ML20199A084

1996 Annual Rept for Boston Edison. W/Form 10-Q for Quarter Ended 970930,cash Flow Forecast for 1998,narrative Statement of Curtailment of Capital Expenditures

ML20199A084
Person / Time
Site:	Pilgrim
Issue date:	12/31/1996
From:	May T BOSTON EDISON CO.
To:
Shared Package
ML20199A055	List: BECO-LTR-97-108, Forwards 1996 Annual Rept,Form 10-Q for Quarter Ended Sept 1996 as Filed W/Securities & Exchange Commission,Cash Flow Forecast for 1998 & Narrative Statement of Curtailment of Capital Expenditures ML20199A084
References
NUDOCS 9711170052
Download: ML20199A084 (73)

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Earnings' Per Sharc Dividends Paid Per Share

$2 75 ' r 12 00r

_ $2 61 51 88

$2 50 51 82 11 76 11 75 -

$2$2*1

$2 28 11 70 52 25 g3 g 12 10 M i i i i 1992 1993 19'<4 1995 1996 1992 1993 1994 1995 1996

• 1995 amount endudes a 50 44 restructunng charge l

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j years ended December 31,

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1996 1995 Operating revenues (000) $1,666,303 $1,628,503 Income available for common stock (000) $126,181 $96,739 (a)

' 3 Common shires outstanding - weighted average (000) 48,265 46,592

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Earnings per share j l $2.61 $2.08 (a) 1 64 , _. I ; -

It 1 Dividends declared per share - /

, $1.835 Payout ratio 72 % 88 % (a)

Bock value per share $21.37 $20.61 Return on average common equity 12.4 % 10.0 %(a)

Fixi.d charge coverage (SEC) 2.91 2.38 (a) Includes a $34 milhon, or 50.44 per share, restructuring charge.

Positive Financial Performance Suong Operational Performance At Headquarteis:

a Reached a settlement agreement with the o A growing economy in Massachusetts helped Massachusetts Attorney Gearat and fuel a 2.8% . increase in retail kdowatthu*

Massachusetts Division of Energy Resources on sales.

issues relating to industry restructuring.

~ highest commercial building occupancy rate a Entered two exciting new business ventures; in 15 years. one to market electricity, natural gas and energy services throughout New England, and the other

- non-manutacturing employment up t 9%

to provide retail telecommunications services.

over 1935 O Earnings per common share and return on equity At Pilgrim Station:

continued to show a steady increase. m Maintained good reputation with the Nuclear Rcgulatory Commission for reactor safety.

- earnings per common sha.e of $2 61 represents an increase of ' 6% over 1995. m Achieved a 905 percent capacity f actor-a excluding the nonrecurring restructuring best ever performance for Pilgrim and third best charge in 1995 in the world for boiling water reactors.

e Achieved unit run of 601 days out of a possible

- return on equity of 12 4% highest in a 619 days since its last refueling.

decade.

O All business units continued to streamhne At Fossil:

processes, improve productivity and reduce a Maximized the value of fossil assets by costs implementing a 'best practice" operating

- lowest total spendmg and strongest cast, philosophy.

flow in ten years. m Maintained a high unit availability of O P *"

- lowest statfing levels since 1940's.

a Reduced non-fuel operating costs by more than D Economic development program helped t 13 percent over 1995.

secure jobs for Masst ;husetts workers.

In Field Service:

- signed up over 15.000 kilowatt hours of new electnc load amounting to over $5 million in a Expanded installation of automatic meters for more accurate, less costly meter reading and annual revenues.

billing.

e implemented Field Service System for faster

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I employse dispatch to customer locations.

4 improving labor productivity by 200 percent.-

a Continued upgrade of our electric distribution system, resulting in s 50 percent reduction in ed.ge time in areas where upgrades have t.ompleted

I About The Company in addition to the two new joint ventures describec in detail in this report, the company participates in unregulated activities through its wholly owned Boston Edison is a public utility engaged principally subsidiary, Boston Energy Technology Group (BETG).

in the gene'ation, purchase, transmission, distribution ,

and sale of electric enetgy it was incorporated in 1886 We supply electricity at retail to an area of C0NECD apprcximately 590 square miles wnhin 30 miles of Boston, encompassing the city of Boston and 39 CONECO is an enerDy management services company surrounding cities and towns The population of the acquired by Boston Edison in 1994. CONECO started territory served at retail is approximately 1,500.000 as a lighting retrofit company, but quickly adapted to a changing marketplace and evolved into a full-We also supply electricity to other utilities and service energy management services company.

municipal electric departments at wholesale for CONECO has provided project management services resale. About 88 percent of our revenues are derived and energy-efficient retrofits in more than 2,000 f tom retail electric sales and 12 percent frcm commercial, industrial and government buildings.

wholesale sales in its most recent venture. CONECO partnered with

. The Conservation Group, a New York state conservation company, to perform energy efficiency i' Y projects, totaling approximately $20 million, in six

\0u Empire State sci col districts.

CONECO has of ices in Boston, New York, Florida, 1,i%  %

/L a, Indiana and Wi shington. 0.C.

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, , Northwind v

A iq Northwind Boston llc is a joint venture with Unicom

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k Thermal Technologies of Chicago, owner and y 7. q

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~h operator of the largest ice-based district cooling

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A+ f system in the world. Northwind's business is to I j) /" develop district cooling systems to provide

. environmentally responsible air conditioning service to large buildings in Boston's Back Bay and Financial District Using Northwind's ice storage technology, a

customers eliminate on site chillers that use ozone-

, depleting chlorofluorocarbons (CfCs)

The Northwind Back Bay f acihty, its first, is expected to begin commercial operation in early 1998

Contents Letter to Shareholders 2 Our Strategy 4 Financia! Section 16 Management's Discussion and Analysis 17 Notes to Consolidated financial Statements 28 Officers and Directors 47 Important Shareholder Information 48 C

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Dear Shareholder,

The develonments of 1996 were pivotal for the statewide plan to restructure the electric power -

industry and for your company, as deregulation industry, marking a dramatic change in the way came into sharper focus The Massachusetts the electric utikty industry has operated by Department of Public Utihties set and met an separating the generation of electricity from the aggressive schedule with its issuance of final delivery of electricity and by making competition restructuring guidehnes in Docembv in a reahty This represents the most sweeping tandem with this etfort Boston Edison has been change in Boston Edison's history. A 110-year-working to address past commitments while nld business is being transformed as Boston sustaining sohd financial performance and Edison prepares to sellits non nuclear positioning itself for the future. Simultanerusly, generation business and essentially become a the gas, electric and telecommunicatic 4s distribution compe'iy.

markets began to converge' o e Mles d pide m in last year's teport,I spoke to you about orderly transition to damgulation, putting industry reform, the direction of public pohty and uncertainty behind u allowing us to focus the unbundling of the industry. As I outlined, aggressively on the future. This transition Boston Edison had a seat at the table as the represents momentous change and daun'ing industry was reshaped Because of this challenges We are becoming a very different successful collaboration, we were able to reach company, yet we have demonstrated a a settlement agreement with the Massachusetts successful track iecord that will serve the Attorney General and the Massachusetts company and its shareholders well in the future.

