1,304 9,089 169 1,850 171 59,871 13,847 200,253 16,450 8,930 49,805 10,648 362 78,932 2,682 162,225 2,595 179,530 7,594 53,560 997 2,485 230 379,150 87,689 925,265 102,149 OPERATION &

MAINTENANCE PARTICIPANTS 12/31/03 SHARE 11,356 51,437 1,726 59 13,751 467 24,145 386 30,273 1,281 8,874 165 3,207 297 58,107 13,439 202,876 16,094 6,649 50,706 13,132 446 97,353 3,308 214,490 3,431 237,240 10,035 70,590 1,314 2,499 231 511,532 118,305 1,204,191 137,070 PERCENTAGE SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. I-SBK Nuclear Mix No. 1-MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL 26

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (000) 2004 ANNUAL COST 2005 ANNUAL COST 2006 ANNUAL COST PERCENTAGE SHARE PARTICIPANTS SHARE PARTICIPANTS SHARE PARTICIPANTS SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. I -SBK Nuclear Mix No. 1-NELS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL 4,569 12,875 1,355 46 10,041 341 16,929 271 19,847 840 6,094 113 563 52 41,855 9,680 114,128 11,343 2007 ANNUAL COST PARTICIPANTS SHARE 9,262 1,358 46 10,070 342 16,972 272 19,939 843 6,107 114 586 54 41,845 9,678 106,139 11,349 2,080 12,873 1,354 46 10,039 341 16,947 271 19,903 842 6,099 114 523 48 41,848 9,679 111,666 11,341 2008 ANNUAL COST PARTICIPANTS SHARE 3,268 1,358 46 10,070 342 16,986 272 19,962 844 6,108 114 299 28 41,845 9,678 99,896 11,324 12,428 1,358 46 10,067 342 16,955 271 19,926 843 6,109 114 528 49 41,847 9,678 109,218 11,343 2009 to 2013 PARTICIPANTS SHARE 5,952 202 44,119 1,499 80,010 1,281 84,598 3,578 29,066 541 173,587 40,147 417,332 47,248 PERCENTAGE SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. I-SBK Nuclear Mix No. I -MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL 27

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (000) 2014 to 2018 ANNUAL COST 2019 ANNUAL COST PERCENTAGE SHARE PARTICIPANTS SHARE ARTICIPANTS SHARE Stony Brook Peakinig Project Stony Brook Intermediate Project Nuclear Mix No. 1 -SBK Nuclear Mix No. I-MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK s

3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 397 2,947 49,600 53,065 11,007 13 100 793 2,245 205

$1 4,415 1,021 4,415 1,021 124,290 28,745 241,306 32,101 TOTAL 28

Goulet, Salvidio & Associates, RC.

Certified Public Accountants James F. Goulet, CPA, MST Catherine A. Kuzmeskus, CPA Michael A. Salvidio, CPA James R. Dube, CPA INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL INFORMATION The Board of Commissioners Hudson Light and Power Department Our audits were made for the purpose of forming an opinion on the financial statements of Hudson Light and Power Department for the years ended December 31, 2003 and 2002, which are presented in the preceding section of this report. The supplemental information presented on pages 30-32 is for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Goulet, Salvidio & Associates, P.C.

&o1l/w £kAdo S 6Ivy, g?6 Worcester, Massachusetts April 20, 2004 Nine Irving Street Worcester, MA 01609 Tel: 508-757-5957 Fax: 508-753-0948 E-mail: admin@gsamycpa.com The @)

Never Underestimate The Value'

HUDSON LIGHT AND POWER DEPARTMENT SCHEDULES OF OPERATING REVENUES FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 2003 2002 Sales to Residential Customers Sales to Commercial Customers Sales to Power Customers Private Property Lighting Sales Miscellaneous Electric Sales Municipal Sales Hudson Street Lights Hudson Municipal Buildings Hudson Municipal Power All Electric Municipal Buildings Stow and Berlin Street Lights Stow, Maynard and Other Municipal Services Total Revenue from Sales of Electricity Power Adjustment Charges Residential Sales Commercial Sales Power Sales Private Property Lighting Municipal Power Adjustment Charges Hudson Municipal Buildings Hudson Municipal Power All Electric Municipal Buildings Stow and Berlin Street Lights Stow, Maynard and Other Municipal Services 6,573,366 1,767,094 12,065,353 72,453 376,115 100,610 71,926 426,034 334,739 4,710 91,842 21,884,242 1,965,662 561,825 6,720,690 17,413 22,835 196,028 112,794 244 36,970 6,831,927 1,829,846 13,364,798 79,699 0

