ML19208A692

Forwards 790906 PSC of Nh Preliminary Prospectus

ML19208A692
Person / Time
Site:	Seabrook
Issue date:	09/12/1979
From:	Ritsher J ROPES & GRAY
To:	Rubenstein L Office of Nuclear Reactor Regulation
References
NUDOCS 7909170275
Download: ML19208A692 (52)

Text

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9 ROPES & GRAY 225 FRANKLIN STREET BOSTON O2tlO anta coct 617 420 6100 CABLE ADORess AOPGRALOR f r ets mus'estm 940Sr9 September 12, 1979 I'

L. S. Rubenstein, Branch Chief Light Water Reactors, Branch #4 Division of Project Management United States Nuclear Regulatory

[

Commission l

Washington, D.

C.

20555 Re:

Public Service Company of New Hampshire, Docket Nos. 50 443 and 50 444; Staff I

Request for Additional Financial Informa-tion dated July 17, 1979

Dear Mr. Rubenstein:

I enclose twenty-five copies of the Preliminary Prospectus dated September 6, 1979 of Public Service l

Company of New Hampshire relating to its offering of

$50,000,000 of Series B General and Refunding Mortgage Bonds.

Very truly yours, Jo.

A. Ritsher JAR:vml Enclosures cc:

Attached List f)fi'2237 7909170 D [

• ,/'. a

/

Copies to:

E. Tupper Kinder, Esqu' ire Alan S. Rosenthal, Chairman i

As'sistrnt Attorney General Atomic. Safety and Licensing Environmental Protection Division Appeal Board U.S. Nuclear ReSulatory Commission Office of the Attorney General Washington, D.C.

20555 208 State House Annex Concord, New Hampshire 03301

~

~

Dr. John H. Buck Atomic Safety and Licensing Karin P. Sheldon, Esquire Sheldon Harmon, Roisman & Weiss Appeal Board Suite 566 U.S. Nuclear Re5ulatory Commission 1725 I Street, N.W.

Was hin gt on, D. C.

20555 Washin5 ton, D.C.

20000 Michael C. Farrar, Esqulre Atomic Safety and Licensing Dr. Ernest O.

Salo Professor of Fisheries Research Appeal Board U.S. Nuclear Regulatory Commission Institute Washington,

D. C.

20555 Colle5e of Fisheries University of Washington Ivan W. Smith, Esquire Seattle, Washington 98195 Atomic Safety and Licensing

• Dr. Kenrath A. McCollum 3 card Panel U.S. Nuclear Re5ulatory Commission 1107 Wes: Knapp Street Washingten, D.C.

20555 Stillwater, Oklahoma 74074 Robert A. Backus, Esquire Joseph F. Tubridy, Esquire O'Neill Backus Spielman 410S Cathedral Avenue, N.W.

Washington, D.C.

20016 116 Lowell Street Manchester, New Hampshire 03105 Dr. Marvin M. Mann Atomic Safety and Licensin5 Laurie Burt, Esquire Assistant Attorney General Board Panel U.S. Nuclear Regulatory Commission One Ashburton Place Washington, D.C.

20555 Boston, Massachusetts 02108 Lawrence Brenner, Esquire Office of the Executive Legal DLrector U.S. Nuclear Regulatory Commission Washington, D.C.

20555 3GM238

PHELDIINAltY PROSPECTUS DATED SEPTEMBER 6,1979 55:

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$50,000,000 w~

=H. ul*

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 5532 GENERAL AND REFUNDING MORTGAGE BONDS, i3sj SERIES B

% DUE 1999 o :o ;;;e,re

=>

gs g Interest is payable 31 arch 15 and September 15, commencing 31 arch 15,1980. The Series B Bonds g3yg are entith d to a mandatory annual sinking fund payment of $3,750,000, payable in cash or Series B g y ;; t Bonds, bqinning in 1989 with a redemption price of 100fc of the principal amount plus accrued y y "o 3 interest and are also redeemable at the option of the Company at any time, in whole or in part, at the

""g8 prices se. forth herein, except that prior to September 15,1984, the Series B Bonds are not refundable

.$ S 5 3 at the option of the Company at an interest cost less than Tc per annum. The Company may make j 3 5 y, an additional sinking fund payment in any year in an amount not exceeding the mandatory sinking y j ]o y fund payment for that year. The Series B Bonds will be issuable only in fully registered form without coupons and will be transferable without service charge. See " Description of the Bonds" ggg$

j S$

The Series B Bonds beiag offered hereby are secured by a mortgage on substantially all of the di.5 y ( Company's properties which n subordinate to the lien of a first mortgage on sul:stantially the same

] 3 s g properties and by a pledge of certain First 31ortgage Bonds. See " Description of the Bonds" for g2 U E information with respect to the participation of holders of the Series B Bonds in the lien of the first

$ 3 3 $ mortgage.

u xo3 Application will be made to list the Series B Bonds on the New York Stock Exchange.

ag$5 5j$M$

TIIESE SECURITIES IIAVE NOT BEEN APPROVED OR DISAPPROVED BY TIIE T N 3, ",

SECURITIES AND EXCILtNGE CO31311SSION NOR IIAS TIIE CO.T1311SSION ED5y PASSED UPON TIIE ACCURACY OR ADEQUACY OF TIIIS PROSPECTUS.

jf5$j ANY REPRESENTATION TO TIIE CONTRARY IS A CRI31INAL OFFENSE.

nEEa l t?nderwriting Discount 4 Proceeds to fM=8 Price to y5yy Public(1) and Comminions(2)

Company (l)(3)

B 5 a:9 s3y3 Per Bond 100.00 %

N 5 tt i 5525 Total

$50,000,000 D y.n -3 5a y j (g g (1) Plus accrued interest, if any, from the date of original issue.

no o lE g j 'S (2) The Company has agreed to indemnify the several Underwriters against certain civil liabilities, yyj including liabilities under the Securities Act of 1933.

f.e a y (3) Before (iuluction of expenses payable by the Company estimated at $141,000 MfNE 5 y 2,y The Series B Bonds are offered by the several Underwriters when, as and if issued by the Com-3 T 3 }e pany and accepted by the l'nderwriters and subject to their right to reject ordeis in whole or in part.

It is expected that the Series B Bonds will be ready for delivery on or about gggg

-c 8 M N BLYTII EASTMAN DILLON & CO.

KIDDER, P ABODY & CO.

E In oneonvrto Ix viron m o The date of this Prospectus is September

,1979.

IN CONNECTION WITII TIIIS OFFEIIING, TIIE UNDEItWIIITEIIS 31AY OVElt-ALLOT Olt EFFECT TItANSACTIONS WIIICII STAllILIZE 01131AINTAIN TILE 31AltKET PIIICE OF TIIE IlONDS OFFEllED IIEltEllY AT LEVELS AllOVE TIIOSE WIIICII 311GIIT OTIIElt.

WISE PIIEVAIL IN TIIE OPEN 31AltKET. SUCII STAlllLIZING, IF CO3131ENCED, 31AY llE DISCONTINUED AT ANY TI31E.

AVAILAllLE INFOIt3IATION Public Service Cornpany of New Ilampshire (the " Company") is subject to the inforrua-tional requirements of the Securitie, Exchange Act of 1934 and in accordance therewith files reports arul other information with the Securities and Exchange Comuninion. Information for the year 19711 and prior years conce.ning directors arul ofIlcers of the Company, remuneration and any material interests of such person

• in transactions with the Company, is disclosed in proxy statements distributed to sharehohlers of the Company an.1 filed with the Commis ion.

Such reports, proxy statements and other information can be inspected at the office of the Conuninion at Itoom 6101 at 1100 L Street, N.W., Washington, D. C.; Itoom 1100, Federal Iluilding, 26 Federal Plaza, New York, N.Y.; Suite 1710, Tishman IIuilding,10960 Wilshire lloulevard, Ims Angele, California; and Itoom 1228, Everett 31cKinley Dirk.-en Building,219 South

Dearborn Street,

Chicago, Illinois. Copies of such material may also be obtained at prescribed rates from the Public Iteference Section of the Commission at 300 Nurth Capitol Street, N.W., Wa-hington, D. C. 20319. Certain of the Company's securities are li-ted on the New York Stock Exchange where reports, proxy material and other information concerning the Company may also be inspected.

TIIE CO31PANY The Company was incorporated in New IIampshire in 1926. The mailing address of the Com-pany is 1000 Ehn Street, Post Oftlee Box 330,3Ianchester, New IIampshire 03105 and the Company's telephone number is (603) 669-4000.

The Company is the largest electrie utility in New Ilampshire. It operates a single integrated system furnishing electric service in 3Ianchester, Nashua, Portsmouth, Berlin, Dover, Keene, Laconia, Franklin, Ibichester, Somersworth and IST other New IIampshire municipalities, including about 839 of the total population of the State. It also sells electricity to other utilities and distributes and sells electricity in 6 towns in Vermont and 13 towns in 3f aine. The area served at re tail has a popula-tion of about 746.000 The Company is presently experiencing serious difneulties in financing its construction program and has taken steps to reduce that program. See " Problems Facing the Company" for information concerning the proposed reduction in its construction program and a description of the external finane-ing reiluired in order to enable the Company to maintain its construction program and continue its business operations, pending receipt of regulatory approvals for the preosed reduction.

o 35.2240

PItOSPECTUS SU3131AltY The follorcing material is qualified in,its < utircly by the dctailcd information and the finan-cial statemcnts and m>tts app <aring clsachtre in this Prospcclus. &e csyccially "Probicms Facing the Company" Tile Ol'FEltlNG Company Public Service Company of New Hampshire lionds to be Offered

$50,000,000 General and Refunding Mortgage Bonds, due 1999 Sinking Fund

$3,750,000 annually, conuneneing September 15,1989, to retire 75% of the issue prior to maturity.

Use of Proceeds To retire short-term debt incurred for const ruction, to defray construction costs and for other corporate purposes.

Bonds to be listed New York Stock Exchange Tile COMI'ANY Business Electrie utility Energy Sources (12 months ended June 30,1979) 011 - 499, Coal-389, Nuclear-79 and Hydro-69 Estimated 1979-1985 Construction Expenditures (excluding allowanco for funds used during construction)

$598,300,000*

' Assuming proposed reduction of ownership interests in nuclear plants under construction. See " Problems Facing the Company" FIN ANCI AI.1.VOlulATION (Amounts in thousands etrept ratios)

Twel e nth.

Year ended Decemlier 31, July 31,1979 1978 1977 Operating Revenues

$2S1,135

$260,751

$214,787 Operating income 47,780 4S,33S 29,174 Net income 39,497 36,507 21,722 Hatio of Earnings to Fixed Charges-Actual 2.55 2.87 2.38 Pro Forma 1.98 Capitalization and short-term debt as of July 31,1979, and as adjusted for the proceeds from the sale of the Series B Bonds (see " Capitalization"):

Percent of Adju ted Actual As Adju=ted C spitalisation Long-Term Debt

$288,427

$337,S02 44.89 Preferred Stock 112,622 112,622 14.9 Conunon Stock Equity 3 M.022 304.022 40.3

$705,071

$754,446 100.0 9 Short-Term Debt

$ 72,100

$ 22,725 3

3.W.7su

PItOBLE31S FACING TIIE CO31PANY The Company is presently experiencing serious difficulties in financing its construction program and in maintaining cash flow adequate to fund this program and the costs of current opervions.

If the Company's construction program is not reduced as described below, such program would have an estimated cost of $1,107,300,0(X) over the period 1979-1985 The major portion of this program is the Company's present 509 ownership interest in the 2300 31W nuclear plant at Seahnmk, New IIampshire; the estimated cost of this interest and related nuclear fuel over the same period is approximately $749,900,000 (see " Construction Program" and " Financing").

The Company's financing program had been based upon the inclusion in the Company's rate base of a portion (approximately 50% on average) of the expemlitures for construction work in progress ("CWIP") associated with major generating facilities, and in 1978 the Company's request for such inclusion was granted by the New IIampshire Public Utilities Commission ("NHPI'C"). On 3!ay 7,1979, a New IIampshire statute prohibiting the inclusion of CWIP in the Company's rate base became law. By onler dated August 29,1979, the NIIPCC excluded CWIP from the Company's rate base as of 3 fay 7,1979, but the NHPCP determined that the Company's rates would remain unchanged as temporary rates as of 3Iay 7,1979, and or lered an investigation to establish new rates which would provide a just and reasonable rate of return for the Company. A hearing has been scheduled for September 7,1979 to initiate that investigation. The Company on August 31, 1979 filed with the NIIPUC a new retail tariff providing new permanent rates designed to generate revemus approxi-mately $18,500,000 (about 8.59 ) on an annual basis above those currently received This filing has been suspended by the NHPUC pending full investigation and has been consolidated with the rate investigation initiated by the NHPUP. See "Husiness-Hates - New Hampshire Retail" R, ducti<m of C<mstruction Prognnn. In view of the cash stringency which woubl result fn>m the anticipated elimination of CWIP (see Note D to the Statement of Earnings and " Business-Hates-New Hampshire Retail") and the resultant difficulty of financing the 509 interest in Seahnmk, the Company decided a 3farch 3,1979 to reduce its ownership interest in the Seabrook plant to 289 by offering ownenhip ir terests aggregating 229 to other utilities. It has also offered to other utilities its ownership interes s in the Pilgrim c2 and 3fillstone =3 projects. The Pompany is entering into contracts for sale of nost of its interest in 31illstone #3; the Company did not receive expressions of interest in Pilgrim ::2. The Company plans to continue its efforts to dispose of its remaining interests in these two units. if all of these reductions are completed, they wouhl result in an estimated 1979-1985 construction program for the Company of $598,300,000 Only a relatively small portion of the proposed reducti< n in the Company's construction program is attributable to the proposed sale of the Company's inte ests in Pilgrim #2 and 3fillstone c3 ($35,000h00 and $34,100,000, respectively, for the period 1979-1935). See " Construction Program

By amendment to the.Toint Ownership Agreement relating to the Seabrook plant, nine other New England utilities

• have agreed, subject to necessary regulatory and other approvals, to increa.se

• Their names tad increases in percentages are: 31assachusetts 3Iunicipal Wholesale Electric Company

("3DIWEU") (13.874469), New Bedford Gas and Edison Light Company ("New Bedfonl")

(2.17390 9 ), Bangor Hydro-Electric Company (1.801429 ),3fontaup Electric Company ("31ontaup")

(1.09), Central 3faine Power Company (1.09), Central Vermont Public Service Cor,, oration (1.09 ), Green 31ountain Power Porporation (1.09 ), Town of Hudson, 3Inssachusi tts, Light and Power Department (0.019579) and Taunton 31unicipal Lighting Plant Commission (0.130659).

4 352242

gradually over an Adjustment Period of about two years their ownership interests in the Seabrook plant by pn, ruta sharing of costs otherwise attributable to the Company's ownership interest until their aggregate investment in Seabrook wid be increased by 229, and the Company's investment reduced to 29;, of the total investment of all participants. The amendment to the Joint (hvnership Agreement will become effective, and the Adjustment Period will begin, only after receipt by the utilities involved of all nxiuired regulatory and stockholder approvals. The proceedings on the appn>vals are expwted to be completed by 3Iarch,1950 but appeals may be filed by interrenors. Until the Adjustment Period begins, the Pompany must continue to finance its consi uction pn) gram at its present.T(7 ownership interest in the Seahnmk pniject.

Action is re<plired on the 229 reduction by n gulatory agencies in New IIampshire, 3Iassachu-setts and Vermont, and by the Nuclear Regulatory Conunission ("NI!C). All requinst New IIamp-shire approvals have bien received by onlers of the NilPUC dated July 27, 1979 and August 10, 1979: a rehearing has been n quested by intervenors. All necessary filings have been made with the NIN', but its clearance has not yet been received. No regulatory approvals of the acquisition by the two Alaine utilities are required under 3Iaine law.

Of the utilities increasing their interests in the Seabrook plant 3I31WEC has agreed to take the major portion of such incoase. AlliWEC s obligation is subject to its obtaining financing for such increase, which financin requires appnival by the 3fassachusett. Department of Public Utilities

("DPl"). Such DPU approval will be sought when 3IllWEU has obtained power purchase commit-ments from its constituent city and town electrie departments. Those depactments are in the pn> cess of considering and voting on such commitments and there is opposition in some of the conoounities.

3131WEP oftkials tentatively estimate that commitments will be obtained for somewhat less than the 11874W; which 3131WEU originally agreed to take.

Under 31assachusetts law, the increases of the other two 3f assachusetts utilities, Afontaup and New Bedfoni, must be approved by their respective parent companies, as stockholders, and by the Company's stockholders. The Company has called a meeting of its stockhohlers for September 6,1979 A pproval by the DPU is also required: petitions have been filed with the DPU and hearines commenced in A u gust. This proceeding has been consolidated with two other pniceedings relating to transfers of Seahn ok interests by other participants; the 3f assachusetts Attorney General has intervened in these pn>ccedings in opposition to the several proposals.

On July 19. 1979 the Vermont Public Service Boani issued an opinion conditionally approving a l!E acquisition by each of the two Vermont utilities, which are onsidering whether to pn>ceed notwithstanding the conditions.

The Company believes that, if one or both of the Vermont utilities elect not to pnieced or if 3131WEC ocerpts he than 1.i.si4Wg, the t'ompany and the participants involved woubl probably agree to start the Adjustment Period assumine that the major portion of the 22'; reduction was accepted.

Immediate Financing Program. The Company has a revolving credit agreement with a group of seven conunercial banks under which the ('ompany may borrow up to $115,000,000 through October 12, 1979. The banks have recently agreed to extend the maturity date fnim October 15,1979 to July 1,1960. The Company believes that the availabil'.ty of such credit to July 1,1950 will depend prin-eipally upon the success of the Company's financing program described below, and the timely receipt of the regulatory approvals required for the commencement of the Adjustment Period. The same 5

NNM

group of commercial banks have extendW to the Company a $25,000,000 term credit due January 3, 1980. The Company has additional lines of credit of $5,350,000 with New Ilampshire banks. At a

September 6,1979, an aggregate of $90,100,000 was outstanding under such agreement Ind lines of credit. On the date of sale of the Series 11 Honds offered hereby, the Company's short-term bank borrowings are expected to be approximately $112,000,000. In order not to utilize fully its existing credits, the Company is deferring temporar:ly payment of appniximately $5,000,000 of its liabilities principally to Seabrook contractors.