Division of Energy Resources which is consistent This is crucial, because as our core utility with the Departrnent of Public Utikties' business restructures, we must look to guidehnes We have agreed to participate in a diversification for our future growth.

We will continue to execute our business plans in ,

ways that create value for our ,

shareholders.

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', ,' plans with speed and agibty, joined with gf r .1 '/,. nationally respected partners and reached an

)." historic agreement with key opinion leaders in the state. But the job is not done. In f act. it has

. only begun. We must continue to execute our business plans in ways that create value for our shareholders. We will do that by concentrating on the delivery of exceptional service for the best possible value to our customers, by continuing to focus on best practices in all The solid perfarmance of our core business segments of our business and by seizing operations in the midst of deregulation was emerging growth opportunities.

impressive Earnings per share in 1996 were

$2.61, an increase of 3 6% over 1995's level. Our ongoing abikty to understand and meet excluding the nonrecurrirg restructuring charge in custorar needs will be the ultimate measure of our success. We will couple this with the use of 3 1995 Our aggressive attention to process improvements and cost control allowed us to innovative technology to differentiate ourselves achieve our lowest spending levels in a decade, in the marketplace and with the utilization of the significantly strengthen our balance sheet and right people who know how to get the job done.

dramatically improve productivity across all As you will see in this report, Boston Edison has business units. Our financial strength allowed us maue several bold moves which caught the to maintain our dividend at $1.88 per share despite attention of industry experts and customers the unreselved issues surrounding the industry. alike. In short. Boston Edison has set the These mi!estones were reached simultaneously with the convergence of the telephone, cable. Thomas J. May electric and gas markets Boston Edison has f

, capitalized on this trend, establishing a leader- [

ship position with our two recently announced joint ventures in Loth telecommunications with Chairman, President and Chief Executive Officer RCN Telecom Services. Inc., a subsidiary of C-TEC, and in retail energy marketing with Williams Energy Services Company, a subsidiary of The Williams Companies I

i Our Strategy in 1996 alone,12 major utility consolidations were announced across the country with a combined market value of $70 billion. Market pressure will drive the industry toward greater economies of scale, especially in high-concentration areas like New England, where numerous utilities currently exist. Naturally, we want to be a bigger player-even at a time when utikties' traditional lines of business are shrinking. Boston Edison will be a smaller company after the sale of the fossil generating units. But with the

" wires" business, or distribution, as the core focus, we expect to claim our share of a burgeoning unregulated energy market with expansion plans across New England. Additionally, we will leverage our " ground f!oor" position in telecommunications.

Emerging businesses in this new, competitive world will require size and scale. That can be achieved in several different ways, including mergers and acquisitions, which we believe will continue to accelerate in the industry and, specifically, in New England. Much of the future consolidation will be in local distribution businesses for both electric and gas. Another way to ensure diversification and grow 1h, as Boston Edison has demonstrated, is through Previously separate businesses; electric, gas, telephone, cable and Internet access, are coming together to provide a new package of services to customers. Boston Edison is on the c"tting edge of this convergence.

3

THE WILLIAMS COMPANIES,INC.)$$

" Boston Edison is a forward thinking and aggressive utility that understands who the customer is and that the customer will soon have choices," said Steve Cropper, President and CEO, Williams Energy Services Company. "This

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alliance provides an excellent retail ap" M' # development opportunity to q

• serve an important, rapidly evolving market."

5 affiliations. The af filiations with RCN. a subsidiary of C-TEC, for # g telecommunications and with Williams Energy Services Company, part of The Williams Companies, for the marketing of electricity gas and energy services.

prove that good joint ventures are a marriage of strengths. Involvement with " Speed to market is critical in this strong partners will h'elp us secure our collective future. We will anticipate business," said C-TEC Chairman the market and adapt quickly, with clear vision and a penchant for action- and CEO David C. McCourt.

Our future depends on offering innovative customer solutions, achieving best- " Boston Edison has demonstrated practice status, effectively running regulated delivery systems and to us that it can move quickly and maintaining best in-class marketing skills in our unregulated Lusinesses. with agility, both of which are essential to success."

la order to achieve these goals most effectively, we recently filed with the Department of Public Utilities a proposal to form a holding company, an umbrella structure under which all of our businesses, joint ventures and subsidiaries would reside. Our business unit structure, implemented in early 1995, began the functional separation of our regulated businesses from the unregulated. Further

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restructuring to a holding comoany is now reauired so that these businesses can j

be effectively separated, an issue that has been of keen importance from the ,

public pohty perspective. For Boston Edison, a holding company provides greater flexibility to diversify and expand as the industry restructures. From the , ,

regulatory viewpoint, a holding company structure minimizes the likelihood that companies will engage in unfair competitive activities.

Boston Edison is facing the tough realities of the deregulated environment by collaborating with the leading state consumer advocate-the Attorney Generars ofhte-and other interested pa"ies, on how best to proceed with industry restructuring and how to deliver real cost savings to customers. We worked successfully with these parties and, in December, reached an agreement as to how to bring market competition and customer choice to Massachusetts consumers.

Our settlement agreement will need to be approved by the Massachusetts Department of Ablic Utilities. In its current form it resolves the uncertainty surrounding stranded investments, a key issue in the industry restructuring

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debate by allowing for full cost recovery. Also outlined in the settlement is a l commitment from Boston Edison to reduce its rates by 10 percent once customer choice begins.

Boston Edison successfully worked with many interested parties to settle complex restructuring issues. Full recovery of stranded investments will allow us'to invest in innovative new technologies to meet changing customer demands.