115,089 68,934 367,082 380,759 7,468 98,271 23,143,873 1,674,164 478,916 6,102,549 16,174 18,230 139,755 109,750 1,290 31,976 Total Power Adjustment Charges 9,634,461 8,572,804 Other Income Other Electric Revenues 60,901 56,382 TOTAL OPERATING REVENUES 31,579,604 31,773,059 See Independent Auditors' Report on Supplemental Information 30

HUDSON LIGHT AND POWER DEPARTMENT SCHEDULES OF OPERATIONS AND MAINTENANCE EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 PRODUCTION EXPENSES:

Nuclear Power Generation:

Operation Supervision Fuel Coolants and Water Steam Expenses Electric Expenses Miscellaneous Nuclear Power Expenses Maintenance Supervision Maintenance of Structures Maintenance of Reactor Plant Equipment Maintenance of Generation and Electric Plant 2003 22,950 30,997 1,907 7,512 0

64,840 6,466 3,362 16,685 7,144 2002 18,691 31,797 2,008 18,378 473 46,240 10,517 2,816 17,185 14,359 Total Nuclear Power Generation Expenses Other Power Generation:

Operation Supervision Fuel-Oil Fuel-Natural Gas Generation Expenses Generation Expenses-Lube Miscellaneous Other Power Generation Expenses Maintenance Supervision Maintenance of Structures Maintenance of Generation and Electric Plant Total Other Power Generation Expenses TOTAL PRODUCTION EXPENSES PURCHASED POWER EXPENSES:

Purchased Power-Entitlement Purchased Power-Nepex System Control and Load Dispersion TOTAL PURCHASED POWER EXPENSES 161,863 37,695 170,849 27,066 91,028 6,842 117,175 36,388 51,804 83,904 622,751 784,614 19,782,318 5,123,962 7,641 24,913,921 162,464 34,820 50,612 99,142 81,463 4,116 125,006 35,819 245,346 77,536 753,860 916,324 20,228,582 4,312,311 7,544 24,548,437 See Independent Auditors' Report on Supplemental Information 31

HUDSON LIGHT AND POWER DEPARTMENT SCHEDULES OF OPERATIONS AND MAINTENANCE EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 2003 2002 TRANSMISSION EXPENSES 1,925,638 1,856,552 DISTRIBUTION EXPENSES:

Operation Supervision and Engineering Station Expenses Overhead Line Expenses Underground Line Expenses Street Lighting and Signal Expenses Meter Expenses Customer Installation Expenses Miscellaneous Distribution Expenses Maintenance Supervision and Engineering Maintenance of Station Equipment Maintenance of Overhead Lines Maintenance of Underground Lines Maintenance of Line Transformer Maintenance of Street Lighting Maintenance of Meters TOTAL DISTRIBUTION EXPENSES GENERAL EXPENSES:

Supervision Meter Reader Expenses Customer Records and Collection Expenses Uncollectible Accounts Miscellaneous Sales Expenses Administrative and General Salaries Office Supplies and Expenses Outside Services Employed Property Insurance Injuries and Damages Employee Pension and Benefits General Advertising Expense Miscellaneous General Expenses Maintenance of General Plant Transportation Expenses TOTAL GENERAL EXPENSES REAL ESTATE AND OTHER TAXES TOTAL OPERATIONS AND MAINTENANCE 38,024 153,774 11,251 3,236 12,439 110,873 5,293 3,724 38,058 5,500 405,888 11,964 29,548 10,318 591 840,481 17,284 68,544 254,654 59,541 17,252 471,908 17,668 69,816 41,738 93,855 934,856 4,324 36,131 69,429 54,393 2,211,393 15,756 30,691,803 36,534 140,382 13,812 6,553 10,788 96,005 4,758 1,482 39,784 10,304 377,084 23,078 16,774 9,018 2,018 788,374 15,692 60,148 245,307 131,696 15,827 494,436 17,388 87,335 36,387 75,033 848,052 2,481 34,148 51,229 48,044 2,163,203 14,517 30,287,407 See Independent Auditors' Report on Supplemental Information 32