The Company estimates that,in order to finance its construction program if the Adjustment Period begins in 31 arch,1980, it must raise up to $15,000,000 by long-term financing during the remainder of 1979 in addition to the pniceeds from the sale of Series H Bonds and approximately $26,000,000 during the first two months of 1950, assuming the extension of the term credit and the continued availability of such $120,350,000 of short-term bank erMit. If the necessary approvals for the commencement of tho Adjustment Period are obtained earlier than Starch,1980, the Company's financing requirements would be reduced.

In July,1979, the Company received advance payments aggregating $10,600,000 from the other Seabrook participants against their present ownership interests in the project. These advances are to be credited against amounts payable by such participants after December 31,1979, and are secured by the Company's interest in nuclear fuel for the Seahnnk project. To raise the remaining funds needed in 1979 the Company is negotiating a nuclear fuel financing of about $30,000,000, part of the proceeds of which will be credited against such advance payments.

At the present time, the Company is unable to issue any significant amount of First 31ortgage Honds and the amount of General and Refunding 31 ort,. cage Bonds which the Company can issue is also limited to the extent described under " Financing - 31ortgage Bonds" Adverse developments in rate proceedings coubl reduce the availability of external financing, including the availability of short-term bank credit. See " Business-Rates - New IIampshire Retail" Connqucnce of Failure to Obtain mquired <Ipyronds or Financing. There can be n> assur-ance that the required approvals for the proposed reduction in the Company's interest in the Sea-brook pn> ject will be obtained or that the Company or other Seabnnk pacticipants can obtain financing in the necessary amounts or in a timely manner. Timely approvals and financing are essen-tial to enable the Company to maintain its construction program and continue its business operations.

INDUSTRY PROBLDIS The Company has experienced and may in the future experience in varying degrees a number of problems generally common to the electrie utility industry. These problems include obtaining ade-(plate and timely rate increases, uncertainties caused by increasing political involvement in utility regulation, financing large construction programs during an inflationary period, obtaining sufficient capital on reasonable terms, compliance with environmental n gulations, high costs of fossil fuel, delays in licensing and constructing new facilities, and effects of energy conservation.

Events at the Three 31ile Island Nuclear Unit No. 2 in Pennsylvania ("T311") resulted in damage to the plant and release of radioactivity into the surrounding environment and caused wiihspread concern about the safety of nuelcar generating plants. The Company has interests not only in the Seabniok project but also in six other nuclear generating plants which are either operating or planned or under construction in New England (see " Business-Joint Projects"); its interests in the four 6

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s.be)N.C.l}*f,

such operating plants represent appn>ximately Sg of the Company's prrsent generating capacity.

The company cannot predict what effect the events at T311 which have precipitated increased oppo-sition to nuclear power may ultimately have upon the completion or the cost of completion of the Seabrook project or such other planned nuelcar units or upon the continued operation of the existing nuclear generating plants in New I'ngland or upon its planned reduction of its interest in the Sea-hn ok project. Neither the Seahniok l' nits nor any of these six other New England plants utilize a nuclear steam supply system furnished by the vendor which supplied TMI. United i:ngineers & Con-structors Inc., the engineer-constructor for the Seahn>ok pniject, was constructor of TMI but was not involved in its design. The TMI incident has pn>mpted a rigorous reexamination of safety related equipment and operating procedures in all nuclear facilities. The plants in which the Company has an interest are being reviewed by their owner-operators, and those plants and all other nuclear facilities are being reexamined by the NHU. The T311 incident has also generated a multiplicity of legislative proposals in Congress and various state legislatures. While the ultimate effect of these reexaminations and proposils cannot he specifically predicted they could cause delays in construction and costly modifications of both the operating and plannni nuclear plants in which the Company has an interest.

USE OF PitOCEEDS The proceeds to the Company from the sale of the Series B Bonds will be used for the Company's continuing construction program, including the reduction of short-term borivwings incurred in connee-tion therewith. On the date of issue of the Series B Bt>mls, short-term borrowings are expected to be approximately $112,000,000.

CONSTRUCTION PROGRAM The area served by the Company has experienced relatively rapid population and economic growth in the last several years. According to statistics compiled by the United States Department of Com-merce, Bureau of the Census, the average annual rate of population growth in the State of New Ilamp-shire was approximately 29 during the period 1970-78, the second highest rate of growth for any state east of ('olorado. Figures released by the New Hampshire Department oC Employment Security show that New Hampshire is experiencing one of the lowest unernployment rates in the nation, and the lowest in New England - 2.89 ( not seasonally adjusted) for the month of May,1979.

As a result, the electric needs of the Company's customers have increased (an average annual increase of 7.V; in the Company's annual peak load during the ten-year period ending December 31, 1978). While there is some contrmersy concerning the rate of growth the Company will experience in the future, the ('ompany has projected the meds of its customers to increase at an average annual rate of approximately 6.59 at least through 1937, which would be the highest anticipated increase of any major electric utility in New England based upon estimates furnished to the New England Power Pool. The Company's forvea.sts indicate that its net purchases of capacity will have increased to 4M MW at the time of scheduled completion in 1983 of the first unit of the Seabrook plant described below, of which the Company's expected reduced share will be 322 MW. Certain of the utilities wiu>se shans in the Seahnok plant are being increased may sell all or part of their increased Seabrook entitlements to the Company for varying periods. If the Company's load growth projections are cor-rect, the Company would he required to purchase capacity from other electric uthities during most of t he 19Ws. If the Seabnmk plant is not completed on schedule, such purchases will increase, and there c an he no assurance that the Company would be able to purchase sufficient power to render adequate service to its eu.stomels.

7 O -) e, * ) A r) a

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On July 30,1979, the NHPUC issued its finding that the electrical peth growth rate for New Hampshire is 5.0% and that the NIIPUC will use that number pending further review.

The Company proposes to meet the projected needs of its customers primarily through its share of the 2,300 31W Seabrook nuclear plant, with two units each having a capacity of 1,150 31W currently planned for completion in 1983 and 1985, respectively. Unit #1 of the Seabrook plant is the only major base load generating station in New England now scheduled to begin service before 1985. In the view of the Company, both units of the plant are essential to meet not only the Company's needs but the New England load as well. As described under " Problems Facing the Company", the Company and nino other New England utilities have agreed to adjust their ownership interests in the Seabrook project, subject to receipt of the neccssary regulatory approvals. After such adjustments, the Company's share of the total cost of Seabrook upon completion, including the initial nuclear fuel, is estimated at $560,000,000, excluding any allowance for funds used during construction ("AFUDC")

(see Note D to the Statement of Earnings), which allowance is estimated to be $309,600,000. If the Company's ownership interest should remain at 50%, these amounts would be $1,000,000,000 and

$429,600,000, respectively. See " Problems Facing the Company" and " Financing" for a discussion of the factors affecting the financing of the Seabrook plant, and see " Business-Scabrock Nuclear Project" for a discussion of administrative proceedings and litigation relating to the Seabrook plant.

The Company's aggregate construction program for the seven-year period 1979 through 1985, which is subject to continuing review and adjustment, is currently estimated to be about $598,300,000 (excluding AFUDC) if its ownership interest in Seabrook is reduced to 28% as described above and under " Problems Facing the Company" and its ownership interests in Pilgrim #2 and Afillstone

1. 3 are sold. Such construction expenditures would total $1,107,300,000 if such interests remain at their preent levels. The following table sets forth the Company's estimated construction expendi-tures for 1979 (assuming no effect in this year of its reduced construction program) and the un-adjusted and adjusted construction programs as described above based on current construction sched-ules and cost projections (including an inflation factor, which in the case of Seabrook is 89 per annum, and excluding AFUDC):

Estimated Construction Expenditures (Millions of Dollars)

Unadjusted Adjusted Generating Facilities 1979 1979-1985 1979-1985 Company's Share of Seabrook Nuclear Project Plant

$134.5

$ 673.0

$271.5 Nuc! car Fuel 24.2 76.9 38.5 Total 158.7 749.9 310.0 Participation in Other P'

's' Nuclear Plants 4.9 68.9 6.1 Nuclear Fuel 0.4 6.9 0.6 Total 5.3 75.8 6.7 Other Generation 2.5 12.2 12.2 Total Generating Facilities 166.5 837.9 328.9 Transraission Facilities 11.0 128.0 128.0 Distribution and General Facilities 18.2 141.4 141.4 Total

$195.7"

$1,107.3

$598.3

• See " Business - Joint Project 4 "

"Of this amount, approximately $104,400,000 had been expended through July 31,1979.

8 95Z246

The following table shows the aggregate amount for each of the years 1979 through 1985 of the Company's estimated construction program before and after adjustment to reflect the reduction of the Company's ownership interest in Seabrook to 28?c commencing in March,1980 and the sale of its interests in Pilgrim #2 and Millstone #3 as of that date:

Unadjusted Adjusted Construction Construction Program Program 1979

$ 195,700,000

$195,700,000 1980 216,800,000 59,300,000 1981 207,100,000 32,400,000 1982 175,600,000 90,800,000 1983 137,200,000 89,700,000 1984 109,700,000 76,900,000 1985 65,200,000 53,500,000 Total

. $1,107,300,000

$598,300,000 Actual construction expenditures could vary from these estimates because of changes in the Company's plans and load forecasts, cost fluctuations, delays and other factors. The Company estimates that the ultimate cost of its share of Seabrook would increase between $5,770,000 and $7,900,000 for a 28% ownership interest (and between $10,300,000 and $14,100,000 for a 509b ownership interest) for each month's delay in completion. Delays of more than one month may result in a higher per month cost; the increase in cost in each case depends upon the cause and length of the delay. It is also possible that additional expenditures may be required to meet regulatory and environmental requirements at the Seabrook nuclear plant and at the Company's other generating facilities. See

" Industry Proolems" and " Business - Environmental Matters."

The complexity of present-day electric utility technology and the time required for the construc-tion of generating facilities and for the completion of the necessary licensing and regulatory proceed-ings, which have become increasingly extensive, have compelled the Company, as well as other electric utilities, to make substantial investments in the construction of such facilities before the licensing and regulatory proceedings are final. At July 31, 1979, the Company had invested approximately

$3S8,200,000 (including AFUDC of approximately $47,400,000 and nuclear fuel of $24,000,000) in the Seabrook nuclear plant. While it is possible that future developments could lead to cancellation of the project, the Company considers such a possibility unlikely not only because the necessary construction permits and approvals have been received (although certain of them are subject to further court appeal and administrative pmeeedings, see " Business-Seabrook Nuclear Project") and construc-tion is proceeding but also because of the projected need for the plant's power in the Company's service area and in New England generally. Ilowever, if the Seabrook project were cancelled, the Company estimates that at the present time its shara o# the total costs would be substantially more than its investment; the precise amount would depend upon a number of factors, including the amount of termination charges and salvage and the results of negotiations in connection with contract terminations. The Company would apply to regulatory autharities for approval to amortize its share of total costs over an appropriate future period and to recover such costs through the Company's retail and wholesale rates. While the Company cannot predict whether and to what extent regulatory authorities would permit such recovery, construction of the plant was authorized by the New IIamp-9 35%247

shire Public Utilities Commission based upon its finding that the plant was required to meet the demand for electric power. See " Business-Seabrook Nuclear Project-NIIPUC" FINANCING Financing of the Company's adjusted 1979-1985 construction program estimated at $598,300,000 (assuming its construction program is reduced as described above), and the refinancing at maturity of certain long-term debt and required sinking fund payments together aggregating $114,235,000 during this period (see Notes 4 and 7 of Notes to Financial Statements), represents a major under-taking for the Company. The Company estimates that approximately $174,000,000 will be generated from internal funda during this period (principally after 1982). The balance is expected to be financed from external sources.

During 1978, the Company raised approximately $83,000,000 from permanent financing, consist-ing of $23,900,000 from the sale of 1,300,000 shares of Common Stock in 3 fay and $60,000,000 from the sale of General and Refunding 3Iortgage Bonds in September. During 1979, tLe Company has raised approximately $107,380,000 from permanent financing, consisting of $39,640,000 from the sale of 2,000,000 shares of Common Stock in January, $30,000,000 from the sale of 1,200,000 shares of Preferred Stock ($25 Par Value) in 31ay and $37,740,000 from the sale of 2,000,000 shares of Common Stock in July. The Company's financing plans for the 1979-1985 period include the issuance of common stock, preferred stock and long-term debt, nuclear fuel financing and intermediate-term debt financing.

The success of the Company's fkmeing plan is dependent upon a number of factors, including the Company's ability to obtain adequate and timely rate increases, conditions in the securities mar-kets, economic conditions and the Company's level of sales and particularly resolution of the matters discussed under " Problems Facing the Company" Mortguge Bonds. Due to certain restrictions in the Company's First Mortgage Indenture. no significant amount of First 3Iortgage Bonds may be issued thereunder until an operating license is obtained for Seabrook Unit 4:1, now anticipated in late 1982. The Company is considering seeking the consent of the holders of its First Mortgage Bonds (759 in principal amount required) to amend that Indenture by modifying or eliminating these rcstrictions, but no assurance can be given that such consent will be sought or obtained. If these amendments are made, the Company is required to redeem all outstanding General and Refunding Mortgage Bonds, including the Series B Bonds offered hereby, by exchange for First Mortgage Bonds; until such time, such First Mortgage Bonds as may be issued will be pledged as additional security for the General and Refunding Mortgage Bonds.

At July 31,1979, the Company had $196,724,000 of First Mortgage Bonds outstanding and $805,786,000 of net Utility Plant, including $432,405,000 of Unfinished Construction.

Because of the restrictions in the Company's First Mortgage Indenture, the Company has entercd into the General and Refunding Mortgage Indenture dated as of August 15,1978 (the "G&R Inden-ture"), constituting a second mortgage on the Company's properties to secure General and Refunding Mortgage Bonds. The Company sold $60/X)0,000 of such Bonds to institutional investors in Septem-ber,1978. The terms of the G&R Indenture are generally similar to those of the First Mortgage Indenture except for elimination of the above-mentioned restrictions on issuance of bonds and the 10 Sf?R48

inclusion of a limitation on the amount of other income (including AFUDC) includible in earnings coverage under the G&lt Indenture. See "l)escription of the Ilonds" For the twelve months ended July 31,1979, the earnings coverage of interest on bonds was approximately 3.38, as compared with the requirements for the is.suance of additional bonds contained in the G&It Indenture of 2.0. At July 31,1979 the earnings coverage test wouhl have limited the principal amount of General and Itefm. ding.\\lortgage Honds (119 annual interest rate assumed) which could have been issued to

$136,000,000. The exclusion of CWIP from rate base without the substitution of additional revenues would adversely affect the earnings coverage and the amount of Ilonds issuable under the G&lt Inden-ture would be significantly reduced.

Ilank Financing. The Company has a revolving credit agreement with certain commercial banks which prior to August,1979 permii'.ed the Company, subject to periodic review by the banks, to borrow up to $115,000,000 until Octobec 12, 1979. In August,1979, the banks agreed to extend the maturity date to July 1,1980. See" Problems Facing the Company-Immediate Financing Program" The same group of commercial banks have extended to the Company a $25,000,000 term credit due January 3,1980. The Company has additional lines of credit aggregating $5,350,000 with New IIampshire banks.

As of July 31, 1979, the Company could have incurred approximately $134,500,000 of short-term unsecured indebtedness under its Articles of Agreement without obtaining the approval of holders of the Preferred Stock. The N11PUC has approved up to $121,700,000 of short. term borrowings.

Preferred Stock. Under the Company's Articles of Agreement additional Preferred Stock may be issued without the affirmativo vote of the holders of a majority of either class of the Preferred Stock provided that the ratio of earnings to fixed charges and preferred dividends, including dividends on Preferred Stock to be issu+ d, is at least 1.50. For the twelve months ended July 31,1979, the ratio of earnings to fixed charges and preftrred dividends computed under the method prescribed by the Company's Articles of Agreement was 1.94; and based thereon, the Company could issue, without such vote of the holders of the Preferred Stock, approximately $S4,800,000 of additional Preferred Stock (119 annual dividend rate assumed).

c r, -o o

s2 e W de sJ 11

CAPITALIZATION The capitalization and short-term debt of the Company as of July 31, 1979 was, and adjusted as of that date to reflect the issuance of $50,000,000 principal emount of Series B Bonds offered hereby and the application of the proceeds thervof (assumed to aggregate $49,375,000) would have been, as follows:

Amount Outstanding July 31,1979 Adjusted Amount Percent Amount Percent long-Term Debt (including current maturities)

(Thousands of Dollars)

First Mortgage Bondn (a)

$196,219

$196,219 General and Refundb2g Mortgage Bonds (b) 60,000 109,375 Promissory Note 25,000 25,000 Pollution Control Revenue Bonds 7,208 7,208 Total Long-Term Debt 25S,427 40.9 %

337,802 44.6%

Preferred Stock-Cumulative

$100 Par Value, Authorized, 1,350,000 shares Outstanding, 676,217 shares (c) 67,622 67,622

$25 Par Value, Authorized, 2,000,000 shares Out standing, 600,000 shares; adjusted, 1,500,000 shares (c) 45,000 45,000 Total 14eferred Stock 112,622 16.0 112,622 14.9 Common Stock Equity Common Stock-$5 Par Value Authorized, 18,000,000 shares Outstanding, 13,845,472 shares (d) 69,227 69,227 Other Paid In Capital 165,140 165,140 Betained Earnings 69,655 69,655 Total Common Stock Equity 304,022 43.1 304,022 40.3 Total Capitalization (e)

$705,071 100.0 %

$754,446 100.0 %

Bhort Term Debt

$ 72,100

$ 22,725(f)

(a) Because of certain restrictions in the First Mortgage Indenture no significant amount of bonds may now be issued thereunder. See " Financing" For a description of the outstanding series, see Note 7 of Notes to Financial Statements.