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The settlement also provides for a competitive transition charge which would decline over a perind of 12 years. Additionally, the agreement calls for the company to sellits fossil generating plants. A detailed divestiture plan will be filed in May 1997 and we expect divestiture to be completed no later than six months after retail access begins. Boston Edison will continue to own and operate Pilgrim Nuclear Power Station, with future revenues based on 'he market price of energy. Pilgrim will continue to work toward a regionalinodel for nuclear power operaticns.

. We are exiting a large portion of our generation business and are now focusing on the steps necessary to operate our " wires." or distribution business, under new and more demanding performance criteria. At the same time, the company is pursuing innovative growth opportunities that will complement the core distribution business.

This settlement addresses public policy supporting customer choice and also oLr desire to establish a reasonable, workable transition from past regulatory ,

practices. Once the settlement is filed with the Department of Public Utilities, a process of hearings and dehberation on the matter will begin. We ,

expect that the Massachusetts legislature will take a necessary and active role in the restructuring debate over the next several months.

Consensus building marked the entire negotiation process for the settlement, which will ensure that utilities can obtain recovery for their past l

commitments and minimize litigation, for the best interests of consumers as well as shareholders.

We realize, however, that exiting a major portion of our business has an impact on employees and host communities where plants operate. We will be working on a comprehensive approach to ease the transition and meet the needs of those affected The settlement and the sale of fossil generating plants are consistent, g however, with the company's strategic direction. Additionally, our strategic shif t is a!igned with public pclicy for unbundling, and the stranded cost l

recovery provisions allow us to pursue market share in the emerging businesses of the new millennium.

Boston Edison's newly formed joint ventures will allow us to expand the services we offer customers in our existing service territory as well as to expand our presence in both the Greater Boston and New England markets.

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A single strand of fiber optic ps sg w 4= " -"gp ,,e -

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cable can transfer an almost

+ limitless amount of inforrnation-ten gigabites per second, or the equivalent of 160,000 telephone lines.

Fiber optics are used to carry voice, video, data and Internet access.

The settlement, when approved, will also set the stage for the company to .*

pursue new business opportunities by providing a platform for financial s

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Telecommunications .

Boston Edison and RCN, a subsidiary of C-TEC Corporation, have formed a joint venture to provide local and long-distance telephon6 service, video, /'

high-speed Internet access and, eventually, energy management and property monitoring services, RCN was attracted to Baston Edison as a partner g

Muene of our focus on innovative technology, our sales and trarketing enoutbe pod our reach into 100 percent of the homes and businesses in the Boston market.

" Speed to market is critical in this business," said C-TEC Chairman and CEO

David C. McCourt. " Boston Edison has demonstrated to us that it can move quickly and with agibly, both nf which are essential to success.' .

This joint venture is one of the most comprehensive in the nation between an electric company and a broadband network company to provide one stop shopping for energy and telecommunications services RCN is already providing services in Boston and New York City and expects add tional rollouts this year.

The projected cost of creating the Edison /RCN telecommunications network for a population of over 1.5 million h the Greater Boston area is about $300 million. The venture, in the form of an unregulated entity, will utilize Boston Edison's 200 miles of existing fiber optic cable, which is more than that owned by any other electric company in Massachusetts or by many telecommunications companies.

We recognize that we are in the customer service business, and we want to beccme the best at maximizing technology to deliver new services as they become available. This venture will offor customers one-stop shopping for in the competitive world, speed to market is an important advantage.

We won't mimic our competitors. Rather,

we will move before the market tells us to, and in so doing, establish a leadership position with the help of compatible partners.

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The joint venture partnership, announced in September between Boston Edison and RCN Telecom Services, Inc., will provide custorners one-stop shopping for 11 telecommunications and ,

electric services.

their total telecommunications needs, including voice, business / residential trAgV l) video, Internet access and private data nuworks. Steady growth is expected ia the $1.9 billion telecommunications market over the next three to five -

, x ., 6 years. This will be spurred by the Internet explosion, more frequent use of 4-7- d phone services and the increased demand for broadband connections to feed -c -

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Since Boston Edison is well established in the Boston market, we are a good .

s match for RCN. Conversely, RCN's technological leadership and presence in , N the telecommunications market make them an ideal choice for us as well.

Customers can expect added benefits from this joint venture over time, including interactive communicctions with their energy provider, opportunities to receive many competitively n: iced services from one source and economies of scale that can lead ;o prire advantages as the system grows.

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iThe convergence of the telecommunications and information industries is

[ creating a iew definition of oneistopshopping for the Information A00. -..

Retail Energy Marketing - -

I oston B Edison was among the first in the nation to bring a leading regional -

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' electric utility together with a national full-servic'e energy company to offer customers an expanded menu of energy and energy services, last October,-

1 we announced our partnership with Williams Eriergy Services Company, a i

- subsidiary of the Oklahoma based Williams Companies, to form EnergyVisionf La limited liability retail company, to market electricity, natural gas and energy :

. services to customers in all six New England states. Williams has a 3

tremendous breadth of capabilities in energy transportation and in risk 1 management. In fact, they own the largest natural gas pipeline infrastructure  ;

in the United States; Williams also brings a wide scope of financial products and packages to customers to meet their energy acquisition needs.

12 Boston Edison has attracted

. n nitionally recognized partners-multi-billion os c

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a ~]qT - ,j jiL, jtj;j <R *i  ! do .lar!c'o mpa,nies, and major players in their Ucs . _-4m t t;a,-

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respective businesses. Why did these ,

companies choose Bostor Edison?

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i;i lv ii ogg r CQv i Theypg"d recognize ourj bus)iness acumen; U%3pg 7 >

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sales and marketing expertise.

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This map depicts The Williams Companies' ,

natural gas pipelines.

Williams owns and operates the nation's largest system of g

interstate natural gas pipeiines.

The formation of EnergyVision will allow us to become an aggressive player j in the New England energy arena, a $5 billion market for gas and electricity alone. Add the energy services market in the region for an additional $2 billion, and the opportunities are indeed immense.

"This joint venture will give customers a broad variety of energy choices at

,g market based prices and will rapidly adapt to changing customer needs " said Willian.s Energy Group President and CEO Steve Cropper.

" Boston Edison is a forward thinkita and aggressive utility that understands who the customer is and that the customer will soon hav9 choices. This alliance provides an excerent retail development opportunity to serve an important, rapidly evolving market

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h the new competitive energy market, difforent customers will want ditferent products and services, from shopping the rnarket for the best commodity price to ,

seeking a supplier to help reduce the total cost of operations. EnergyVision will be a retail company that can meet these diverse customer needs.

Boston Edison is a changing and dynamic company, As we enter competitive markets we will continue to focus our efforts on performing well for our shareholders We recognize the synergy inherent within the company and throughout the external market, a simple but powerful principle that the whole is greater than the sum of its parts.

Througtaut this groundswell of industry change, we will continue to provide customer value in each business Many others are already in the energy and energy services business We know that our long-term success depends on understanding the needs of customers, helping them manage through this competitive transitinn and delivering value better than anyone else. This will u be the formula for maintaining the momentum of our financial strength.

We will continue to look for more

~efficient ways to run Boston Edison, enhance teamwork and provide customer value. And we will continue-to evolve, constantly looking to identify and seize upon opportunities for growth.

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A definitive partnership agreement

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.  : Boston Edison Company r .  :  ; . t

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it represents one of the most exciting and dramatic f .

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steps in the evolution of Boston Edison from e lo;al t

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, energy provider.

J Ernployees Made 11 Happen Our achievements are the fruits of hard work by all our employees in the face

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of real and persistent challenges. Yet, the rapidly evolving competitive ,

marketplace presents us with an ever increasing set of performance g.

expo-tations. Our employees fully understand the impact of competition on -

our business, and are aware that, in every other industry that deregulated, -

the service quahty increased while the price of service decreased. All of us at Boston Edison are comraitted to meeting the challenges ahead with determination and innovation.

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Retail Sales Growth ' Return On Equity

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• 1995 port.entage excludes i.

$0 44 restructunng charge.

L Capital Expenditures Onrnnonsi )

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Retail Customer Sales Mix  !

~ Res.deatial 27%

Commen al 609 Industnal & Other 13%

.M: nag:m:nt's Discussi:n cnd An: lysis able access charge designed to recover all of our stranded costs -

which are currently estimated to be appmximately $3 billion.

Positioning in the industry These costs include the above-market commitments under -

existing purchased power contracts, our net generation plant Backgre.md investment, nuclear decommissioning commitments and regula-Electric utilities have traditionally operated under a monopo- tory assets related to our generation business.

' listic regulatory framework. Under this framework customers As part of the settlement we have agreed to divest our fossil

.ne been restricted to a single electricity provider, typically a generating plants no later than six months after the Retail artically integrated electric utility engaged in the generation. Access Date. We expect to continue operation of Pilgrim transmissionind distribution of electricity. However, since Nuclear Power Station with a new revenue mechanism for the 1970's, the electric energy business has become increasmg- recovery of Pilgrim's future costs and have agreed to estimate ly competitive. With the enactment of the Public Utility the market value of the station by December 31,2002.

Regulatory Policies Act of 1978, a new independent power Regulatory assets related to our generation business and our producer industry commenced, competing with traditional net generation plant investment will be recovered with a return electric utilities for opportunities to generate electric power. over a twelve-year period. As an incentive to mitigate stranded in recent years many state utility commissions, incbiding the costs, our return on equiry will be increased for mitigation prior Manachusetts Department of Public Utilities (MDPU), have to the Rmail Access Date and as the transition access charge initiated inouiries into restructuring the electric utility indus. declines thereafter. The aggregate amount of the access charge try with a goal of promoting competition and extending to all will be reduced by the net pmceeds from the fossil divestiture customers the option of choosing their own electricity suppli- and the maket valuation of Pilgrim Station. Nuclear decom-ers, in 1996, hianachusetts electric utilities and other inter- missioning commitments and above-market commitments ested parties participated in the industry restructuring pro- under existing purchased power contracts will be collected over ceeding before the hlDPU. This pmcess culminated in the the lives of the underlying obligations which are expected to latter part of the year with a series of settlement agreements exceed twelve years. Certain severance, employee training and and the iuuance by the MDPU ofits formal electric industry community-related transitional payments are also recoverable restructuring plan. through the access charge.

Our electdc delivery business will remain fully subject to Ebetric utility industry restructur.mg 17 rate regulan.on. As part of the agreement, while there wd. l be in December 1996, we reached a settlement agreement with some rate design chan;;es, our base rate revenue level (non-fuel) the Massachusetts Attorney Genenu and the Massachusetts will be frozen until the Retail Access Date when custcmer Division of Energy Resources that resolves certain necessary choice begins.

issues surrounding electric industry restructuring. This agree- Effective with the commencement of retail choice and pur-ment mut be filed with and approved by the MDPU. If suant to the settlement agreement, our electric delivery business approved, the settlement agreement allows retail electric cus- will annually fde with the MDPU a computation supporting romers the ability to choose their electricity supplier (referred our return on average common equity associated with distribu-to as retail accesd. Retail access would occur at the later of tion system operations. The return on equity would be subject Ianuary 1,1998 or the date when retail access is made available to a floor of 6% and a ceiling of 11.75%. If the return on equi-i all cusmmers of Massachusetts invesmr-owned utilities (the ty is below 6% we would be authorized to add a surcharge to Retail Access Date). The settlement agitement provides us customer rates in order to reach the 6% floor. If the return on 3 with the ability to fully recover our stranded costs incurred equity is above 11% we would be required to adjust cusmmer I under the traditional electric ratemaking structure- rates by an amouat necessary to reduce the calculated return on }

Under the settlement agreement, all retail customers will equity between 11% and 12.5% by 50% and a return above j hase the opportunity to select their electricity pmvider starting 12.5% by 100% No adjustme'nt would be made if the return )

on the Retail Access Date. Retail customers will continue to on equity falls between 6% and 11%.

recei e electric delivery service under regulated rates. The settletoent also provides for the cor inued pmtection Cusmmers who choose not to participate in the competitive of the environment thmugh stringent emissions standards, a  !

marist will have the option of continuing to buy power from continued commitment to energy conservation and renewable j our elutric delivery business at

• Standard Offer

• prices for remurce programs and pmtections for low-income customers. j seven years. fl'he " Standard Otter" will pmvide customers with in October 1996, another major electric utility in electric service at rates designed to give a 10% savings in electric Massachusetts, along with the Massachusetts Attorney General,  !

prices. Our electric delivery business will purchase power for - the Mawchusetts Divisioh of Energy Resources and other parties

' Standard Offer

• service from suppliers through a competitive '

filed a settlement agreement with the MDPU. Their settlement bidding process.