(b) The amount of bonds issuable under the General and Refunding Mortgage Indenture is subject to certain restrictions. See " Description of Bonds-Additional G&R Bonds" and " Financing" For a description of the outstanding series, see Note 7 of Notes to Financial Statements.

(c) For a description of the outstanding series, see Notes 4 and 5 of Notes to Financial Statements.

(d) In addition, as of July 31,1979 there were reserved for issuance upon conversion of the 49,217 shares of Convertible Preferred Stock, 5.5096 Dividend Series, 218,063 shares of Common Stock based upon the conversion price of $22.57 per share (the Convertible Preferred Stock being taken at its par value of $100 per share).

(e) See Note 8 of Notes to Financial Statements v ith respect to Commitments and Contingencies.

(f) On the date of the issue of the Series B Bonds, short-term bank borrowings are expected to be approximately $112,000,000. See "Use of Proceeds" and Note 3 of Notes to Financial Statements.

12 352250

STATE 31ENT OF EARNINGS The following Statement of Earnings, so far as it relates to the five years in the period ended December 31,1978, has been examined by Peat,3farwick,31itchell & Co., independent certified public accountants, whose report thereon appears elsewhere in this Prospectus, The information for the twelve months ended July 31, 1979 is unaudited and, in the opinion of management, includes all adjustments (consisting only of normal recurring accruals) necessary to a fair statement of results of operations for such period. This statement should be read in conjunction with the other financial statem<uts and the related notes appearing elsewhere in this Prospectus, Twek Montha Ended Year Ended December 31, July 31, 1979 1978 1977 1976 1975 1974 (IInaudited)

(Thousands of Dollars)

Operating Revenues ( A)(11)

$281,135

$260,751

$214,787

$196,674

$1S6,393

$155,930 Operating Expenses Operation Fuel (H) 96,114 71,996 70,500 54,481 58,511 43,161 Purchased and Interchanged Power 37,775 43,422 37,810 36,468 27,153 32,505 Other 34,110 31,490 27,641 25,059 22,04S 19,283 Maintenance ( A) 1 c,096 17,502 14,550 12,930 10,727 8,575 Depreciation (A) 15,170 14,752 14,117 13,791 13,522 11,624 Federal and State Taxes on Income

( A)(C) 17,943 19,666 8,399 9,733 9,916 3,702 Other Taxes, Principally Property Taxes 14,107 13,5s3 12,596 11,860 10,018 9,756 Total Operating Expenses 233,355 212.413 155,613 161,721 151,595 123,606 Operating income 47,750 45,333 29,174 31,953 34,495 27,324 Other income and Deduction-Allowance for Equity Funds t' sed During Construction (D) 11,309 7,528 6,093 3,205 1,5 73 1,785 Equity in Earnings of Affiliated Com-panies ( A) 929 870 802 1,007 821 870 Other - Net 1,3s3 9s3 491 391 49A 2,644 Total Other Income and Deductiors 13,621 9,631 7,36 4,603 2.x92 5.299 Income Before Interest Charges 61,401 53,019 36,560 36,556 37,390 32,623 Interest Charges Interest on Long-Term Debt 25,053 21,073 19,980 17,932 16,640 13,547 Other Interest 11,3s0 8,201 2,029 290 1,209 4,672 AIIowance for Borrowed Ponds Used During Construction (D)

(14,534)

(7,762)

(6,171)

(2,661)

(1,307)

(1,S96)

Net Interest Charges 21.904 21,512 14,w3 s 15,561 16.532 16,323 Net Income 39 197 36,507 21,722 20,995 2 0,*o w I t',300 Preferred Divid<nd Requirements 7,003 6,391 5,120 4,444 3,604 3,378 Earnings Available for Common S'ock

$ 32,494

$ 30,116

$ 16,602

$ 16,147

,$ 17,204

$ 12,922 Average Share. of Common Stock Outstand-ing (Thousach) 10,907 9,2, a e,6 ?n 6,372 6,124 5,134 Earnings Per,whare of Common H+ock (E)

$2.9s f3.25

$ 2.16

$2.53

$2.51

$2.52 Dividends Per Share of Common Stuk

$2.12

$1.91

$1.M

$136

$1.72

$1.64 Ratio of Earnings To Fixed Charges lF)

Actual 2.55 2.57 2.33 2.61 2.66 1.93 Pra Forma 1.9s (See "3fanagement's Discussion and Analysis of the Statement of Earnings".)

( A) See the applicable portion of Note 1 of Notes to Financial Statements.

(B) For the period December 3,1977 through 3Iay 6,1979 the Company's New IIampshire retail rates were bnsed in part upon the inclusion in the Company's rate base of a portion of the costs 13 b N.2.1{

of construction work in progress (CWIP) associated with major generating projecta. The inclu-sion of CWIP in rate base increased revenues from customers to cover the costs of financing such CWIP. On 31ay 7,1979 a New IIampshire statute prohibiting the inclusion of CWIP in the Company's rate baso became effective. By order dated August 29, 1979 the NIIPUC excluded CWIP fria the Company's rate base as of 31ay 7,1979, but determined that the Company's rates would remain unchanged as temporary rates as of 31ay 7,1979 and ordered an investigation to determine the Company's revenue requirements and to mtablish fair and reasonable rates. These temporary rates are subject to possible retroactive adjustment, either upward or downward, upon completion of the investigation. See " Business - Rates-New IIampshire Retail" for informa-tion concerning a new tariff fihsl with the NHPUC on August 31, 1979.

See " Business-Rates-Other" for a discussion of increased rates to wholesale customers put into effect by the Company on July 29,1978.

During 1977, the Federal Power Commission (FPC) affirmed an Administrative Law Judge's decision which resulted in the Company refunding in October,1977 approximately $1,622,000 of 1975 wholesale fuel adjustment clause revenues. This decision was affirmed by the United Statm Court of Appeals for the District of Columbia Circuit on 3 fay 3,1979. The Company has filal a petition for certiorari with the United States Supreme Court; pending a final decision on this matter, the Company has charged the refund with interest to deferred debits.

In August,1976, the Company and a fuel supplier reached agreement on the amount of a fuel inventory adjustment. As a result of this settlement, operating revenues and fuel expense for 1976 are each approximately $4,598,000 less than they otherwise would have been.

(C) See Ncte 2 of Notes to Financial Statements for information regarding income taxes.

(D) AFUDC is the estimat(d cost, during the period of construction, of funds invested in the con-struction program which are not recovered from customers through current revennes. Such allowance is not realized in cash currently Lut under the rate-making process the < munt af the allowance will be recovered in cash over the service life of the plant in the form of increased revenue collected as a result of higher plant costa. The NIIPUC, for the period December 3, 1977 through May 6,1979 permitted the Company to include in rate base a portion of the costs of CWIP associated with major generating projects. Therefore, AFUDC for this period did not include the cost of funds invested in the construction program which were provided by revenues of the Company.

To the extent CWIP is not included in the Company's rate base, the cost of fumls invmted in CWIP (interest on debt and return on equity, including dividends) is not provided by revenues and AFUDC is added to the cost of the plant being onstructed with offsetting credits in the Statement of Earnings. Since the credits are rot cash items, cash for interest and dividends may need to be provided in whole or in part by additional financing during the construction period.

As described in Note B above, as of May 7,1979, the Company's rates were made temporary and the Company was precluded from basing its rates upon CWIP in the rate base. Therefore, as of 31ay 7,1979, consistent with the August 29, 1979 rate order the Company began recording APUDC for CWIP previously included in the Company's rate base, thereby increasing AFUDC by approximately $1,962,000 for the twelve months ended July 31, 1979.

AFUDC net of applicable deferred income tax provisions equalled 32.59 and 48.4w of net iueome for 1978 and the twelve months ended July 31, 1979, respectively. The Company capitalized AFUDC at a net-of-tax rate of 7%% for 1974. Effective January 1,1975, the Com-pany began using a pre-tax rate of 9%9c (increased to 107c effective January 1,1979) and b22@

began recogniziny deferred income tax expeese applicable to the current tax reduction resulting from interest expense aweiated with construction, but these changes had no significant effect on m t income.

The Company began conipounding AFUDC on February 1,1977 resulting in an increase in the grass amount of AFUDC (apitalized during 1977 and subsequent periods. This change increas< d 1977 net income and earnings per share of common stock 1 y appn>ximately $816,000 and 40.11, respectively.

(E) Earnings per share are based on the average number of common shares outstanding, after recog-nitior. of preferred clock dividend requirements.

(F) Earnings represent the agen gate of Net inenme, less undistributed income of unconsolidatal companies, plus pnivisions for Federal and state tax (s on income and fixed charges. Fixed charges represent interest, related amortization and the interest component of annual rentals. The pro-fonna ratio of earnings to fixed charges would be 1.98 after giving effect to (1) the annual interest requirements on long. term debt outstanding at July 31,1979, (2) the annual interest requirements on the Series 11 Honds being ofrered (1151 interest rate assumed) (3) the prorated interest re-quirements on additional long. term debt expected to be issued on October 15,1979 ($25,000,000 at 12.6551 interest rate assumed) and (4) the annual interest requirements mi the estimated average short term debt expected 4 he outstanding during the twelve months ending July 31, 1980 ($96,480,000 at 13.019 interest rate assumed).

Sunplemental ratios of earnings to fixed charges base been calculated pursuant to Accounting Series Release No.122 of the Securitim and Exchange Commission. Such ratios include in earn-ings the undistributed income of unconsolidated companies, and include in fixed charges the Con pany's allocable portion of the fixed charges of the reg'>nal nuclear generating companies in which the Pompany has invotments. The supplemental ratim are not materially different from the basic ratios.

(G) The following quarterly information is unaudited, and, in the opinion of management, is a fair summary of results of operations for such periods. Variations between quarten reflect the sea-sonal nature of the Company's businesa, and beginning with the fourth quarter of 1977, addi-tionally includes the itTect of rate increases. See " Management's Discussion and Analysis of the Statement of Earnings." The fourth quarter of 1977 also includes an adjustment which de-creased maintenance expenses reconled in the first three quarters of 1977 by approximately

$ 1,000,000.

Quarter Ended Year 1979 Year 1978 Year 1977 June' March Dec.

se pt.

June March Dee.

Sept.

June March (Thousands except Per Share Amounts)

Operating Revenuen

$65,%6 $ so,072 $69,316 $62,387 $57,039 $ 71,9 *0

$57,091 $52,678 $ 67,491 857,527 Operating Iomme 9,302 14,75s 12,324 1! -

10,119 14,195 9,109 6,611 5,252 R,203 Net Income 8,335 12.017 9,359 5,t.

7,192 11,0x4 7,390 5,099 3.244 5,990 Preferrn! Divilen.1 Requirements 1,952 1,56 1,594 1,594 1,599 1,600 1,516 1,199 1.197 1,208 Earnints \\vaihtle for Common Stock 6,343 10,631 7,765 7,274 5,593 9,4 %4 5,874 3,599 2.047 4,782 Average Shares of Common St ock Out st an. ling 11,423 11,319 9,770 9,755 9,109 R,447 8,444 7,823 7,230 7,209 Earnings Per share of Common Stock

$0.54

$0 94

$0.79

$0.75

$0.61

$1.12

$0.70

$0.50

$0.24

$0.66

• Amounts restated to be consistent with the August 29,1979 rate order of the NHPUC described in Note B above.

15 pg /gp e )*9

.y.n.

ft5

]

6

-2

=

3tANAGE31ENTS DISCl'S510N AND ANALYSIS OF Tile % TATE 31ENT Ol' EAltNINGS Twehe 3fonth, Emled July 31,1979., Compared with Calendar 1978:

"Op, rating fle re n ue $" inen a ed $20,3s4,000 principally due to (1) the opt ration of the fuel adjustment clause / $11,15W,000), (2) an increase in unit I.mor sales (52,119,000) and (3) an inen ase in prime energy sah s.

"Fu,I Ilrp, nst " inen asnt $21,118,000 b< cauw a larger 1.creentage of total power supply uns gen. nited by t!ompany-owned fossil fuel plants and due to increau s in the unit costs of coal and oil.

"Purt ho3< d and In t< rr/ning< d P,nn r".h ereased 45,617,000 due to the increased generation by Company-owned fos.sil fuel plants.

"Fe de ral and N/atc Tare s on Incwne" di crrased $2.291,900 primarily due to a decrease in taxable in con.e.

" llion a nti for I:quity Fu nds l'se d During Construc tion" and ".111owano for llorrowe d Fund.<

Use d Durinu Construction" inen ased due to an increaso in the Company's construction program, primarily the si abrook nue! car plant and bn ause AFl*DP has been an rued from 3f ay 7,1979 through luly 31.1979 on PWIP inebn!rd until 31ay 6,1979 in New llampshire rate base.

"Oth< r Inuonc and D. dartions-Ollo r-L t" increased r:UW),tH30 due to increawd interest incorne from short-term investme nts and increased miscellaneous income.

"luta re st Charg< s" increased principally due to (1) additional long-term debt outstanding and (2) an increase in the rates and level of short-term Lorn, wines from banks as an interim mrthod of financing construction of new facilitii s.

1978 a-Compared with 1977:

" Ope rating Ilm nu# v" inenmed $15,961,000 principally due to a rate increase to Ni w llampshire retail eustomers on December 3, 1977 (127,000,000 on an annual basis), increased to $30,000,000 on an annual basis on. lune 1,1978; a rate increaw to whoh sale customers on.luly 29,1978 (approxi-mately f 2,4nO,600 on an annual basis); inen ased revenue associated aith the operation of a fuel adjustment clauw ( $10,000.tH Mh, and an in"rea* in prime e nergy sales.

" Purchase d and Inte rrhange d Pou e r" increaud $5,612,000 principally due to increases in capa-eity arnt enercy purchses in ce%try to mn t the Company's inen ased KWII s: des and r eplacement pow (r as required during the shutdown of 3h rrimack Station.

"Othe r Operating llJpe nW' inen ased principally because of the effect of inflation on wages, supplit s arn! services and employe e benefits, the exact amount of which cannot be deti rmir ed indi-vidually.

".11aintrnance I;rpr ns<s" inen as.d principally due to increased cost of maintenance at 3ferrimack Station t al proximate ly 60'i of the total inercase ) and becauw of the e ffect of inflation on waves and materials (approximately 3Pj ) and on costs of annual maintenance at other generating stations (approximately 6(' ).

c 16

" Federal and State Ta,res on income' increased $11,267,000 principally due to an increase in current taxable income due to inen ased operating revenues, and an inertase in deferred taxable income.

"Other Toro, Priwspally Prope rty Tarts" ineret.. sed due primarily to higher real estate property as.scssments and tax rates.

" lliowance for Equity Funds l%ed During Construction" and ".lltowana for Borroun d Funds Used During Construction" increased due to an increase in the Company's construction program, primarily the Seabrook nuclear plant.

"Othe r hwuna and Deductiona - Other-M t" inert ased $560,000 primarily as a result of in-creased interest income from shor'-tt rm innstments.

"Inte rrst Chartic s" ihert ased principally due to (1) additional long term dt ht outstanding (ap-pniximately 25L of the total increase) and (2) an inen ase in the rates an i level of short-term borrowings from banks as an interim method of financing construction of new facilities (a pproxi-mately 759 ).

1977 as Compared with 1976:

" Ope rating Ile ta nues" increased $18,113,000 in 1977 principally due to increased revenue associ-ated with the operation of a fuel adjustmtnt clause ($7,685,000), an increase in unit power sahs

( $ 3,268,000), a rate increase to New Ilampshire retail customers on December 3,1977 ($27,000,000 on an annual basis) ami an increase in prime energy sales.

"Fuct Exp4 ae" increased $15,619,000 in 1977 because a larger percentage of total power supply was generated in Company-owned fossil fuel plants (approximately 499 of the total amount) and due to increases in the unit costs of coal and oil (approximately 219 ), and also because of the inven-tory adjustment referred to in Note 15 to Statement of Earnings (approximately 309 ).

"Other Opcrating Expen,scs" increased in 1977 principally because of the effect of inflation on wages, supplies and services, employee benefits, and additi<>nal cost for transmission services associated with additional power purchased.

"JIaintenance Expous" increased in 1977 principally due to increased costs of maintenance at lerrimack Station (approximately 129 of the total increase) and because of the effect of in ation o

on wages and materials (approximately 489 ) and on costs of annual maintenance at all generating stations (approximately 409 ).

"Pederal and State Tarts on Income" decreased $1,334,000 in 1977 primarily due to a decrease in taxable income.

"Other Tara, Principany Property Taxes" increased in 1977 due primarily to higher real estate property tax rates.

" Allowance for Equity Funds Used During Construction" and ".lllowance for Borrowed Funds Used During Construction" increase 1 substantially in 1977 due to (1) an increase in the Company's construction program, primarily the Seabrook nuclear plant and (2) the effect of compounding of AFUDC semi-annually, effective February 1,1977 as permitted by Ftderal Power Commission Order No. 561. See Note D to Statement of Earnings.