36teement provides for retail choice, full compensation for poten-Commencing with the Retail Accm Date, the retail deliv- tial siranded costs and the divestiture ofits fossil and hydroelec-cry rates of our distribution business will include a non bypass- tric generating business. In addition, customers that do not l

l l

' choose an alternative supplier would receive " Standard Offer" ser- - Holding Comp:ny

. vice that would provide a 10% savings i:t electric prices upon the in January 1997, we announced a plan to form a holding com-

- Retail Access Date. On February 26,1997, the hiDPU issued an pany structure. The holding company structure, which is sub-1 order wepting this utility's settlement agreement. ject to shareholder and regulatory approvals, is intended to pro-;

We anticipate that the MDPU wil! . sue a decision on our vide increased financial, mat.agerial and organizational flexibili- ,

settlement agreement in the second or third quitter of 1997. ty in order to better position us to operate in the changing elec-

. Implementation of the settlement will also be subject to enact- tric utility industry, it will permit us to take adnntage of ment of enabling legislation _ by the hiassachusetts legislature nonutility business opportunhies in a more timely inanner. In .

and rulings by the Federal Energy Regulatory Commission addition,~he holding company structure will clearly separate

- (FERC). In th Ont quarter of 1997, both the hiassachuset: 5 our regulated and unregulated lines of business enabling us to Governor and a Joint Committee of the hiassachusetts legisla- pursue nonutility business ventures in a manner consistent with ture filed sepaute bilh on restructuring the electric utility the electric utility industry restructuring principles outlined by industry. The major princip es l of these bills are substantially the Af DPU. The holding company structure is a well-estab-mnsistent with those of the htDPU restructuring plan,includ- lished form of organization for companies conducting multiple ing the opportunity for stranded cost recovery and reduced elec-lines of business, particularly entities engaging in both regulated tricity prices. The bilh clarify the hiDPU's authority to create and unregulated activities. Allinvestor-owned hiassachusetts the opportunity for retail customer choice by January 1.1998- electric utilities, other than Paston Edison, are currently orga-in December 1996, the hiDPU issued its formal electric nized in a holding company structure.

indmiry restructuring plan. The stated goal of the plan is to reduce costs, over time, for all consumers of-lectricity. Under 1992 Rate Settlement -

the hiDPU's pmposal, the current monopoly regulatory frame- As referred to in the following Results of Operations, the work will evolve into a competitive rnarket system featuring hiDPU had previously approved our three-year settlement agree-conn.mer choge among providers of generation services. The ment efTective November 1992. This agreement provided us transmission and distribution of electricity will remain monopo- with retail rate increases, allowed for the recovery of demand side lies subject to rate regulation. management conservation program costs, specified cenain Joint ventures acwonting adjustments and dariGed the timing and recognition of certain expenses. The agreement also set a limit of 11.75%

ts M,e curremly conduct unregulated aco. . . vines through our wholly f i fm M of Mndu owned subsidiary, Ilosion Energy Technology Group (llETG).

in December 1996, BETG signed a joint venture agreement MW dim #ia m mds

, from performance incentives. The rett.il rate increases consisted with knownResidennal as RCN Telecon Commumcauc.a Servkes, Inc. (RCN), o Netwd.

form a hmite Inc., curreml[

of . d retail base rate increases of $29 million effective two annual

. Novernber 1993 and November 1994 and an annual pe for-liabih.ty company to provide kical and long-distanct telephone mance adjustment charge effecn.ve November 1992 through service, video, high-speed Internet access and other telecommu-October 2000. The performance adjustment charge varies annu-mcanons-related vrvices (the Telecommumcanons Venture ). .

ally based on the performance of Pilgrim Nuclear Ibwer Statmn.

.The unregulated entity will be owned un to 49% by BETG, .

. .Du. s charge v . further desen. bed .m the Electnc Sales and wtth RCN having the day-to-day management responsibih.ty.

Revenues section. We did not make a base rate 6!ing upon the

.the projected cosis of creating the Telecommunications

,, expiration of the 1992 settlement agreement, therefore base rates Venture , which .is planned to serve 1.6 md. lion customers in the .

have remainedme . . ffect at their 1995 levels.

greater Boston area, is approximately $300 milh.on over several l years. The joint venture agreement is subject to a number of Results of Operations l- conditiom which must be satisGed before formal operations l 1 begin, including the obtaining of certain regulatory approvals. 1996 versus 1995 In January 1997 BETG, through one ofits wholly owned Earnings per share of common stock ivere $2.61 in 1996 com-

- subsidiaries, signed deGnitive agreements with Williams pared to 52.08 in 1995. Earnings in 1995 reflected a nonrecur-l Energy Services Company (WESCO), a subsidiary of The ring before tax charge of $34 million ($20.7 million net of tax, l < Williams Companies, Inc., to form EnergyVision,11C, an or 50.44 per share) associated with our corporate restructuring.

unregulated limited liability umpany. .This " Energy The restructuring is discussed fmther in Note F to the

- hlarketing Vemure' will market electricity, natural gas and Consolidated Financial Statements. Excluding the nonrecurring energy related services to retail customers in the six New restructuring charge, earnings per common share increased England states. EnergWision began operations in Febru;"y 3.6% over 1995 primarily due to Icwer ocerations and mainte-l

! '1997J BETG,ihmugh its subsidiary, and WESCO each own nance and interest expenses and higher Pilgrim performance 50% of the new company, with an expected combined initial revenues. These positive changes were partially offset by an

-investment ofless than $10 million. inuease in depreciation expense.

Operating r: venues - od of these deferred costs from fhe years to two years, consis-Operating revenues increased 2.3% over 1995 as follows: cent s.;th the two-year cycle between terueling outages at f(in thousands) _ Pilgrim Station.

R;teil electric revenues $48,649 The 1995 operating expenses reflect a $34 milhon nonre.

cuning charge related to our corporate restmauring. Refa m Demand side management revenues -(20'545) the Results of Operations for 1995 versus 1994 and Note F to Wholesale revenues ' (2,072) the Consol dated Financial Statements for additional informa-

- Short-term salet and other revenues 11,768 tion regarding our 1995 restructuring.

Increase in operating revenues $37,800 Depreciation and amortization increased $32 million. The increase is primarily the result of a change in the estimated Retail electric revenues increased $48.6 million. Fuel and remaining economic lives of our hiystic 4,5 and 6 fossil gener.

purchased power revenues increased approximately $36 million. ating units in the second quarter of 1996, retroactive to the These higher revenues are offm by higher fuel and purchased beginning of the year, and an increase in the depreciable plant power expenses and, therefore,, have no net effect on earnings. balance. The change in estimated economic lives of hiystic 4,5 Performance revenues, which vary annually based on the operat- and 6 resulted in a $22 million increase in depreciation expense ing performance of Pilgrim Station, increased $14.5 million as for the year. Refer to Note B to the Consolidated Financial Pilgrim Station operated at a higher capacity in 1996. Pilgrim's Statements for more information on depreciation expense.

annual performance adjustment charge is discussed further in The decrease in DSM programs expense reflects the declin:

the Electric Sales and Revenues section. Retail kWh sales in current DSM program expenditures.

increased 2.8% in 1996, primarily due to the positive economic The increase in income taxes is due to higher net income impacts on our commercial customers. and a higher effective tax rate in 1996. Our effective tax rate in Demand side management (DSM) revenues decreased pri- 1996 is 38.2% versus 37.1% in 1995.

marily due to a decline in current DSM program expenditures.

interest charges The primary reason for the decrease in wholesale revenues is due to a decrease in Pilgrim contract customer revenues. Interest on long-term debt decreased due to the maturity of These revenues decreased despite increased kWh sales due to $100 million 8 7/8% debentum :n December 1995 and $100 lower operations and maintenance expense related to Pilgrim million 51/8% debentures in March 1996. These decreases Station. Pilgrim contract customers are billed for their propor- were panially offset by the issuanca of $125 million 7.80% 19 tion 2te share of the unit's costs, debentures in May 1995 which were outstanding for all of Net short-term sales and other revenues increased $11.8 1996. Other interest charges increased due to an increase in million. Despite lower kWh sales, short-term sales revenues interest on shon-term debt caused by the higher average short-increased approximately $6 millian due to higher fuel prices, term debt level partially offset by a lower average short-term Revenues fmm shon-term sales result in a corresponding reduc. borrowing rate. The short-term debt balance increased as a tion to furu e fuel and purchased power billings to retail cus- result of the debenture maturities and the redemption of $4 tomers and, therefore, have no net efTect on earnings. This million of preferred stock in 1996. Allowance for borrowed increase also reflects an increase in revenue from nonelectric funds used during construction (AFUDC), which represents the sources in 1996, fmancing costs of construction, decreased due to lower overall construction acuvity during 1996, shorter construction periods, Operating expenses and lower short term interest rates.

Fuel and purchased power expenses increased $53 million. Fuel 1995 versus 1994 expense increased, despite a slight decrease in company genera-tion, due to significantly higher oil and natural gas prices. Earnings per share of common stock were $2,08 in 1995 com-Purchased power expense reflects a higher volume of energy pared to $2.41 in 1994. Earnings in 1995 reflect the nonrecur-purchases and an overall increase in energy prices. These ring before tar charge of $34 million ($20.7 million net of tax, increases were panially offset by the timing effect of fuel and or $0.44 per share) associated with our corporate restructuring.

' . purchased power cost collection. Fuel and purchased power The charge reflects the costs of early retirement and severance expenses are substantially recoverable ihmugh fuel and pur- pmgrams implemented as part of our organizational streamlining

, chased power reveaves, and reorganization into business units. Excluding the restructur-Operations and maintenance expeme decreased $41 million ing charge, earnings per common share were $2.52 in 1995, an L primarily due to lower labor costs resulting from our 1995 increase of 4.6% over 1994. This increase is due to the $29 mil-restructuring and the continuing cost control etTorts of each of lion annual retail base rate increase effective November 1994, the our business units, in addition, the amonization of deferred ending of amonization of deferred cancelled nuclear costs in nuclear outage costs decreased $9 million. As discussed in Note 1994, a 1.2% increase in retail kWh sales and lower revenue DB to the Consolidated Financial Statements,in the third quaner reserve provisions. These positive impacts were panially offset of 1995 we made a retroactive change to the amonization peri- by higher income and property taxes, nuclear outage amoniza-

1 tion and employee benefit expenses in 1995 wer 1994 levels, ing costs in the electric delivery business. Electric generation and a gain recorded in 1994 related to a favorable court ruling costs increased only 1% in 1995, primarily due to a refueling on an eminent domain case. and maintenance outage at Pilgrim Station.

The $34 m_illion nonrecurring restructuring charge was Operating revenues incuned over the third and founh quarteis of 1995 as a result Operating revenues increned 5.4% over 1994 as follows: of our corporate reorganization announced in July 1995. As (in thousands) part of the reorganization,330 emptnyees elected to retire under Ret il electric revenues $69,8S1 enhanced retirement programs and 149 employees whose posi- ,

Demand side management revenues 8,783 tions were eliminated became tiigible for benefits under a spe.

Wholesale revenuos (1,799) _ cial severance pmgram. Refer to Note F to the Consolidated 6,933 l'mancial Statements for additional information.

. Short-term sales and other revenues

$82,768 I' preciati n and am nizati n expense increased due to a Increase in operating revenues higher average depreciable plant balance, in 1994 we fully expensed the remaining deferred costs of Retail electric revenues increased $69.9 million. q the cancelled Pilgn.m 2 nuclear unit.

- Approx.imately $28 milh.on of the increue was due to the 'I he increase in demand side management programs November 1994 base rate increase while approximately $11

, . . expense is related to the increase in DSM revenues. Beginning rm!! ion wu due to the m. crease m rcrad kWh sales. Fuel and . .

wnh the annual conservation charge implemented in February purchased power revenues increased $11 million as a result of 1995, DSM costs are recovered and expensed primarily m. the the timing effect of fuel and purchued power cost recovery. .

' ear mcurred. The 1995 expense includes $31 milh.on of 1995 These higher revenues are offset by higher fuel and purchased program costs and $14 million of amortization of costs capital-power expenses and, therefore, have no net effect on carnings. .d.m 1992 through 1994.

ne I,ilgn.m performance revenues m. creased $9 million primarily Property md other taxes increased primarily due to higher due to a higher perfonnance rate effecu.ve m 1995 and a 17% Boston property taxes resulu.ng from capital addm. .ons.

increase in generation. Our elTeco.ve annual income tax rate for 1995 was 37.1%.