17 3Q'Zy

OPERATING STATISTICS Twelve Months bded Year Ended December 31, Nr 31, 1979 1978 1977 1976 1975 1974

&lWil Generated and Purchased - Net Generated by Water l'ower 254.521 291,972 332,523 325,701 335,501 347,129 Generated I.y Fuel 4,*97,733 3,849,553 4,033,704 3,596,002 3,669,500 3,385,098 Total Generated 5,156,254 4,141,325 4,366,227 3,924,703 4,u05,321 3,732,227 Power Purchased - Nuclear Affiliates 623,743 674,337 629,116 670,994 618,757 530,129 Other Power Purchand and Interchanged 727,003 1,374,045 999.0s2 1,092,414 819,437 1,135,423 Total Generated and Purchased 6,507,000 6.190,107 5,934,4 3 5,635,111 5,443,545 5,400,779 1)isposition of 31Wil Output Hold 6,050,541 5,752,784 5,556,378 5,256,507 5,055,673 5,054,271 Used by the Company 25,393 22,734 15,217 13,476 13,047 23.821 At+>rbed in Deinery 123,026 414,% 9 392.830 335,129 374,S25 322,637 Total Output 6,507,000 6,190,107 5,994.425 5,6n,111 5,4 5 3,54$

5,400,779 A!WIIHoll Residential 1,732,775 1,765,553 1,709,524 1,G6,950 1,552,212 1,552,714 Indust rial 1,$30,70 1,743,131 1.563,0 4 1,539,4s9 1,396,957 1,470,307 Unit Power 502,409 364,735 M 5,755 372,321 524,831 502,715 Wholesale, Commercial and Other 1,934,644 1,w75,315 1,763,027 1,697,717 1,581,673 1,529,535 Total 51Wil Hvid 6,o30,531

, 5.N,7H 5,5 6,37s 5,236,507 5,u55,6 73 5,054,271 thurces of 1:lectric Revenue (Thousands of Dv!]ars)

Residential Hales

$ 101,713 $ 94,331 $ 81,551 $ 77,153 $ 72,167 $ 57,566 Industrial sales 69,919 63,565 44,878 45,361 42,049 34,807 Unit Power Na!es 11,523 9,104 10,297 7,029 9,130 6,746 Wholesale, Conauercial and Other 89,wo9 62,549 69,27%

63,392 55,992 44,742 31iscellaneous Operating Revene 8,141 7,202 4,783 3,739 7,055 11,769 Total Electric Rese:aes

$ 231,135 $ 260,751 $ 214,737 $ 196,674 $ 136,393 $ 155,930 Electric Custono rs (End of Period)

Residential 247,503 244,003 239,530 232,358 226,215 221,737 In lust rial 1,093 1,080 1,046 1,018 987 982 Unit Power 1

1 1

1 1

1 Wholesale, Commercial and Other 31.915

' 1,766 30,%71 30,115 29,06s 28,853 Total Electrie Customers 250,512 2 76,=55 270,743 263,492 256,471 251,573 Diversity of Industrial Revenues Textile Product s 3.4%

3.7%

3.9%

4.1%

4.5%

5.6%

Paper Products 17.5 17.2 16.5 16.5 15.7 17.9 Leather Products 2.9 3.0 3.2 3.4 3.6 3.5 Chemicals 9.7 9.3 9.0 8.3 7.9 8.1 Other Non Duralde Products G.9 7.4 7.9 7.6 7.7 7.5 Total Non-Durable Products 40.4 40.6 40.5 40.2 39.4 42.6 5!nchinery 17.0 16.3 16.3 15.2 14.M 14.7 Other Durable Produets 13.2 13.2 13.0 12.4 12.1 12.0 Total Duralde Products 30.2 30.0 23.3 27.6 26.9 26.7 Total llanu facturing 70.6 Vii 69.s 67.5 66.3 69.3 Cocauercial and service 29.4 29.4 30.2 32.2 33.7 30.7 Total 100.o 5 100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

Customer Statiatics ( Annual)

Average Customrrs - Residential 245,113 212,416 236,453 230,390 224,% 6 220,937 Aseragr KWH Per Customer - Resid ntial 7,273 7,233 7,230 7,279 6,902 7,028 As era ge Rate - t 'ents Per RWil Residential 5.71 5.57 4.74 4.60 4.65 3.73 Indu st rial 3.52 3.65 3.10 2.95 3.01 2.37 Other Utilities 3.50 3.00 3.07 2.85 2.44 2.12 Ascrage Acnual Bill-- Residential

$414.96

$ 105.63

$344.90

$33 4.58

$300.90

$261.91 Average Nucirar Fuel Cost per KWH G nerated 0.39739 0.363 4 0.3151t 0.25599 0.3506f 0.2245(

Average Pussil Fuel Cost per KWII Generated 1.9629(

1.8701c 1.7575v 1.6540(

1.5944f 1.2902t 18

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e

IlUSINESS Power Supply and Properties.

The electric properties of the Company form a single integrated system including transmission facilities which are part of the New Lngland-wide transmission grid. The maximum one-hour prime peak load "xperienced to date by the Company's system was 1,173 net 31W on February 13,1979. At that time the Company had available to meet such load 1,154 31W of its own generating capacity,97 31W from its participations in the four Yankee nuclear generating companies described below under

" Joint Projects" and 217 31W of purchased (apacity. Ilecause the generation and transmission systems of the major New England utilities, including the Company, are operated as if they were a single system, the ability of the Company to meet its load is dependent on the ability of the New England utilities to meet the New England load. See "New England Power Pool" below.

The Company has one coaldired 456 31W electric generating station (3ferrimack Station), from which the Company has agreed to sell to another utility 100 31W on a single unit basis from Unit #2 through April,1998, and four oil-fired electric generating stations with an aggregate effective capability of 64131W, consisting of the Newington plant (420 31W), the Schiller plant (180 31W) and two smaller plants. See " Environmental 31atters" below. The availability of the two units at 31errimack Station, the Company's largest fossil fuel station, has been less than desired due to forced outages caused by both the boilers and the turbines. However, the availability record of the Station is roughly comparable to that of other coal-fired generating plants of similar age and design.

The Company also has other gencrating facilitios with an aggregate effective capability of 162 31W as follows: hydro-electric (" 31W), combustion turbine (111 31W) and diesel (3 31W). The Company has participations with other New England utilities in five generating units recently com-pleted, under construction or in design stages, including the two Seabrook units. See " Construction Program", and see " Joint Projects" and "Seabrook Nuclear Project" below.

Tho Company purchases capacity and energy from other utilities as necessary, together with its own generating capacity, to meet its load growth and its reserve obligations under NEPOOL dis-eussed below. These purchases are expected to increase from 217 31W to approximately 454 31W by April.1983 when Seabrook Unit =1, in which the Company's reduced interest will be 322 31W, is currently scheduled to be completed and to reduce substantially the need for such purchases. See

" Problems Facing the Company" New England Power Pool.

A New England Power Pool Agreement ("NEPOOL") to which the major investor-owned utilities in New England, including the Company, and certain municipal and cooperative utilities are parties, has been in effect since 1971. This Agreement provides for joint planning and operation of generating and transmission facilities and also incorporates generating capacity reserve obligations and provisions regarding the use of me.or transmission lines and payment for such use.

Substantially all planning, operation and dispatching of electric generating capacity for New England is done on a regional basis under NEPOOL. At the time of the 1978-19m NEPOOL winter peak, the New England utilities had about 21,500 31W of installed capacity to meet the New England peak load of about 14,956 31W.

The Company's capability responsibility under NEPOOL involves carrying an allocated share of a New England capacity requirement which is determinal for each period based on certain regional

q. c,,- w m 19 UNM 1

reliability criteria. It is expected that the Company's capacity will be sufficient through its own generating facilities, its participations and through purchases to meet its NEPOOL obligations in the foreseeable future.

Joint Projects.

The Company is a part owner with other New England electric utilities of four nuclear generating companies. The Company owns a 7% interest in Yankee Atomic Electric Company, a 5% interest in Connecticut iankee Atomic Power Company, a 59 interest in 3faine Yankee Atomic Power Company and a 49 interest in Vermont Yankee Nuclear Power Corporation, each of which owns an operating nuclear generating plant with present net capabilities of 175 31W,575 31W,7813RV and 528 3nV, respectively. The stockholders of each of the four nuclear generating companies are entitled to the entire output of the plant in proportion to their rupective ownerships, and are obligated to pay their proportionate shares of the generating company's operating expenses and return on invested capital.

The Company is participating on a tenancy-in-common basis with other New England utilities in the ownership of five other generating units. One of these, Wyman Unit #4, a 600 31W oil fired genere'ing unit in 3faine in which the Company has a 3.1433% interest, commenced operation at full capacity in February,1979; the other units are planned or under construction as follows:

Company Share Estimated Construction Cost (3)

Completion Capacity Capacity Total Per Type Date (1)

(MW)

Percent (2) (MW)(2)

(Millions)(2)

KW Seabrook #1 & #2 Nuclear 1983 & 1985 2,300 28.0000 644.0

$ 869.6

$1,350 (New IIampshire)

Pilgrim #2 Nuclear 19S6 1,150 3.4700 39.9 69.5 1,742 (3fassachusetts) 3fillstone #3 Nuclear 19S6 1,150 3.8910 44.7 102.0 2,282 (Connecticut)

(1) The completion dates of the four nuclear units have been deferred from time to time and addi-tional deferrals may occur due to licensing delays, economic conditions and other factors.

Due to the time required for the construction of generating facilities and the completion of licensing and regulatory procredings relating thereto, substantial investments in the above units will be required prior to the completion of licensing and regulatory proceedings. There is no assurance that all necessary approvals, permits or licenses will be obtained, or if obtained, will not be mmlified or revoked. See " Industry Problems" (2) See " Problems Facing the Company" for information concerning the proposed reduction of the Company's inter (st in Seabrook to 28% and sale of the Company's interests in Pilgrim #2 and 3fillstone #3. In connection with such reduction, the Con.pany may acquire up to a 5.2fc interest in a 568 3DV coal-fired unit planned for construction by Central 3faine Power Company at Sears Island, 3Iame. If the Company's ownership interio in Seabrook should remain at 50%, the capacity would be 1,150 31W and the estimated total cost, $1,429,600,000.

20 N*Nb

(3) Including the cost of the initial nuclear fuel and AFUDC on the estimated costs of unfinished construction not included in the Company's rate base. AFUDC was discontinued on December 3, 1977 on the portion of untinished construction included in rate base. For purposes of this table such portion of unfinished construction has been excluded from rato base effective May 7,1979 and it has been assumed that AFUDC will be capitalized thewafter on all unfinished construc-tion. See Note D to the Statement of Earnings for a discussion of AFUDC.

Estimated construction expenditures for the jointly owned units used in calculating the estimated cost per KW are based upon information furnished by the utility responsible for the construc-tion of such unit. The Company has been advised by each of the sponsoring utilities that con-struction budgets are continuously under review in light of increased costs due to deferrals, delays and other factors. The estimated expenditures and completion dates of the nuclear units may abo be affected by the licensing and regulatnry proceedings relating to each unit and to nuclear power generally and may also be affected by events and conditions which cannot now be predicted.

Seabrook Nuclear Project.

The Company is the had owner of the Seabrook project now unde-eanstruction in Seabrook, New IIampshire and has entered into contracts covering the purchase of equipment and services in connection with the project. The project is planned to consist of two Westinghouse pressurized water nuclear reactors utilizine ocean water for condenser cooling purposes. Other owners of the project presently include The United Illuminating Company ("UI") (207F), New England Power Company (109 ) and a number of other utilities with smaller participations. UI has made available for sale to other utilities one-half of its 20% ownership interest in accordance with a recommendation of the Connecticut Department of Business Itegulation - Division of Public Utility Control contained in a recent rate decisien; however, the UI offering has not been fully subscribed. See " Problems Facing the Company" for information concerning the proposed reduction of the Company's ownership interest in the project.

The project has required numerous approvals and permits from various state and federal regu-latory bodies consisting principally of a certificate authorizing construction of the plant (which incor-porates related state permits) from the New IIampshire Public Utilities Commission ("NHPUC")

under New Hampshire's power plant siting law; approval of the once-through cooling system for the project by the Envirenmental Protection Agency (" EPA"); and construction permits from the Nuclear Itegulatory Commission ("NRC"). All of these apprtwals and permits have been obtained and, except as thseribed below, there are no appeals or proceedings relating thereto. Construction of the project is continuing and at July 31,1979, Unit =1 and the portion of the project common to both units were 23.4% complete and Unit =2 was 4.49 complete.

The process of obtaining these approvals and perow has been long and complex, has been con-sistently opposed by a number of interv(ning groups, has included demonstrations at the Seabrook site, and has been plagued by lengthy delays which have resulted in greatly increased costs for the project. Court appeals from these federal regulatory approvals have been decided in the Company's favor, but one appeal described below is still pending and further appeals are possible. The Company is unable to predict what effect adverse legislative action, financing problems, work stoppages or 21 e

,G M m

JU

further administrative or court decisions relating to NHPUC, NRC or EPA action. may have on the eo npletion of the project, on the cost of the project or on the Co.pany. See " Problems Facing the Co npany" and " Construction Program" XHPUC. The state siting proceedings began in 1972, involved lengthy hearinga dering 1972 and 1973 and culminated in inuance of the rtquisite certificate on January 29,1974. A subsequent appeal to the New Hampshire Supreme Court resulted in a romand for further findings but did not invali-date the certificate. The supplemental findings were issued on December 30,1975; no further appeals were taken. Pniecedings before the NHPUC and the New Hampshire Site Evaluation Committee are pending on the Company's petition seeking modification of thc certificate to reflect the extension of the cooling water intake tunnel ordered by the EPA, transmission line rehications ordered by the NRU, and certain other transmission line reh> cations.

XRC. The NRC proceedings commenced with the docketing of the application for construction permits on July 9,1973. The hearings before an Atomic Safety and Licensing Board (the " Licensing Board"), in which seven intervenors in opposition participat 2d, consumed over sixty days during 1975 and 1976 and culminated on June 29,1976 in the issuance by the Licensing Board of its Initial Deci-sion (one member dissenting), approving the issuance of construction permits for the Seabrook project.

The NRC issued the permita on July 7,1976, and construction commenced shortly thereafter but was subsequently suspended in 1977 and 1978 for periods of seven months and three w&k, rcspectively, as a result of administrative proceedings and court appeals.

The Initial Decision was affirmed by an NRC Atomic Safety and Licensing Appeal Board (the

" Appeal Board") (with ene member dissenting) and by the NRC. The dissenting member of the Appeal Board issued his dissenting opinion which relates to the seismic issue on August 3,1979 and the Ni(C has extended the time for filing petitions to review this issue until 15 days after the issuance of any supplemental opinion by the majority of the Appeal Board or October 8,1979 at the latest.

On June 30,1978, the NRC ordered.he Appeal Boatd to conduct further hearings on whether cooling towers (rather than the once-through cooling system presently approved) would be environ-mentally acceptable at the Seabrook site and whether Seabn>ok with cooling towers is acceptable over alternate sites. On August 6,1979, the Appeal Board dismissed this proceeding as moot because no action had been taken to appeal the 31ay 2,1979 decision of the United States Court of Appeals for the First Circuit referred to below under " EPA" One aspect of the June 30,1978 order was appealed by certain interrenors to the United States Court of Appeals for the First Circuit which dismissed the appeal on May 30,1979.

There is presently pending before the United States Court of Appeals for the First Circuit an appeal by intervenors from a decision of the NRC challenging the NRC's refusal in 1976 to suspend the Seabrook construction permits despite a court decision in litigation not involving the Company which set aside the NRC's rule with respect to the environmental effects of reprocessing spent fuel and disposing of nuclear waste. (Xatural Resources Dcfen,se Cmencil, Inc. v. XRC, D. C. Cir. Nos. 74-1385 and 74-1586, which was reversed and remanded by the United States Supreme Court on April 3,1978 in Ymnont Yankte Nucitar Pmter Corporation v. Natural Rcsourccs Defcnse Council, Inc., No.76-419). Effective September 4,1979, the NRC (one member dissenting) has promulgated a new rule (which supersedes the interim rule in place since March,1977) covering the environmental impact of reprocessing spent fuel and disposing of nuclear waste. The Company believes that the 22 35'260 4

environmental effects of the fuel cycle, determined in acconlance with the new rule, art too small to affect the envinmmental cost-benefit evaluation of the project.

In 5farch,1979, after the Company announced its decision to reduce its ownership interest in the Seabrook project, an intervenor filed a request with the NRC staff for issuance of a show cause order as to why the construction permits shouhl not be suspended or revoked because of the Company's alleged lack of financial qualifications and lack of review of financial qualifications of the partici-pants whose ownership interests are proposed to be inertasol. The staff on April 6,1979, gave public notice that it would tt ke action on that rtquest within a reasonable time. The staff had previously asked the Company to furnish further details of its financial plans, which were filed on April 23, 1979. On 31ay 2,1979 the same mtmenor tiled a further request with the NHC staff for issuance of a show cause onler as to why the construction permits should not be suspended or revokal because of the NitC's failure to require development of evacuation plans beyond the low population zone and to evaluate the conse quences of certain types of necidents including the possibility of such evacuation.

The Company cannot predict when the staff will act on either request or what actions it will take.

Before either of the Seabrook units can be put into operation, the Company must obtain the rnpiisite operating license from the NitC. The Comi>any intends to file the necessary applications therefor in mid-1981 well in advance of the projected in-service date for Unit #1; however, the Company cannot predict the extent of the regulatory proceedings which will result or their outcome.

El'A.

Under the Federal Water Pollution Control Act, as amended, the EPA has jurisdiction over discharges from the cooling system of the Seabrook plant. In August,1974, the Company applied to EPA for approval of the once-through cooling system utilizing ocean water and, in June and Region I of EPA approved the concept subject to October,1975, the regional administrator i

extending the intake tunnel further offshore. After a further hearing resulting from a court remand, the EPA Administrator on August 4,1978 reaffirmed his previous approval of the once-through cool.ng system and that decision was afilrmed by the United States Court of Appeals for the First Circuit on 3 fay 2,1979. The period for seeking further review has expired.

Othcr. The Company is also involved in proceedings or disputes concerning title to a portion of the Seabn>ok site, the undergrounding of the Seabrook transmission lines and the use of the Com-pany's water wells on the Seabrook site. The Company believes that none of these matters will have a material adverse effect upon the Seabrook project.