A new annual conservation charge for recovery of demand vs. 31.4% for 1994. The higher rate is the result of a $10 mil-side management program costs was implemented in February -

lion adjustment to deferred income tax expense made .m 1994-1995. Under th.is charge all 1995 program costr were recovered .

m accordance w.it h the 1992 settlement agreement.

. 20 .

l m 1995. Th.is resuhed in higher DSM revenues and expenses

( than in prior years when certain program costs were deferred Other income l and recovered over a six-year period' The net decrease in other income is primarily due to a $5.7 Short-term sales increased as a resuh of higher generating million gain recognized in 1994 from a court ruling on a 1989 availability in 1995. Revenues from short-term sales resuh in eminent domain taking of certain of our property, a conesponding reduction to future fuel and purchased power billings to retail customers aad, thercfore, have no net effect Interest charges on earnings. Interest on long-term debt increaed due to a $125 million debenture issuance in May 1995, partially otTset by interest sav-Operating spenses ings from first mortgage bond and debenture redemptions in Fuct and purchased power expenses increased $22 million pri- 1994. Other interest charges increased slightly due to higher marily due to the timing elTect of fuel and purchued power short-term interest rates partially ofTset by a lower average short-cost collection. Excluding the timing efTect, fuel expnse term debt level. AFUDC decreased due to a lower construction mcreased due to an 8% increase in fossil gcneration while pur' work-in-progress balance and shorter construction periods, par-chased power expense was substantially unchanged, Fuel and tially offset by higher short-term interest rates, purchased power expenses are substantially recoverable ihmugh fuel and purchased power revenues. Electric Sales and Revenues Operations an ! maintenance expense increased 3.3% over -

Electric sales 1994. Tlus waa pnmanly due to an $11 million increase m the Retail kWh sales increased 2.8% in 1996. The major contrihu-amonization of deferred nuclear ourage costs. In the third tor to th_is increase was the positive efTect on commercial cus- .

quaner of 1995 we made a retmactive change to the amortiza-

! comers of a continued strong economy in our retail service terri-tion period of deferred nuclear outage costs from five years to t ry. The strong economy's impact in greater Boston is ilhis.

t two years as discussed in Note B to the Consolidated Financial Statements. In addition, employee benefit expenses increased trated by the highest commercial ofTice occupancy rate in 15 L

l primarily due to higher postretirement benefit expenses record. years. In addition, hotel occupancy rates and non-manufactur-ed in accordance with the 1992 settlement agreement. We also ing employment increased over 1995. The commercial sector it curred higher administrative costs in positioning the company represents approximately 50% of our electric operating rev-enues. Residential sales, which represent approximately 27% of for changes in the industry, which were offset by lower operat.

. electric operatica revenues, decreased slightly primarily due to performed during the shutdown. Tbe power needs usually met

~ overall rnilder than normal weather conditions. Industrial sales - by the station were met by other generating plants or purchased remained relatively flat, This sector represents approximately from other suppliers as necessary We do not believe that the 9% of electric operating revenues. Total kWh sales, including ' generator damage resulted fmm actions within our control.

wholesale, increased 3.3% The increase in w holesale sales was Our recovery of the incnzmental purchased power costs during (primarily due to higher sales to our Pilgrim contract customers - the ettage through fuel and purchased power revenues, howev.

as the plant was operating for substantially all of 1996, in addi. cr, rema:ns subject to review by the hiDPU under a generating

' tion, sales to our municipal customers increased due to a reduc. unit performance program.

_ tion in available energy supply in New England.

A 1.2% increase in retail kWh sales in 1995 was primarily N*.dI*Y due to a stronger economy, partially offset by the impact of . We ordinarily meet most of our cash requirements for pla*u deman_d side management programsc Total kWh sales expenditures with internally generated funds._ These funds are increased 3.8% primarily due to an increasi. in Pilgrim can' tact cash flows from operating activities, adjusted for changes in customer sales. working capital and the payment of dividends During 19C.

1995 and 1994 our internal generation of cash provided 170%,

Electric revenues . 102% and 109%, respectively of our plant expenditures. The Our retail electric rates are subject to the jurisdiction of the capital spending level, excluding nuclear fuel, forecasted for

- hiDPU. As discussed in the Positioning in the industry sec. 1997 is $144 million which includes amounts for utility plant _ >

tion, we reached a seulement agreement in December 1996 and our new business ventures. The capital spending level over that, if :pproved, resolves certain necessary issues surrounding the next Sve years is forecasted to be approximately $750 mil-electric industry restructuring. As part of the settlemeri abree- tion.- In addition to capital expenditures, we have long-term

. ment our electric delivery business will provide " Standard debt and preferred stock payment requirements of $103.6 mil-Offer" customers service at rates designed to give a 10% savings lion per year in 1997 and 1998, $3.6 million in 1999, $168.6 in electric prices. Under the agreement, our base rates will million in 2000 and $53.6 million in 2001.

temain froren until the Retail Access Date (the later of- External financings continue to be necessary to supplement January 1,1998 or the date when retail access is made available our internally generated funds, primarily through the issuance to ah customers of hlassachusetts investor-owned utilities). We of short-term commercial paper and bank borrowings. We have do not expect that maintaining base rates at their current level authority fmm the FERC to issue up to $350 million of short- a until the Retail Access Date will have a material adverse etTect term debt. We also have a $200 million revohing credit agree-on our fmancial condition or results of operations. After the ment and arrangements with several banks to provide additional Retail Auss Date, the return on equiry on our electric delivery short-term credit on a committed as well as on an uncommitted business will be subject to an i1.75% ceiling which is lower and as available basis. At December 31,1996, we had approxi-than has been experienced in the recent past. mately $201 million of short-term debt outstanding, none of The annual performance adjustment charge from our 1992 which was incurred under the revolving credit agreement. In settlement agreement with the hiDPU remains in effect 1994 the hiDPU approved our financing plan to issue up to ihmugh the year 2000 and provides us with opportunities to $500 million of equity and long-term securities thmugh 1996, impmve our Gnancial results. The most significant potential in 1996 the hiDPU approved our request to extend this fmanc-impact of this performance incentive is based on Pilgrim ing plan through 1998. Authority to issue approximately $322 Station's annual capacity factor. An annual capacity factor million remains under this plan. Proceeds fmm issuances under between 60% and 68% would provide us with appmximately this plan are to be used to re6 nance short and long-term securi-