Insura nce. The Federal Price-Anderson Act provides, among other things, that the maximum liability for damages resulting from a nuclear incident wov 1 be $560 million, to be provided by private insurance and governmental sources. As required by NRC regulations, prior to operation of the Seabrook project, the owners of the Seabrook project will insure against this exposure by pur-chasing the maximum available private insurance (presently $100 million), the remainder to be cov-ered by the recently implemented retrospective premium insurance and by an indemnity agreement with the NRC. Under recent amendments to that Act, owners of operating nuclear facilities may be assessed a retrospective premium of up to $5 million for each reactor owned in the event of any one nuclear incident occurring at any reactor in the United States, with a maximum assessment of $10 mil-lion per year per reactor owned. As a part owner of other operating New England facilities (see

" Joint Projects" above), the Company would be obligated to pay its proportionate share of any such assessments, which presently amounts to a maximum of $1,050,000 per incident. While it is not yet 23 352261

possible to evaluate the claims being asserted as a result of the T31I incident, the Company does not anticipate any assessments being levied under these provisions as a result of that incident.

Regulation.

The Company, as to retail rates, security issues. and various other matters, is subject to the regulatory authority of the NHPUC. A management audit report prepared by an independent management consulting finn at the direction of the NIIPCC was released on October 11,1978, and identifies both management strengths and opportunities for improvement and makes certain recom-mendations for action. Among the significant strengths identified are the following: tight control of staff levels and employee compensation, sound financial planning, sound management of the Seabrook project, and a strong transmission and distribution system planning and engineering function. Ac-cording to the report, the more significant opportunities for improvement are in the following areas:

the overburdening of top management, correction of operating problems at 3ferrimack Station, fuel procurement and storage, and public relations. In addition to recommending expansion of the top management group by the creation of several new executive positions, the report recommends reor-ganization and strengthening of the fuel management function, strengthening of the public affaim function, and a comprehensive review of 3ferrimack Station operations. The NHPUC requested the Company to comment oc. tie audit report and to state how it proposes to implement the report's recommendations, and the Company has filed a detailed response with the NHPUC.

As to properties and business in 3faine and Vermont, the Company is subject to the regulatory authority of the Public Utilities Commission of 3Iaine ("31PUC") and the Vermont rubbe Ser.

vice Board, respectively. Additionally, both the Connecticut Department of Business Regulation-Division of Public Utility Control and the 3fassachusetts Department of Public Utilities have limited jurisdiction over the Company based on the Company's ownership as a tenant-in. common of portions of the 31illstone #3 and Pilgrim #2 nuclear units. See " Joint Projects" above. The Company is also subject, as to some phases of its business, including accounts, certain rates, and licensing of its hydro-electric generating plants, to the jurisdiction of the Federal Energy Regulatory Commission

("FERC") under the Federal Power Act. The various nuclear generating units in which the Com-pany has an ownership interest are subject in their construction and operation to the broad regulatory jurisdiction of the NRC under the Atomic Energy Act of 1954, particularly in regard to public health, safety, environmental and antitrust matters. See also " Environmental 3fatters" below.

Rates - New Hampshire Retail.

On 3 fay 25,1978, the NHPUC granted the Company an increase in its New Hampshire retail rates of approximately $30,000,000 on an annual basis based on a test year ending in April,1977.

The order allowed the Company a return on common equity of 149, an overall rate of return of 10.199, and included in rate base CWIP associated with major generating facilities. The order of the NHPUC was affirmed by the New IIampshire Supreme Court on 3Iay 17,1979. The ratas filed with the NHPUC in April,1977 were p! aced in effect on December 3,1977 subject to refund; under the NHPUC's 3 fay 25,1978 order, no refunds were nemsary. On 3f ay 17,1979 the New Hampshiro Mpreme Court decided that the Company had unlawfully applied the new higher rates to bills rendered after December 3,1977 for service rendered before that date, and the Company has been ordered by the NHPUC to make refunds to its New Hampshire retail customers, estimated at approxi-mately $1,000,000.

24 w

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Q Lo

On 3 lay 7,1979 a New Ilampshire statute prohibiting the inclusion of CWIP in the Company's rate base became effective. The NIIPUC has ordered the Company to eliminate CWIP from its rates but has indicated that the removal of CWIP couhl not he accomplished without a concurrent reexamina-tion of th'. utire revenue question and noted its preliminary conclusion that the exclusion of CWIP by inct usir, b overall risk to investors justifies an overall rate of return to the Company higher than th. i v. owed in the 1978 proceeding.

The Company filed with the NIIPUC on August 31,1979, a new tariff intended to establish new permanent rates designed to generate revenues approximately $18,500,000 (about 8.59) on an annual basis higher than those presently in effect. These rates wou!d be based on a test year ending 3Iay 31, 1979 and in part on pro forma adjustments to reflect changes since that date, deletion of CWIP from rate base, an increase in depreciation rates for distribution plant, normalization of the income tax effect of liberalized depreciation with respect to property placed in scrvice after 1970, and a signifi-cantly higher return on common equity. See " Problems Facing the Company" The Company has a fuel adjustment clause which is designed to recover, after a two months' lag, all fuel costs above base, including the energy portion of the cost of purchased power. A hearing and prior approval by the NIIPUC is required with respect to each month's fuel adjustment rate.

In January,1975, the NIIPCC ordered an investigation into the rate structures of the electric utilities under its jurisdiction. IIcarin s began in July,1975 ard continued from time to time through 1978. While the investigation has not been concluded, the proceeding has involved only the propec distribution of ratcs among the various customers and customer classes and not overall revenue re-quirements. Pursuant to an interim order of the NHPUC issued in January,1977, the Company has implemerted peak-load pricing rate experiments involving certain of its customers. Legislation was enacted in 1978 requiring the Company to offer time of day and seasonal rates on an optional basis, and such rates have been made available to its residential customers and have been filed for its other customers.

Rates - Other.

Rates to the Company's wholesale-for-resale customers increasing revenues from these customers by approximately $3,865,000 on an annual basis became effective as of April 11, 1976. On April 28, 1978, the Company filed new rates with FERC proposed by the Company to be effective on 3Iay 29,1978 that would increase revenue from the Company's wholesale-for-resale customers by approxi-mately $2,400.000 or 7.79 on an annual basis based on a 1978 test year; the new rates went into effect subject to refund on July 29,1978. The Company has also filed with FERC a petition requesting the inclusion of CWIP in rate base. After trial of the CWIP issue, the Administrative Law Judge issued an initial decision on January 25,1979, which authorized the Company to include in rate base CWIP associated with major generating fa ilities and which allowed the Company a return on common equity of 139. That decision has been app <aled to FERC. The Company cannot place wholesale rates based on CWIP into effect unless and until FERC issues a final favorable decision on the CWIP issue.

In another proceeding before FERC, the Company's right to collect through a surcharge approxi-mately $1,850,000 of accrued but unbilled fuel clause revenue was contested by certain wholmale-for-resale customers, and FERC ruled against the surcharge and onlered the Company to refund approxi-mately $1,622,000 with interest, the balance not having been billed. FERC's decision was affirmed by the United States Court of Appeals for the District of Columbia Circuit, and the Company is seeking Supreme Court review. See Note B to the Statement of Earnings. In another phase of the same pro-25 EM@

ceeding, FERC has ordered a refund of the higher cost of spot-market purchases of coal by the Company; the Company has been granted a rehearing on the order.

Rates essentially identical to those in effect in New If ampshire prior to December 3,1977 were placed in effect in Vermont on 3 fay 1,1975, and in 3faine on 3farch 2,1976. On an annual basis, about $65,000 of additional revenues results from the Vermont increase and approximately $592,000 results from the 3f aine increase. In its decision allowing the increase to become effective in 3faine, the 3fPUC commented on the disparity between the allowed rates of the Company and those of Central 3faine Power Company (C31P), which serves adjacent territory at lower rates. The decision requested the managements of the two companies to discuss the possibility of a transfer of the Company's 3faine business to C3fP and sta ed that in the future the 31PU' might use C31P's rates as a yardstick to determine the reasonableness of the Company's rates. While preliminary discussions have been held between the two managements, no conclusions have been reached concerning the desirability of such a transfer. A complaint was fikwl with the 3fPUC in April,1976, by two 3faine municipalities and a number of their residents who are customers of the Company alleging that the Company's rates are unreasonable and discriminatory and requesting that the rates be reduced to a level no higher than the rates of C3tP. IIcarings began in December,1976, and the proceeding is still pending. In 1978 the Company obtained from its 3faine customem approximately 1.49 of its operating revenues.

On August 20,1979 the Company filed with the 31PUC a petition requesting an urgently neces-sary temporary rate adjustment for its 3faine customers, which would increase revenues approximately 99 or $340,000 on an annual basis. The Company also notified the 31PUC that it would be filing for a permanent rate increase by October 31, 1979. The Company has requeded prompt action by the 31PFC but cannot predict if or when these new rate-will go into effect.

The Company intends in the near future to offer for ~ae its business and properties in Vermont, the revenues from which in 1978 amounted to approximately $672,000, or about.25% of the Company's operating revenues.

Fuel Supply.

Por the twelve months ended June 30,1979, the Company's firm net output was derived 499 from oil, 389 from coal, 79 from nuclear, and 69 from hydro. As indicated above under " Power Supply and Properties" and "New England Power Pool", substantially all of New England's genera-tion and transmission systems, including those of the Company, are operated as if they were a single system.

Oil. The New England electrie utilities, including the Company, make greater use of fuel oil for generation of power than those in any other region of the country. 3fost fuel oil supplies of the New England utilities are derived from foreign sources and are subject to interference by foreign governments and price increases. The Company has a contract expiring on December 31,1979 with a supplier for fuel oil for the Company's oil-fired plants and the Company is currently soliciting bids for the 1980 supply of fuel oil. The storaec capacity for the Company's two large oil-burning plants is approximately 30 days operating at full load, and inventory varies substantially depending upon oil shipments. During 1979, the average inventory through June 28,1979 was approximately 14 days operating at full load. The two small plants have limited storage capacity. See " Environmental Afatters" Irlow.

Coal. Coal for the Company's only coal-burning unit, the 456 31W 3ferrimack plant, is presently being furnished from West Virginia sources under a contract which expias in April,1983. The 26 Jt

.%ux.m.4 e

contract generally provides that a 45-day supply of coal is to be maintained for the Company, that the base price of the coal may be changed by the seller annually but the Company's disagreement with the change will result in termination of the contract at the end of the year, and that the price of the coal is subject to certain adjustments for changes in the seller's costs. The Company's policy is to maintain a 60-day supply of coal on hand for the 31errimack plant; at August 18,1979, a 71-day supply was on hand. The plant, with 119 31W and 337 31W units, presently requires a total of approximately 1,000,000 tons of coal per year. Future annual tonnage requirements of the Company may be more or less than that figure depending upon a number of variables including particularly the relative cost and availability of coal and other fuels and possible conversion of units presently burning oil. See

" Environmental 3Iatters" below.

The Company's approximate average coats of oil and coal for 1973 through July 31,1979 were as follows:

Coal Oil Per Oil Per Coal Per CoalPer Spot Price Barret 31illion BTU Ton 31illion BTU Per Ton 1973

$ 3.75

$0.61

$13.78

$0.51 1974 11.32 1.83 21.97 0.82

$40.67 1975 11.49 1.88 32.55 1.24 37.50 1976 10.95 1.77 34.33 1.25 35.27 1977 12.97 2.09 35.54 1.31 1978 12.13 1.95 39.09 1.47 38.54 1979 (through July 31) 13.80 2.21 40.89 1.51

• No spot purchases by the Company during the period.

Nucl(ar. The cycle of production of nuclear fuel consists of (1) the mining and milling of uranium ore, (2) the conversion of uranium concentrate to uranium hexafluoride, (3) the enrichment of the uranium hexafluoride, (4) the fabrication of fuel assemblies and (5) the reprocessing, storage, or disposal of spent fuel.

With respect to the Seabrook units, the Caapany has long-term contracts for enrichment. The Company also has contracts for conversion services and for the fabrication cf the initial cores and six reload regions (each region consisting of one-third of a complete core). Thete contracts are expected to meet the Company's requirements for fuel cycle services as follows: enrichment through 2008, conversion through 1987, and fabrication through 19S6.

The Company has con *racted for all of the uranium concentrates required to commence operation of the Seabrook units an6 is actively seeking additional sources thereof, which it expects will be avail-able when needed. The Company has no contractual arrangements for reprocessing of spent fuel and there are no reprocessing facilities currently operating in the United States; President Carter has stated the position of his Administration to be that the United States should defer indefin:tely com-mercial reprocessing and the recycling of spent nuclear fuel. If such services are not available when required for the Seabrook units, the spent fuel can be stored pending reprocessing or disposal.

Although the cost of such storage is not known at the present time, it is anticipated that such cost would be substantial. The Company cannot predic, _ this time what difliculties will be encountered regarding disposal of nuclear wastes. The NRC, along with other federal agencies, is in the-process of developing regulations and guidelines in this area. The Company expects to develop plans for the disposal of its nuclear wastes after pmmulgation of these regulations and such plans will be subject to regulatory approvals.

27

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The Company ha.s been advised by the companits operating, planning or constructing the other nuclear generating stations in which the Company has an interest that they have contracted for certain segments of the nuc! car fuel production cycle through various dates. The Company has further been advised by the sponsors of the four operating nuclear generating stations that they have or will have storago capacity to meet the spent fuel storage needs of the units through various dates ranging from 1955 to the late 1990's. Contracts for other segments of the fuel cycle will be required in the future, and their availability, prices and terms cannot now be predicted.

National Energy Policy.

A national encrgy net was recently enacted dealing with coal conversion, gas deregulation, energy conservation, energy taxes and utility rate regulation; the effect of this act on the Company, including its rates and fuel supply, cannot be predicted at this time.

Enrironmental Statters.

The Company is subject to regulation with regard to air and water quality, and may b( subject to regulation with regard to other environmental considerations, by various federal, state and local authorities. The Company cannot foreca.st the effect of all such regulations upon its generating, trans-mission and other facilities, or its operations.

The application of federal, state and local standards to protect the environment, including but not limited to those hereinafter described, involves or may involve review, certification or issuance of permits by various federal, state and local authorities. Such standards, particularly in regard to emissions into the air and water, thermal mixing zones and water temperature variations, may halt, limit or prevent operations, or prevent or substantially increase the cost of construction and opi ration of installations and may require substantial investments in new equipment at existing installations.

They may also require substantial investments above the flgures stated under " Construction Program" for proposed new projects.

stir Quality Control. Pursuant to the Federal Clean Air Act of 1970, as amended, the State of New Hampshire acting throuch the New Hampshire Air Pollution Control Commission ("APCC")

has adopted regulations containine standards limiting emissions of particulates, sulphur oxides and nitrogen oxides, which are gem rally designed to achieve and maintain Federal primary ambient air quality standards. The Company's fos.sil fuel generating units are being operated in compliance with APCC's regulations.

Pursuant to the 1977 amendments to the Clean Air Act, the APCC has proposed lists showing those areas of New Hampshire which have attained or failed to attain national ambient air quality standards, has reviewed the State implementation plan, and has filed a revised State implementation plan with the EPA. It does not appear that any of the revisions in the State implementation plan will require the Company either to modify operations at any of its fossil fuel generating plants or expend funds for additional air polhttion contnd equipment.

While coal now aval.able and expected to be available in the future for the Company's Merrimack Station presently meets all applicable requirements, if mee stringent requirements become effective which could not be met by such coal, the Company might haw to install sulphur removal equipment at substantial capital co.st or take such other actions as may be required by r(gulatory authorities. The installation of such equipment would increase operating costs and reduce the net capability of the units.

"S c -) o o m mE 440t2

In August,1976, a hearing by the Federal Energy Administration (now the Department of Energy) was held on the draft Environmental Impact Statement relative to a prohibition order issued by the FEA under the Energy Supply and Environmental Coordination Act of 1974 prohibiting two 50 MW units of the five units at the Company's Schiller Station from I urning oil as their primary fuel. On 31ay 7,1979, the Department of Energy notified the Company that it was rescinding the prohibition or !er, which had never become 4 freetive; however, further actim to require conversion to coal might be taken by the Department under the Fuel Use Act of 1978. On July 2, 1979 the NilPUC ordered hearings to commence September 4,1979 in an insestigation to determine whether any of the five Schiller Station units should be converted from burning oil to burning natural gas or coal. Any conversions from oil to coal would require substantial expenditures and reduce the capability of the units affected.

Water Quality Control. The Company has received from EPA, or from the Maine Department of Environmental Protection in the case of one generating station located in the State of Maine, all permits required under the Federal Water Pollution Control Act, as amended, for discharges of thermal and other effluents from its generating stations. Such permits have varying expiration dates and the Company has made and expects to make timely applications for renewal. The EPA issued enluent limitations guidelines for steam electric power plants based on application of the best practicable control technology (to be met by July 1,1977) and of the best available technology (co-nomically achievable (to be met by July 1,1994), and alternate effluent standards O.h respect to thermal discharges from steam electric power I ants. The guidelines and standards impose rigorous d

limitations upon the industry. An industry group tlled an appeal in a Federal Court of Appeals challenging the guidelines and standards, and the Court of Appeals rtmanded the guidelines and standards to the EPA for reconsideration of certain of them. The Company is in complianet with the July 1,1977 guidelines.

The discharge permit for the Company's Newington phat contains conditions requiring installa-tion of some type of close 5eyele condenser cooling system if ac exemption is not obtained. 'I he Com-pany has been studying the effects of the plant's operation on the aquatic environment of tl e Pisca-taqua River and will apply to EPA for an exemption to permit entinuation of the present once-throuch cooling. While it cannot be known what action EPA wih takt a 2; plication when filed, the Company believes that the results of its studies will support the granting of such ex(mption. If the Company should be unable to obtain such re quested exemption, it would have to make substantial capital expenditures to install the closed-eyele condenser cooling system.

Pursuant to a requirement in its discharge permit for its Merrimack plant located on the Merri-mack River, the Company is studying the effects of the plant's operation on the aquatie environment of the Merrimack River and expects to be able to show, as required by the permit, that discharges from the present once-through cooling system either are in compliance with the thermal limitations in the permit or will not interfere with the resident and migratory fish in the affected portion of the Merrimack River.

The Company's construction and operation of the Seabrook plant, including environmental con-siderations, is subject to regulation by the NRC and the EPA. See "Seabrook Nuclear Project" ab3ve.

Othe r Enrironmental Expenditura. The Company's capital expenditures for environme,tal protection facilities amounted to approximately $12,613,000 for 1978, the major portion of which was 29 onyn r 9 Uki.o o q

for f acilities to reduce the thermal effect of the discharge of the Scabrook plant condenser cooling systems, with $250,000 for the control of water pollution at other Company facilities.

For the years 1979 and 1980 rnd for the years 1981-1982, there will be approximately $8,500,000,

$7500,000 and $7,500,000, respectively, of further expenditures for these pollution control facilities.

The foregoing amounts are included in the construction expenditures set forth under the caption

" Unadj usted 197919S5"in the table under " Construction Program." Any expenditures associated with the conversion at the Schiller Station referred to above would be in addition to these amounts.

Fmplayees, Salaries and frages.

The Company has approximately 1,730 employees, of whom 359 are represented by unions with which the Company has contracts. Su a contracts became effective.Iune 1,1979, and will expiro on July 31,1991. The contracts refleet u 7.59 general wage increase effective.Iune 3,1979 and an addi-tional 7.99 increase effective. lune 1,1980. Increases comparable to the June 3,1979 increase ta union-represented employees will be granted to non-represented employees.

Voluntary frage and Price Guidelines.

The Company is subject to the voluntary Wage and Price Standards of the Federal Council on Wage and Price Stability, which provide basically that annual increasm of wages and benefit pay-ments should not exceed 79 and that prices should not he increased during 1979 more than.5 of 1%

below the average annual rate of increase during 1976-1977. The regulatory agencies are asked to assure compliance to the fullest extent possible. The Company is unable to predict what effect these standards will have upon its operations in the future.

Siunicipalities and Cooperatives.

New Hampshi e law permits municipalities to engage in the production and sale of electricity, including the power to condemn the plant and property of any existing public utility which is located in the municipality. Under legislation enacted in 1975, intended primarily to enable all electric sys-tems (including municipalities) to participate in regional bulk power supply projects, New Hamp-shire municipalities now have broader powers with respect to contracting and extra-territorial activity, as well as the power to finance through the issuance of revenue bonds the ownership of new generating units of at least 25 MW and new transmission facilities of at least 69 KV. The City of Berlin took preliminary action in 1969 and 1970 authorizing the City to engage in the production, distribution and sale of electricity, but the matter has not been finally determined. The Company's revenues from salm in the City of Berlin in 1978 were about $6,220,000 including revenues of about $3,229,000 from a single large industrial customer. If the City of Berlin were to acquire ownership of the Company's property, the Company wouhl be entitled to compensation for the fair valae of its property and any severance damages. No other municipality served at retail by the Company is, so far as is known to the Company, taking steps to engage in such business.

New Hampshire Electric Cooperative, Inc., a cooperative association financed by the Rural Elec-trifleation Administration, as well as five small municipal electrie utilities, operate in areas adjacent to areas served by the Company. The Cooperative purchases most of its electricity from the Compans and is subject to regulation by the NHPUC as a public utility 30 952268

ItEPOllT OF INDEPENDENT CEltTIFIED PUllLIC ACCOUNTANTS The Board of Directors Punue SERVICE COMPANY OF NEW llAMPSIIIRE We have examined the balance sheet of Public Smice Company of New Hampshire as of Decem-her 31,1978 and the related statements of earnings, retained earnings, other paid-in capital and changes in financial position for each of the five years in the period then ended. Our examinations were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the aforementioned financial statements present fairly the financial position of Public Service Company of New IIampshire at December 31, 1978 and the results of its operations and the changes in its financial position for each of the five years in the period then ended, in con-formity with generally accepted accounting principics applied on a consistent basis.

PErr, 3fARWICK, MITCIIEIL & CO.

Boston, Massachusetts Peternary 16,1979, except as to Note 8, which is as of March 5,1979 b[$22Ij9 31

PUBLIC SEllVICE CO31PANY OF NEW IIVIPSIIIILE BALANCE SIIEET ASSETS July 31, December 31, 1979 1978 (Unaudited)

(Thousands of Dollars)

Utility Plant, at Original Cost (Note 1):

Electric Plant

$516,3GO

$507,711 Less Accumulated Provision for Depreciation 142,979 134,373 373,381 373,338 Unfinished Construction (Principally Nuclear Generating Projects)

(Note 8) 432,405 346,382 Net Utility Plant 805,78G 719,72)

Investments (Note 1):

Nuclear Generat. g Companies 9,670 9,529 Ileal Estate Subsia ary 4,188 4,472 Other, at Cost 184 184 Total Investments 14,042 14,185 Current Assets:

Cash (Note 3) 2,177 1,879 Accounts Iteceivable 24,132 27,588 Unbilled Revenue, Estimated (Note 1) 19,328 18,057 Fuel,3faterials and Supplies, at Cost 24,2SS 20,743 Prepayments 1,170 3,330 Total Current Assets 71,095 71,597 Other Assets:

3fiseellaneous Properties 453 314 Deferred Debits 6,237 5,h59 Unamortized Debt Expense 995 92G Total Other Assets 7,675 6,599

$S98,598

$812,101 See accompanying Notes to Financial Statements.

32 SE22r/0

PUBLIC SERVICE CO.TIPANY OF NEW ILUIPSIIIRE IIAIANCE SilEET CAPITALIZATION AND LIABILITIES Capitalization:

July 31 December 31, 1979 1978 Common Stock Equity:

Common Stock - $5 Par Value (Note 5)

(Unaudited)

W">u.and. of Dollars)

Authorized: 18,000,000 Shares Outstanding: 13,845,472 Shares (1978 - 0,786,969)

$ 69,227

$ 48,035 Other Paid-in Capital 165,140 108,232 Retained Earnings (Note 6) 69,Caa

1. 1,140 Total Common Stock Equity 3(M 0+>

'">8.307 Redeemable Preferred Stocks (Sinking Fund) (Note 4):

Disidend l'ar Value Sharen Outstanding 7.64 9

$100 120,000 12,000 12,000 9.00fb

$100 180,000 18,000 18,000 11.24 9

$ 25 1,200,000 (1978-None) 30,000 Total Redeemable Preferred Stocks 60,000 30.000 Non-Redeemable Preferred Stocks (Notes 4 and 5):

Disidend Par Value 5 hares Outstanding 3.35 9

$100 102,000 10,200 10,200 4.50 9

$100 75 000 7,500 7,500 5509

$100 49,217 (1978-5S,C22) 4,922 5,862 7.92 9

$100 150,000 15,000 15,000 11.00 9

$ 25 000,000 15.000 15,000 Total Non-Redeemable Preferred Stocks 52,622 53,562 Long-Term Debt - Net (Note 7) 261,211 287,252 Current Liabilities:

Notes Payable-Banks (Note 3) 72,100 85,325 Long-Term Debt to be Retired Within One Year (Note 7) 27,216 5,231 Accounts Payable (Note 3) 47,756 68,035 Dividends Payable 9,704 Accrued Taxes 12,444 12,349 Accrued Interest 8,541 6,215 Other 1,247 1,145 Total Current Liabilities 179,00s 178,300 Deferred Credits:

Accumulated Deferred Investment Tax Credits (Note 1) 13,744 12,488 Accumulated Deferred Taxes on Income (N >te 1) 27,469 21,716 Other 522 476 Total Deferred Credits 41,735 34,660 Commitments and Contingencies (Note 5)

$698,598

$812.101 See accompanying Notes to Financial Statements.

cM.-. md.

46 33

PUllLIC SEltVICE CO31PANY OF NEW IIA 31PSIllitE s

STATE 31ENT OF ICETAINED EAltNINGS Seven Months Ended Year Ended December 31, July 31, 1979 1978 1977 1976 1975 1974 (Unaudited)

(Thousands of Dollars)

Dalance at Beginning of Period

$ 71,140

$55,725

$56,031

$51,936

$45,070

$ 10,613 Net Income 23,919 30,507 21,722 20,995 00,505 16,300 95,059 95,232 77,kO6 72,931 65,578 56,913 Deiluct :

Dividends DeclareO Preferred Stock, at Required Annual Rates 5.544 6,391 4,925 4,k51 3,416 3,379 Common Stock 19,560 17,693 14,156 11,993 10,526 8,464 Total Divid-nds "5,404 "4,092 19,0s1 16,*47 13,942 11,S43 Halance at End of Period (Note 6)

$09,655

$ 71.140

$58,725

$56,054

$51,936

$45,070 STATE 31ENT OF OTIIEll PAIDIN CAPITAL Seven Months Ended Year Ended December 31, Jufy 31, 1979 1978 1977 1976 1975 1974 (Unaudited)

(Thousands of Dollars)

Balance at Beginning of Period

$105,232

$ 90,409

$70,821

$54,411

$53,102

$39,34 8 Excess of Proceeds over the Par Value on the Issuance of Common Stock:

Sold - 1,650,000 Shares in 1974, 1,000,000 Shares in 1976, 1,000,000 Shares in 1977, 1,321,251 Shares in 1978 and 4,017,474 Shares in 1979 57,41s 17,461 13,961 15,751 (24) 14,665 Conversions - 5.50% Convertible Pre-ferrni Stock, 3,632 Shares in 1974, 97,545 Shares in 1975, 35,000 Shares in 1976, 37,092 Shares in 1977, 21,171 Shares in 1978 and 41,029 Shares in 1979 735 407 751 739 2,061 89 Preferred Stock Issuance Expensen (1,275)

(45)

(104)

(110)

(728)

Dalance at End of Period

$165,140

$ 103,032

$90,409

$70,821

$54,411

$53,102 See accompanying Notes to Financial Statements.

m 352272

PUllLIC SEltVICE COMPANY OF NEW ILOIPSIIIIIE STATDIENT OF CIIANGES IN FINANCIAL POSITION Twelve Months Ended Year D:ded December 31, July 31, 1979 1978 1977 1976 1975 1974 (Unaudited)

(Thousands of Dollars)

Source of Funds:

From Operations:

Net Income

$ 39,497

$ 36,507

$ 21,722

$ "O,995

$ 20,%08

$ 16,300 Principal Non Cash Cl arges (Crnlits) to Income:

Depreciation 15,170 14,752 14,117 13,791 13,522 11,624 Allowance for Equity Funds Usc : During Construction (11,300)

(7,525)

(6,093)

(3,205)

(1,573)

(1,755)

Deferre,1 Taxes and Investment 5,610 2.517 6,400 4,136 Credit Adjustments 10,431 7,021

~ 35,356 34,u9 5 39,157 30,275 Total from Oporations 5:t,7 e 50,455 F om Outside Marce<:

Halo of Long-Term ltonds and Notes 60,000 60,000 25,000 15,000 22,300 45,000 Hale of Preferre,1 Stock 30,000 18,000 15,001 Hale of Common Stock 74,162 2 ;,M9 25,092 20,*70 23,022 Change in short-Term Borrowing 2,775 30,212 55,113 (M,400)

(20,wo)

Adva nco Payment s from Joint Project Partici[mnts 10,599 Total from Outside sources 1 1,535 114,521 123,205 35,w 70 t,900 47.142 Decrease in Working Capital 33,510 44,939 5,100 Total

?2;t5,324

$ 19 *,4 *6

$ 15 *,561

$ 114,907

$ 53.157

$ 77,417 Application of Funds:

Property Additions

$ 191,500

$173,539

$114,310

$ 70,252

$ 35,313

$ 46,926 Allowance for L;uity Funds l'ent During Construction (11,3093 (7,325)

(6,093)

(3,205)

(1,573)

(1,7s5)

Dividends 32,171 24,092 19,031 16,547 13,942 11,*43 Reduction of long-Term Del,t 2,756 5.917 9,271 29,517 9 17 852 focrease in Workicg Capital 12,* s -

a0,378 19,52%

Other Applications-Net 4.359 2,736 1,614 1,496 1,52s 23 Total

$.55.324

$ 19*,4 6

$ 15s561

$ 114.997 8 53,157

$ 77,417 Incrense (Decrease) in Working Capi-tal Other Than Short-Term Debt :

Cash and Ca!.h Imestments

$ (3,346)

$ (3,050)

$ (442)

$ (2,467)

$ 1,370

$ 1,625 R weiratlas 4,229 5,596 2,195 (1,157)

(3,414) 10,481 Inventories 7,352 3,707 (3,020) 2,564 3,696 6,314 Long-Term Debt to be Retirn!

Within One Year 7,741 3,397 20,332 (M,911) 95 25 Accounts Payable (4,141)

(33,125)

(1,500)

(13,335)

(6,344)

(5,053)

Dividends Payable (3,521)

Accrue 1 Taxes (2,090, (11,470) 3,090 (1,054)

(2,220)

(270)

Other 6.623 1,435 (257)

(576) 1,717 5,906 Total Increase ( Decrease) In Working Capital Other Than Short Term Debt

$ 12,647

$ t 33,510)

$ 20,373

$ (44,939)

$ (5,100)

$ 19,529 See accompanying Notes to Financial Statements.

r rs. m.9 u d A,4 (v 35

NOTES TO FINANCIAL STATE 31ENTS (Information related to period 4 subsequent to December 31,1978 is unaudited) 1.

St3! MARY OF ACC01?NUNG POUCIra Regulations and Opcrations: The Company is subject, as to rates, accounting aml other matters, to the regulatory authority of the New Ilampshire Public Utilities Commission (NIIPUC), the Federal Energy Regulatory Commission (FERC) and, to a lesser extent, the public utilities commissions in other New England states where the Company does business.

Invalments: The Company follows the equity method of accounting for its investments in nuclear generating companies and in its wholly. owned real estate subsidiary. The Company's invest-ment in this subsidiary is principally in the form of advances.

'i'he Company's investments in nuclear generating companies are:

Ow ner. hip July 31, December 31, Company Percent 1979 1978 (Thousands of Dollare)

Yanker Atomic Electric Company 79

$1,530

$1,443 Connecticut Yankee Atomic Power Company 57 2,439 2,335 Maine Yankee Atomic Power Company 59 3,371 3,427 Vermont Yankee Nuclear Power Corporation 4G 2,330 2,324

$9,670

$9,529 In the case of each of the nuclear generating companies, pursuant to provisions of purchased power contracts which are regulated by the FERC, the Company is entitled to its ownership percent of total plant output and is obligated to pay a similar share of each company's operating expenses and return on invested capital. Approximately 10.99 and 10.57c of the Company's total energy require-ments were furnished by these companies in 1978 and 1977, respectively.

Utility Plant: Provision for depreciation of utility plant is computed on a straight line method at rates based on estimated service lives and salvage values of the several classes of property. The depreciation provisions were equivalent to overall effective rates ranging from 3.117c to 3.197c of depreciable property for the five years ended December 31,1978. The rate for 1978 was 3.197e.

Maintenance and repain of property are charged to maintenance expense. Replacements and betterments are charged to utility plant. At the time properties are retired, the cost of property retired plus costs of removal less salvage are charged to the accumulated provision for depreciation.

Operating Rcrenurs: Revenues are based on billing rates authorized by applicable federal and state regulatory commissions which are applied to customers' consumption of electricity. The Com-pany records estimated unbilled revenue, includine amr unts to be billed under a retail fuel adjust-ment clause, at the end of accounting periods.

Income Ta,rn: The tax effect of differences between pretax income in the financial statements and income subject to tax, which are the result of timine differences, are accounted for as prescribed by and in accordance with the ratemakine policies of the NHPUC. Accordingly, provisions for de-ferred income taxes are recognize 1 only for specified timing differences. Tax reductions attributable 36 E, gy.qm

/

NOTES TO FINANCIAL STATE 31ENTS - Continued f

(Information related to period, sub equent to December 31,1978 is unaudited) 1.

SU513t ARY oF ACCOUNTING l'oI.!CICS - Continued to other timing differonces are flowed through to net income as reductions of income tax expense. See Note 2.

A%

Investment tax credits earned are deferred and amortized to income over the lives of the related

$,N p roperties.

9

.1llou ance for Funds Used During Construction: Allowance for funds used during construc-tion is the estimated cost, during the period of construction, of equity funds and borrowed funds used for construction purposes which are not recovered from customers through revenues. See Note D to Staterm nt of Earnings.

Pe rufon Plan: The Company has a non-contributory pension plan covering all full-time em-ployees who have met a minimum service requirement. The Company's policy is to fund current pension costs accrued.1% nsion plan costs were as follows: 1974 - $1,320,000,1975 - $1,650,000,1976

- $1 MO,400,1977 - $2,112,000,1978 - $2,4W,000 and the twelve months ended July 31, 1979 -

$2,654,000 At I)ecember 31, 1978, vested benefits under the plan exceeded the market value of the plan's ns. sets by approximately $5,296,0.10, At that date, the total unfunded past service liability was approximately $4,943,000.

Earnings Per Share: Earnings per share are based on the average number of common shares outstanding, after recognition of preferred dividend requirements.

2.

lxcostt: T.t xES The components of income tax expense are as follews:

Twelve Month:

Ended Year Ended December 31, July 31, 1979 1978 1977 1976 1975 1974 (Thousands of Dollars)

Federal:

Operating Incorne

$ 4,s;3

$10,166

$ 1,297

$ 5,915

$ 2,039

$ (1,342)

Other Incon.e and 1) eductions 134 (46)

(113)

(96) 159 (2,333) 4.977 10,100 1,194 5,719 2,197 (3,675)

State, included in Operating Income 2,705 2,4 M 1,492 1,407 1.450 987 Total Current Income Taxes 7,62 12.5s s 2,676 7,120 3,677 (2,6%)

Deferred Federal:

Operating Income 9,071 5,527 3,5 w 2 1,709 2,1 s3 3,754 Other Incom+ nn 1 Deductions (4)

(H 6

2 79 Dcferred State:

Operating Income 150 93 3

(37) 60 278 Total Deferred Income Tases 9.217 5.6 c:

3,45 1,073 2,245 4.111 luvestment Tax credit A dj u st ment 1,214 1.412 1,705 839 4,155 25 Total Income Taxes

$13,113

$19,612

$ t" 6

? 9,613

$10,077

$ 1,448 37

&,TlU

NOTES TO FINANCIAL STATEMENTS - Continued

(

(Information related to periods subsequent to December 31,1978 is unauUted) 2.

INCOME TAX 1M-Continued In accordance with the requirements of the NilPUC, provisions for deferred income taxes are recognized only for the following timing differences:

Tesive Months g

Endej Year Ended December 31, c'* "

July 31,

{'

1979 1978 1977 1976 1975 1974 (Thousands of Dollars)

A portion of Deprwiation and Amortization of 1 lant Facilities *

$ 614

$ w5%

$ 895

$ 315

$ 919

$ 906 Accrued and Unbillel Fuel Adjustme.ut Charges 1,667 1,049 36 (417) 669 3,123 The Interest Component of Allowance for Funds Usel During Construction (See Lte D to Statement of Earnings) 6,710 3,713 2.954 1,274 626 Other (4)

P) 6 2

79

~$9,217

$5.612

$3,u5

$ 1,6 78

$ 2.245

$ 1,111

• Current income tax reductions attributable to (1) the tax depreciation permitted under the Class Life Al)lt System of the 1971 Itevenue Act in excess of the tax depreciation permitted under the Guideline Lives provisions of the 1969 Itevenue Act and (2) the amortization of certain pollution control facilities over five year periods.

The principal rea. sons for the difference between the total tax expense and the amount calculated by applying the Federal income tax rate to income before tax are as follows:

Twelve Months Ended Year Ended De-ember 31, July 31 1979 1978 1977 1976 1975 1974 (Thousands of Dollars)

Income Before Income Tax

$37,610

$56,119

$30,00s

$30,63 s

$30,%5

$ 17,74 8 Federal Statutory Rate (1979 Approx.)

46.829 43?;

45%

45 %

4597.

45 %

Expected Tax Expen*e 26,974 26,937 14,104 14,706 14,525 8,519 Increases (Reductions) in Taxes Resulting from :

Interest and Overhead Charge? 'o Con struction and Expensal for Tax l'ur.

poses (6,245 (4,544)

(3,377)

(1,359)

(979)

(2,109)

Excess of Tax Over Book Depreciation (2,166; (2,265)

(2,315)

(2,773)

(3.019)

(3,924)

State Taxes Net of Federal Income Tax Benefits 1,515 1,332 777 712 500 658 Unbillel Revenues (573)

(629)

(200)

(181)

(457)

(501)

Other Deductions, each less than 5%

of Expected Tax Expense (1,395)

(1,219)

(1,000)

(962)

(1,093)

(1,195)

Total Income Taxes

$ 1 *,113

$19,612

$ 3,236

$ 9,6 43

$ 10.07 7

_$ 1,4 4 8 The Company has made an election under certain provisions of the Internal Revenue Code which will result in the availability of additional investment tax credits for 1978 and prior years. Such election will not affect net income but will reduce the amount of income taxes currently payable by approximately SG,900,000.

3., m(O

• ) G 38

I NOTES TO FINANCIAL STATEMENTS - Continued (Information related to period

• nub equent to Decemlier 31,1978 is unaudited) 3.

Coster.NSATING UALANCPS AND SnO!rr-Trast Bonnow1Nus The (*ompany uses borro.vings from banks as an interim method of financing construction of new facilities. At December 31,1978, the Company had a revolving credit agreement which permitted the Company to horrow up to $95,tMNI,000 through April 30,1979 and also had line of credit agreements which aggregated $5,350,000. See" Problems Facing the Company-Immediate Financing Program" for information concerning an extension of and increase in the revolving credit agreement. The Company pays committnent fees on the revolving credit agreement and maintains compensating balances for certain line of credit agreements. Cornpensating balances amounted to $305,000 at December 31,1978 and July 31,1979.

Tho average interest rate on short. term borrowings at December 31,1978 and July 31,1979 was 12.tH9 at both dates. During 1978, maximum short-term borrowings were $S8,112,500; the average amount outstanding (based on month.end balances) was $66,911,45S; and the weighted average intermt rate was 11.369 computed with commitment fees inchided in interest expense. During the twelve months ended July 31,1979, maxinuun short term borrowings were $114,100,000; the average amount outstanding was $78,741,667; and the weighted average interest rate was 13.49ff.

At December 31, 1978 the Company had deferred the payment to vendors of approximately

$7,500,000 of construction costs. Such deferrals, with interest, were paid in January,1979. At July 31,1979 the Company had received advance payments aggregating $10,600,000 from other Seabrook participants against their present ownership intensts in the project. These advances are secured by the t'ompany's intenest in nuelcar fuel for the Seabrook pn> ject.

4.

Ilenua Alux Piu.rriuun Srocxs The Articles of Agreement authorize the Company to issue 1,350,000 shares of Preferred Stock,

$100 Par Value and 2,000,000 shares of Preferred Stock, $25 Par Value. The dividends of all series outstanding are cumulative, liedeemable preferred stocks issued during the five years and seven months ended July 31,1979 weru $18,000,000, 99 Dividend Series in October 1977 and $30,000,000,11.249 Dividend Series in May,1979.

Sinking Fund provisions reipiire the company to redeem all shares at par on the basis of 4,800 shares annually beginnine in 1984 for the 7.64r7 series,10,S00 shares annually beginning in 1982 for the 9C; series and 60,000 shares annually beginning in 19s5 for the 11.249 series. The annual Sinking Fund requirements with respect to I!cdcemable Preferred Stock are as follows: 1979 through 1961 - none, l!b2 - $1,080,000,1943 - $1,0S0,000 and 1984 - $1,560,000.

Subject to certain refundine limitations, Iledeemable Preferred Stocks are redeemab!e for other than Sinking Funds at redemption prices of $106.37, $109.00 and $27.75 for the 7.649, 9.00?E and 11.249 series, respeetively.

5.

NoN-Iliaria Antn Parrennen Srocxs During the five years and seven months ended July 31,1979, the Pompany issued (in October 1975) $15,000 000,119 Dividend Series Preferred Stock without mandatory redemption n quirements.

General redemption prices of preferred stocks without mandatory n<lemption requiremants are:

3.359 Series $100.00, 4.509 Series $102.00, 5.509 Series $100.00, 7.929 Series $105.94 and 119 Series $27.75.

39 eme JDG (rf a

1 NOTES TO FINANCI AL STATE 31ENTS - Continued (Informa.lon related to periods sub equent to December 31,1978 is unaudited) 5.

NoN-Itumest Am.c Pairatam Srocxs - Continued At.luly 31, 1979 there were reserved for issuance upon conversion of the 49,217 shares of Convertible Preferred Stock,5.509 Dividend Series,21F,063 shares of Common Stock based upon the conversion price of $22.57 per share (the Convertible Preferred Stock being taken at its par value of

$100 per share).

6.

DmDEND HrETRICT!oN Pursuant to terms of the General and R(funding 3fortgaec Indenture, dividends may not be paid on the Common Stock in excess of Lt Income accumulated after January 1,1978 less the negregate amount of all dividends paid or declared an the Preferred Stock of the Company during such periul plus $32,000,000 At December 31,1978, and at July 31,1979 Retained Earnings of $44,415,000 and

$42,929,0fX), respectively, were not subject to dividend restriction.

7.

LONo Trust Denr I"h;N' U***{"Ig' (Thousande of Dollars)

First Mortgage Bonds:

Series E - 3 9, Due 1979

$ 3,356 Series H - 3%%, Due 19S4 10,453 10,4 A3 Series 1-3%9, Due 1956 7,012 7,047 Series M-4%g, Due 1992 21,964 22,149 Series N-6%%, Due 1996 15,874 15,910 Series 0 -- Clin, Due 1997 14.122 14,173 Series P-7%Q, Due 1998 14,247 11,277 Series Q-9 9, Due 2000 19,205 19,206 Series R - 7%Q, Due 2002 19,455 19,4.35 Series S-9 Q, Due 2004 19,643 19,778 Series T - 12%%, Due 1981 24,719 25,000 Series U - 1031%, Due 1985 15,000 15S00 Series V-9%9, Due 2006 15,000 15,000 Series W - 10%Q, Due 1993 10,000' 10,000*

206,724 210,834 Less-Deposited with Trustee of the (kneral and Refunding Mort-gage Indenture as additional security for General and lle-funding Bonds 10,000*

10,000*

Total First 3fortgage Bonds 196,721 200,831 General and Refunding Mortgage Bonds:

Series A - 10%9, Due 1993 60J)oo 60,000 l'romissory Note, Due January 3,1950 with interest at 1169 of ler. ding bank's prime rate plus 0.259 2d,000 25,000 Pollution Control Revenue B:mds:

8%9, Due December 1979 1,500 1,500 9 9, Due December 19S4 5,800 5 HW)

Total Long-Term Debt 289,iili 293.134 Less: Long-Term Debt To Be Retired Within One War 27,216 5,231 Unamortized Premium and Discount 597 651

?7,813 5,M2 Long-Term Debt-Nd

$261,211

$287,252

%" 'd*y g

40

NOTES TO FINANCIAL STATDilNTS - Continued (Infor nation related to perioda ub-equent to December 31,1978 is unaudi;cd) 7.

losu-Tut 3r Durr - Continued The annual Sinking Fund requirements with respect to First 3fortgage Bonds, which may be met by the payment of cash or bonds or, up to one-half of their amounts, by the ce rtith ation of additional property, are as follows: 1979 - $2,213,2 41,1950 - $2.163,211,1941 - $2,636,318,19 42 - $2,052.984, 1983 - $2,052,984 and 1984 - $2,052,991. Annual Sinking Fund requirements with respect to the General and Ilefunding 31ortgage Ilonds are $5,4G0,000 payable in cash beginning in 19A3.

Long-term th bt maturities, excluding the aforena ntionni Sinking Fund requirements, are as follows: 1979 - $4,856,u00,19s0 - $25,000,000, 1981 - $25,000,000,1982 - None,1983 - None and 1984 - $16,283,000 Under the terms of the First 3forteage Indenture and the General and Refunding 3fortgage Indenture, substantially all utilitv property of the Company is subject to the liens thereof.

8.

Cost strrat t:NTS AND CONTINGENCIFS The Company (both as sole and as joint owner of facilities) and tne nuclear generating companies in which the Company has investments, in common with other electric utilities, are subject to proent and developing regulations with r. gard to air and water quality, nuclear plant licensing and safet3, land use

.a other environmental matters by various Federal, state and local authorities. It is pos-sible that ecmpliance with such regulations may require additional capital expenditures and increased operating costs not now determinable in amount.

If the Company's construction program is not reduced as describel in the next paragraph, con-struction program expenditures are farecast to be $195,700,000 for 1979 and $911,000,000 for 1980 through 1985 (excluding allowance for funds used during construction). These estimates included

$15S,700,000 and $591,200,000, respectively, for the Company's interest in a nuclear generating station under construction in Seabrook, New Ilampshire, and $5,300,000 and $70,500,000, respectively, for the Company's interests in other nuclear generating units owned on a tenancy-in-common basis with other New England utilities. The Company's ownership interests and its share of total expenditures included in Unfinished Construction for the jointly owned nuclear facilities in which it is participating are as follows:

Ownership July 31 December 31, l'crcent 1979 1978 (Thousand,of Dollars)

Seabrook #1 and #2 50.0000 9

$3S8,200

$307,800 Pilgrim #2 3.4700 10,800 9,600 3fillstone c3 3.S910 23,S00 21,200

$422,800

$333,000 On 3farch 3,1979, the Company's Board of Directora directed management to proceed to sell all of the Company's Pilgrim #2 and 3fillstone #3 ownership interests and to reduce its ownership inter-est in the Seabrook nuclear plant by offering 229 to other Seabrook participants. See " Problems 41 35' 279 2

NOTES TO FINANCIAL STAmlENTS -Continued (Information related to periods i.uhsequent to Decernher 31,1978 is unaudited) 8.

CostsuTunsTs Axn CoxTiscrsems - Continued Facing the Company" for a description of tho ;,coposed arrang ments for the reduction of the Co a-pany's interest and the effect of such agreements on the Company's financing plans for 1979 and subsequent years.

Construction of the Seabrook project has required numerous approvals and permits innn various state and Federal regulatory agencies. The process of obtaining these approvals and permits has been long and complex, has been consistently opposed by a number of intervening groups, has included demonstrations at the Seabrook site and has been plagued by lengthy delays which have resulted in greatly increased costs for the pn> ject. One court appeal frora Federal regulatory approvals is pending and further appeals nn possible. The Company is unable to predict what effect financing problems or further administrative or court decisions relating to Nuclear llegulatory Commission or Environ-mental Protection Agency actions may have on the Company's ability to cornplete the projtxt or on the cost of the pn> ject.

9.

UNAt?NTm IllTLACD!ENT COST INFoH5! ATION The replacement cost data described in this note has been compiled in response to regulations promulgated by the Securities and Exchange Comn ission and represents, in the opinion of manage-ment, reasonable estimates of replacement costs given the guidelines of the regulations. Ilowever, imprecisions exist and subjective judgments have been made in the estimating process. Also, certain incomo effects which might result from the replaecment of productive capacity are not required to be described by the regulations and have not been esaluated, including the impact of replacement on capital costs and taxes. Furthermore, the regulations do not call for a description of all factors which may result fnna iathtion, including the impact of long-term debt outstanding in a time of intiation and the se han not been evaluated or included in the replacement cost data presented.

Consequently, in the opinion of management this sote is c.f limited usefulness in the evaluation of the impact of intlation on the financial position or results of operations of the Company. Furthermore, the disclosure of this replacement cost data should not be construed as a plan to replace existing productive capacity, and the actual replacement of productive capacity may not take the form implied by the techniques used to develop the estimates. Finally, the replacement cost data presented in this note should not be taken to be managemeM's estimate of the current value of existing prop-erty, plant and equiprrent.

The Company's operating costs and the recovery of its investment in utility property are signifi-cantly affected by intiation and the current and expected more stringent environmental regulations.

Itepla"ing existing utility property with equicalent productive capacity will require substantially greater dollars of capital investrnent than was require 1 to construct or acquire the property originally; but replacement cost is not normally considered in the rate making process, since only the historical cast of utility property is normally included in the rate base upon which the Company is allowed to earn a fair rate of return. Ilowever, the cost of replacement property, when existing productive capacity is actually replaced, is expected to be includcit in the rate base.

42 852280

NOTES TO FINANCIAL STATEMENTS -Continued (Information related to periods sub equent to December 31,1978 is unaudited) 9.

Usaturrm EmLActm:xr Cowr INFOREDON-Continued The computed replacement cost of the Company's productive capacity, depreciated replacement cost and related depreciation experse and corresponding historical cost data are presented below for December 31,1978 and 1977:

Decemtwr 31,1978 December 31,1977 Eatimated Ihtimated Peplace-Iteplace-llintorical

. ment Mtorical ment Gnt Coat Cost Gat Utility Plant:

(Thousand. of Dollars)

Plant in Service Subject to Heplacement Cost Disc'osure

$493,050

$1,452,671

$472,510

$1,345,446 Construction Work in Progress 346,382 346,382 106,825 100,825 Other Property, at IIistorical Costs 14,G31 14,631 14,55S

_ 14,55S Total 854,093 1,813,684 653,893 1,556,829 Accumulated Provision for Depreciation 134,373 435,985 122,364 381,292 Net Utility Plant

$719,720

$1,377,699

$561,529

$1,175.5d7 Depreciation Expense

$ 15,417

$ 45,479

$ 14,731

$ 42,163 (kn(rating Planta: Fuel generation replacemem costs were estimated on the bC.s of current construction cost per mtgawatt at December 31,1978 and 1977 developed by engineering studies and applied to essentially the generation mix at the (nd of each yeat. IIydro generation replacement costs were calculated using the IIandy-Whitman Index.

Transmission and Distribution Plant: Iligh voltage transmission line replacement costs were computed based on engineering studies which determined the cost per mile of line at the end of each year. The replacement costs of certain transmission substations were computed based on costs and technology at the end of each year. The replacement costs of the remainder of transmission facilities along with the replacement costs of all distribution plant were calculated using the IIandy-Whitman Index.

(kneral Plant: Estimated replacement costs of buildings were develcped by applying the estimated cost per square foot at the end of each year to the then present facilities. Estimated re-placement costs for all other general plant were developed by applying unit prices or the appropriate Wholesale Price Index at the end of each year. Other property consists primarily of land and land rights.

Ihstrre For Pepreciation: Related accumulated depreciation based on replacement costs was developed by applying the same percentage relationship that existed between depreciable plant and accumulated depreciation by functional groups on an historical cost basis at December 31,1977 and 1978 to the current replacement costs of the same groups.

Depreciation E.rpr nse: Depreciation expense for the replacement costs of utility plant was developed by applying the actual averaec rates and methods by functional groups in use to the average of beginning and year en ! balances of depreci ble replacement costs.

43 Mi%2M

DESCIUPTION OF TIIE BONDS The Series B Bonds will be issued under and secured by a General and Refunding Mortgage Indenture dated as of August 15,1978 and a First SupplementalIndenture to be dated as of September 15,1979 (the "G&R Indenture") between the Company and New England 31erchants National Bank, as Trustee. The lien of the G&R Inde nture is subject to the prior lien of the Company's First Mort-gage (see " Security and Priority" below).

Interest on the Series B Bonds will accrue from the date of their initial issue and will be payable semi-annually on each March 15 and September 15 to holders of record on the preceding March 1 or September 1, respectively. Principal and interest will be payable in Boston at the principal corporate trust office of the Trustee. The Series B Bonds will be issued only in fully registered form without coupons in denominations of $1,000 or multiples ther sf. No service charge will be made for any transfer or exchange of Series B Bonds.

The brief summary herrin of certain provisions of the G&R Indenture is merely an outline and does not purport to be complete, it uses terms defined in the G&R Indenture and is qualified in its entirety by reference to the G&R Indenture which is an exhibit to the registration statement. Where references are made to the Companyi, First Mortgage Indenture dated as of January 1,1913 and supplemeats thereto (the "First Mortgage"), such references are qualified in their entirety by refer-ence to the First Mortgage, which is an exhibit to the registration statement.

Hedemption Series B Bonds will be redeemable at the option of the Company as a whole or in part at any time prior to maturity, on at least 30 days' notice given as provided in the G&R Indenture, at the general red"mption prices shown in the table below, exprmsed as percentages of the principal amount; provid/d, hmure r, that neither the Series B Bonds nor any portion thereof shall be redeemed prior to September 15,1984, if such redemption is for the purpose or in anticipation of refunding such Bonds, or any portion thereof, through the use, directly or indirectly, of funds borrowed by the Company at an c7"etive interest cost to the Company (computed in accordance with gener:dly accepted financial practice) of less than 9 per annum, and the Series B Bonds will also be redeemable for the sink-ing fund on September 15, 1959, or any September 15 thereafter (and at any time prior to maturity through the application of certain release, insurance, eminent domain, and replacement fund moneys and certain other moneys required to be deposited with and held by the Trustee, as a whole or in part) on like notice, at the principal amount thereof, together in each case with accrued and unpaid interest to the redemption date.

If redeemed at any time in the respective twelve-month period beginning September 15 in each of the following years:

General General itedemption liedemption Year Price Year Price 1979 fc 1959 fo 19S0 1990 1981 1991 1982 1992 1983 1993 1984 1994 1985 1995 1956 1990 1987 1997 1988 1998 bb22b2 44

All outstanding G&Il ihmds, including the Series D Bonds, may also be redeemed in whole but amt in part on at least 30 days' notice at the option of the Company, by issuance in exchange there-for of an equal aggregate principal amount of First 3fortgage Bonds; and the Company covenants that, if the First 3fortgage is amended to permit the issuance of First 3fortgage Bonds against un-licensed or disconnected property additions, it will so redeem all outatanding G&R Bonds by exchange of Fint 3fortgag Bonds. The First 3Iortgage Bonds exchanged for the G&R Bonds shall bear inter-est at the same rate, shall have the same maturity, interest payment dates and redemption prices, shall be so dated that no gain or Ims in interest shall wsult from the exchange, d shall be entitkd to the benefits of the same sinking funds (except as the First 3fortgage may otherwise require) and the same dividend limitations and the same restrictions on the right of redemption, shall be entitled to the benefits of the same replacement fund or maintenance and renewal covenant.

Sinking Fund The G&R Indenture requires that the Company shall on or before September 15,1959 and each September 15 thereafter, up to and including September 15,1998, deposit with the Trust-f the sum of

$3,750,000, payable in cash or an equivalent principal amount of Series B Bond:, The Company may, at its option, pay to the Trustee prior to any sinking fund date as an addi:ional sinking fund payment an amount payable in cash or in Seri H Honds not exceeding the amount of the mandatory sinking fund payment; the right to make sue': 2dditior.a1 sinkin; fund payment in any year shall not be cumulative.

Replacement Fund So long as any First 3Iortgage Bond remain outstanding, the Company will comply with the requirements of the mainter.ance and renewal covenant under the First Ertgage, as described below.

When said requirements cease, the Company will be obligated under the G&R Indentur; to pay as a replacement fund 2%9 of the average of its investment in depreciable property on the last day of each month of the previous calendar year. The replacement fund requirement may be satisfi-1 by cash, G&R Bonds of any series, or Available Amount of Additional Property. Additional property evi-denced under either the maintenance and renewal covenant of the First 3fortgage or the replacement fund under the G&R Indenture may be used to offset certain retirements in computing Available Net Additional Property.

31aintenance and Henewal Covenant The First 3Iortgage contains a specific maintenance and renewal covenant providing that the Company will, during each calendar year, in the aggregate expend for, or albwate Additional Prop-erty to, or deposit in cash with the Trustee on account of maintenance, repairs, renewals and replace-ments, a total of not less than 157 of the gross operating revenues (after deduction of the aggregate cost of electrie energy, gas and steam purchased for resale) during such period from the physical properties, other than leased properties, covered by the First 3fortgage and used for the Primary Purposes of the Company's Business. Expenditures, deposits and alh> cations from in:,urance and eminent domain proceedings and certain other sources may not be included 45 352283

Security and Priority The Series B Bonds will be secured by the G&R Indenture equally and ratably with G&R Bonds af other series by a mortgage lien on substantially all the properties and franchises owned by the Com-pany at the time of the execution and delivery of the First Supplemental Indenture and on substan-tially all pn>perty and franchises subsequently acquired by the Company, except real property in 3Iaine and 31assa-husetts acquired after the filing of the First Supplemental Indenture and befe the filing of a further supplemental indenture specifically subjecting such after-aequired property to such lien; subject, however, to the payment of the Trustee's charges, to the lien of the First 3 fort-gage, to liens on after-acquire 1 property existing at the time of acquisition or created in connection with the purchase thereof not exceeding 609 of the Cost or Fair Value, whichever is less, to certain exceptions set forth in the descriptions of properties in the G&lt Indenture and in the deeds referred to in such descriptions, and to Permitted Liens Certain types of property are expected from the lien of the G&lt Indenture, including, among others; fuel, nuclear cores and materials; all gas, oil, and other mineral properties and personal property related thereto; supplies; mh; securities: contracts; and accounts receivable. While the principal currently operating generating stations, dams, and sub-stations are on land owned by the Company, the principal tranmission lines are mostly on lands of others pursuant to easement rights. Ownership of generating stations now under construction is held in undivided joint ownership with other utility participants.

No debt may be created by the Company ranking prior to or on a padty with the Series B Bonds w;th respect to the security provided by the G&R Indenture, except additional G&R Bonds issued in the manner summarized below, First 3Iortgage Bonds pledged with the Trustee under the G&R Inden-ture, obligations supported by additions and enlargoments to property already subject to certain types of prior liens (none of which currently exist), and purchase money obligations existing or created in connection with the acquisition of after-acquired property. Prior liens and purchase money oldiga-tions, other than First 3Iortgage Bonds, shall not exceed "59 of the sum of all outstanding G&R Bonds and obligations (other than Pledged Bonds) representing liens prior to the G&R Indenture.

G&R Bonds art further secured by First 3Iortgace Bonds whieh the Company is obligated to issue and pledge with the G&R Trustee. Upon any application to issue G&It Bonds (including the Series B Bonds) or certain other actions, the Company is requirM to deposit as a pledge with the G&R Trustee First 3Iortgage Bonds (" Pledged Bonds") in the maximum amount then issuable, sub-ject to certain optional limitations. The Pledged Bonds are secured, together with all First 3fortgage Bonds now issued and outstanding under the First 31ortgage, by a direct fir.st mortgage lien on sub-stantially all the property of the Company, and after-acquired property to the extent permitted by law, subject only to excepted property and Permitted Encumbrances. Under the First 3fortgage, additional First 3Iortgage Bonds may he issued against the retirement at maturity of a like amount of First 3Iortgage Bonds or against 609 of the Net Amount of Additional Property; however, in the o&R Indenture the Company has covenanted to issue First 3fortgage Bonds only for pledging with the G&R Trustee. The Company has also covenanted in the G&R Indenture not to permit certain modifications to the First 3Iortgage which could reduce the amounts of First 31crtgage Bonds issuable in the future, for the purmse of pkdging under the G&R Indenture. The Pledged Bonds will be nont rans ferable.

In 1978, when $60,000,0(O ef G&R Bonds, Series A, were issued, the Company deposited

$10,000,000 of Pledged Bonds and the Company intends to issue $9,302,000 of additional Phdced 40 O

ga) 4 N d.R

Honds upon the issuance of the Series B Ihmds. Because of provisions in the First Ertgage which limit the availability of property additions to support issuance of additional bonds (see " Financing-Ertgage Honds"), there can be no assurance tlmt the deposit of significant amounts of Pledged Honds will occur when subsequent series of G&lt Honds are issued. The principal benefit to holders of G&lt Bonds provided by the Pledged Hands will be that, in the event of a reorganization or insolvency of the Pompany, the allocation to the hohlers of G&lt Ilonds may be increased by reason of their par-ticipation in the lien of the First Ertgage through the Pledged Honds. Upon the retirenwnt of all non-pledged First brtgage Ronds (in 2006. or earlier if such First Ertgage Honds are called for redemption), the First Ertgage will be discharged and the G&R Honds will become first nmrtgage bonds.

Under the Atomic Energy Act, neither the Trustee nor any othe r transferee of the Company's property may operate a nuclear generating station without authorization from the Nuclear Itegulatory Commission.

Additional G&Il Honds Additional G&R Honds of any series may be issued as follows: ( A) against 60% of the'Available Net Additional Property, (H) to refund a like amount of First Ertgage lionds of any series which are not then Funded, (P) to refund a like amount of bonds which are not then Funded originally issued under a mortgage (the lien of

~h is prior to the lien of the (;&R Indenture) existim: on property at or immediately prior to the time ef equisition by the Company of such property. (D) to refund a like amount of ti&It Bonds of any sedes which are not then Funded, and (E) against the deposit of money. Ency so deposited may be withdrawn in arnounts equal to the principal amount of G&R lionds otherwise issuable against Available Net Additional Property or to refund bonds.

When issuing G&lt Bonds agains Additional Property or the deposit of money, the Company must demonstrate that Net Earningdot including any AFUDC in execss of 109 of Net Operating Revenues but including revenues subject to refund unh ss there has been issued a final decision, which has not been stayed, of a regulatory commission or a court ordering a refund of such revenues) for any 12 consecative calendar months within the preceding 15 calendar months are at least twice the annual interest charges on all G&R Honds outstanding and applied for and on all equal or prior lien indebtedness (excluding Ph deed Honds). Except in certain instane no earnings test is required in connection with the refunding of a like amount of bonds.

Of the $50,000,000 principal amount of Series 11 Honds, 49,302,fM) will be issued against the retirement at maturity in 1978 and 1979 of a like principal amount of First Ertgage Honds, Series D and E and the balance will be issued against 609 of Available Net Additional Property. As of

.luly 31,1979, the approximate Available Net Additional Property against which G&lt Bonds might be issued was $300978,436, which will be reduced to $237,1F,43G after giving effect to issuance of Series B Honds. The actual carnings coveraer ratio umh r the G&R Indenture is 3.38 for the twelvo months ended July 31,1979. The pro forma earnings coverage ratio is 2.70 after giving effect to the issuance of the Series H Honds at an assumed annual interest rate of 119 Dividend He-triction So long as any of the Series B Homls are outstanding, the Company may not declare or pay any dividend (other than dividends payable solely in shares of common stock), or make any other distri-bution on, or purchase, any shares of its common stock at any time outstanding (other than by new 47 O W.nr ae.H n u

conunon stock financing), if after such action the amount of such dividends, distributions, and pur-chases (at cost) subsequent to December 31,1977, would exceed its Net Ine< ne subsoquent thereto, less the amount of all dividends paid or declared on its preferred stock, plus $ d,000,000.

Modification of the G&lt indenture The u&lt Indenture may he modified with the consent of 667!39 of the G&R Bonds at the time outstanding (or, if one or more but less than all the series of G&R Bonds would he materially ad-versely affected,669lC of the total hunds of the one or more series so affected). No such modiflcation shall (a) affect the payment of principal, premium, and interest on any G&lt Bonds, or extend the maturity or time of ;myment, without the consent of the h<,! der of the G&R Bond affected, (b) reduce the above specified percentages of G&lt Bondhohlers, or (c) permit the creation by the Company of any lien not otherwise permitted ranking prior to or on a parity with the lien of the G&R Indenture.

No modification may he made which would conflict with the Trust Indenture Act of 1939 as then in e ffect. The Trustee is not obligated to execute a supplemental indenture which would affect its own rights, dpties, or immunities unJer tne G&R Indenture.

The Tru-tee If the Trustee ac piires any conflicting interest it shall either eliminate 't or resign. There are limitations on the rights of the Trustee in respect of certain payments and property received by the Trustee within four months prior to default. The Trustee may become the owner or pledgee of G&R Bomis as freely as if it were not the Trustee.

The holders of a majority in principal amount of the G&R Bonds outstanding may require the Trustee to take certain action, except when forbidden by law or when the Trustee in good faith shall by its responsible officers detccmine that such action woubl involve the Trustee in personal liability or wouhl be unjustly prejudicial to the other G&R Bondholders.

Defaults The following are termed events of default: (a) tailure to pay principal, premium or sinking fund installment when due; (h) failure for 5 days to pay interest; (e) failure for 30 days to pay any replacement or analogous fund installment; (d) default under the First Mortgage or certain other mortgages; (e) failure for 30 days after notice from the Trustee to perform any other covenant or agreement; and (f) certain events of bankruptcy, insolvency, or ra>rganization. The Trustee may vithhohl notice to the G&ll Bondholders of any default, except default in the payment of principal, interest, or any sinking, replacement, or analogous fund installment, if its responsible officers in good faith determine that withhohling such notice is in the interests of the G&l! Bondholders.

Esidence to be Furni hed Tru tec Evidence is required periodically a.s to the absence of default in connection with certain annual sinking and replacement fund requirements and as to compliance with certain other terms of the G&R Indentur7. l'urther, prior to issuance of additiona! G&lt Bonds, release of property, withdrawal of cash, and various other actions under the G&R Indenture, evidence as to the absence of default and as to compliance with certain tenns of the G&It Indenture is required.

46 95'4286

LEGAL OPINIONS The validity of the Series B Bonds will be passed upon for the Company by Ralph II.

Wood, Esquire, Vice President and General Counsel of the Company, and by 31essrs. Ropes & Gray, Boston, 3f assachusetts, and for the Underwriters by 31essrs. Choate, IIall & Stewart, Boston, 3fassa-chusetts, both of which firms, as to the organization and existence of the Company, approvals of state commissions and legal conclusions affected by the laws of New IIampshire, Vermont, 3Iaine and Connecticut, may rely upon Ralph II. Wood. Ralph II. Wood owns, jointly with his wife,300 shares of the Company's Common Stock.

EXPERTS The financial statements included herein so far as they pertain to each of the five years in the period ended December 31,1978 have been so included in reliance upon the report of Peat,31anvick, 3fitchell & Co., independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing.

Ralph II. Wood, Esquire, Vice President and General Counsel of the Company, has reviewed the statements made herein as to matters of law and legal conclusions under the subeaptions " Joint Projects, "Seabrook Nuclear Project", "ltegulation", " Hates-New IIampshire Retail", " Rates-Other "," Fuel Supply", " Environmental 3f atters"," Employees, Salaries and Wages" and "31unicipali-ties and Cooperatives" under the caption " Business, and under the caption " Description of the Bonds" 3Iessrs. Hopes & Gray have reviewed the statements made herein as to matters of law and legal conclusions umler the subcaptions "3fortgage Bonds" and " Preferred Stock" under the caption

" Financing", under the subcaptions "New England Power Pool" and "Seabrook Nuclear Project" under the caption " Business" under the caption " Description of the Bonds" and concerning the jurisdiction of FERC, the NRC and the 3Iassachusetts Department of Public Utilities under the caption " Business - Regulation." Such statements are included on the authority of such person and firm as experts.

49 35' 267 2

UNDERWillTING The names of the several Underwriters and the respective principal amounts of Series B Bonds which they have severally agreed to purchase from the Company, subject to the terms and conditions specified in the Underwriting Agreement filed as an exhibit to the Registration Statement, are as follows:

l'rincipal l'rincipal Name Amount Name Amount I?lyth Eastman Dulon & Co. Incor[mrated Ki41er, Peabo ly & Co. Incorporatel The Underwriting Agreement provides that the several Underwriters are required to take and pay for all of the Series B Bonds offered hereby if any are taken. The obligations of the Under-writers are subject to certain conditions precedent.

The Company has been advised by Blyth Eastman Dilhin & Co. Incorporated and Kidder, l'eabody & Co. Incorporated, as Reprtsentatives of the several Underwriters, that the Underwriters propose to offer the Series B Bonds to the public initially at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of

, and that the Underwriten and such dealers may reallow a discount of not in exces of to other dealers. The public offering price and the concessions and discounts to dealers may be changed by the Representatives.

50 3522S8

No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those con-tained in this Prospectus and, if given or made,

$50,000,000 such information or representations must not be relied upon as having been authorized by the Company or the Underwri+ers. This Prospectus does not constitute an offer to sell, or a solicita-g

\\ (j pUBLIC SERVICE tion of an offer to buy, any of these securities by Pang h Hanph any Underwriter in any jurisdiction to any per.

son to whom it is unlawful to make such offer or solicitation in such jurisdiction. The delivery of this Prospectus does not imply that the informa-tion herein is correct as of any time subsequent GENERAL AND REFUNDING to its date.

MORTGAGE BONDS TABLE OF CONTENTS SERIES B

% DUE 1999 The Company 2

Prospectus Summary 3

Problems Facing the Company 4

Industry Problems 6

Use of Proceeds 7

Construction Program 7

PROSPECTUS Financing 10 Capitaliation 12 Statement of Earnings 13 Management's Discussion and Analysis of the Statement of Earnings 10 Operating Statistics 18 Business 19 BLYTH EASTMAN DILLON & CO.

Power Supply e d Properties 19 INCoHPolt ATED New England Power Pool 19 Joint Projects 20 Seabrook Nuclear Project 21 Effd*fSew 5

KIDDEn, PEABODY & CO.

IIamp~ hire netau Rat es - Other 25 IscouronATrn Fuel Supply 26 National Energy Policy 23 Environmental Matters 28 Employees, Salaries and Wages 30 Voluntary Wage and Price Guidelines 30 Municipalities and Cooperatives 30

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I-anci 1 Mtn r 3 Description of The Bonds 44 Iegal Opinions 49 Ex pert s 49

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