'_ $R5 million of revenues in the performance year ended ties and to fimd capital expenditures and working capital October 1997._ For each percentage point increase in capacity requirements. Refer to Notes H and I to the Consolidated factor above 68%, annual revenues will increase by approxi- Financial Statement, for additioral information relating to our mately $800,000.' For each percentage point decrease in capaci. financing activities. We intend to issue $100 million of two-

.ty factor below 60% (to a minimum of 35%), annual revenues year debt in hiarch 1997.

will decrease by appmximately $900,000. We are currently Outlook for the Future

. billing customers basmi on an 85% capacity factor. Th.is .is a decrease from the capac_ity factor of 90.9% achieved in the per. Competitive forces within the electric utility industry continued

- formance year ended October 1996 due to the scheduled rou- to increase in 1996. Changes in the industry include ongoing

tine refueling outage that began in February 1997. We earned competition in wholesale power markets and increased pressure

$67.6 million in revenues related to Pilgrim's capacity factor in for retail customer choice. These forces are due to a variety of the pdrformance year ended Ocmber 31,1996. factors, including legislative and regulatory proceedings at both Pilgrim Station was shut down for appmxinutely three federal and state levels designed to fost r competition and nmnehs in 1994 due to a non-nucicar problem with its electri- changes in customer expectations. The trend continues toward cal generator [ Regularly scheduled maintenance wark was also increased competition through modi 6ed regulation of the

industry. In Massachusetts, open o: cess to generation markets try have affected utilities' ability to continue to apply regulatory for retail customers is approaching rapidlf, _ .' accounting. The final rules issued by the MDPU or the enact.

The effects ofcompetition have been evident in the wbolet ment cflegislation in Massachusetts could, in the near term,

~salc energy rnarket. In response to'the competition frorn other - cause us to no longer meet the criteria for application of SFAS - 1 electric *utilit es and nonutility , nerators to sell electricity for- 71 for some of our operationsf Should this occur, we would be required to take an immediate noncash charge to incomefor all

~

iesale, we secured long-term power supply agreements with our seven wholesale customers that act rates through 2002 and of our affected regula ory assets and the above-market portion beyond. %is segment renresent: 3% ofour operating revenues. ~ of purchased power contracts. In addition, a write-down of , .

In January 1997, we filed an open access tariff with the - utility plant assets would be required under Statement of

- FERC that incorporates our transmission rates into a New Financial Accounting Standards R.121 Ac6ountir.g for the  ;

England regional transmission tariff. This filing, which is sub- Impairment oflong-Lived Assets and for long-Lived Assets to ject to approul, was madein response to the FERC's open . be Disposed Of, if competitive or regulatory change results in a access transmission order that was inued in April 1996. The - probability that future cash flows will not be sullicient to recov-order requires all utilities with transmhsion systems to file open er our investment in those assets. Based on our settlement access tariffs, to provide service under those tarifTs to transmis. agreement we expect to recover all strandable costs through a ',

sion customers comparable to service provided to their electric non-bypassable access chstge to be paid by customers of our energy customers and to' take s-rvice under the tarifTs for whole- electric delivery business. Unuer our settlement agreement, our sale purchases and sales. The order aho supports the full recov- delivery businen will remain subject to rate-regulation and, cry oflegitimate and verifiable costs previously incurred under therefore, w,a continue to meet the criteria of these accounting federal and state regulation.. The provisions in the order pro- standards. As noted earlier, under our settlement agreement we vide a framvwork for significant changes in the electric utility expect to continue to , perate Pilgrim Station with the ability to . ,

industry. We do not expect the FERL order to significantly collect stranded costs related to the unit. Ahhough not antid-impact the results of our operations, which are primanly regu. pated based on our settlement agreement, the nonrecovery of lated by the MDPU. strandable costs could have a material impact on our results of Additional competition exists with ahernative fuel suppliers operations and financial condition. However, iflaws are enact-as customers are abic substitute natural gas, steam or oil for ed or reg datorv decisions are made that do not ofter electricity for heating or ccoling purposes. In addition, indus- Massachusetts electric utilities an opportunity to recover previ-1

?? trial and large commercial customers may pursue options to ously reviewed, prudently incurred commitments to provide generate their own electric power or factor the cost of electricity service to our customers, we believe we have strong legal argu.

into their decisions to relocate to new service territories. n.ents to challenge such laws or decisions. We will actively pur-In addition to our involvement in the MDPU's restructur. sue the full recovery of stranded costs and are prepared to take ing proceeding. we have actively responded to the changing the action necessary to protect the interests of our shareholders.

- electric utility industry in other ways. In 1995 we reorganized Other Matters the company into separate business units la order to strengthen our competitiveness. The Customer, Fossil Generation Nuclear Connecticut Yankee Generation and Corporate Services business units were designed On December 4,1996, the board of directors of Connecticut to sharpen management focus along our significant lines of Yankee Atomic Power Company (CYAPC), which owns and operation while maintaining company-wide strategic goals. The operates the Co mecticut Yankee nuclear electric generating unit restructuring reduced our workforce which resulted in a signifi-(Connecticut Yankee), unanimously voted to retire the Haddam cani increase in labor etliciencies and cost savings. We also con-Neck, Connecticut unit. The decision w*. based on an eco-tinued to develop customer alliances and provided economic development rates to some c' ustomers. These actions all illus- nomic analysis of the costs of operating the umt through 2007, trate our commitment to be a competitively priced, reliable the period ofits operating license, compared to che costs of pmvider of energy. ci sing the unit and incurring replacement power costs for the In the traditional revenue requirements model, our electric same period. We have a 9.5% equity investment in CYAPC of

- revenues have been based on the cost of providing electric ser- approximately $10 million. Refer to Note L4. to the vice. As such, we are subject to certain accunting standards Consolidated Financial Statements for more information regard-that'are not applic.ble to other businesses and industries in gen- ing Connecticut Yankee.

eral.- We believe that we currently meet the criteria of these Environmental standards. Statement of Financial Accounting Standards No.

• * '"W"' '" numemus federal, state and kical standards with 71; Accounting for the Effects of Certain Types of Regulation rapet to waste d.isposal, air and wa;er quality and other envimn-JSFAS 71) requires us to defer recognition of certain cosu when mental c nsiderations. These standards can require that we mod-incurred when we expect to receive fcture rate recovery of these ly ur exhting fac nes r mm mcteased opuanng mts.

costs. The Securities and Exchange Commission has recentiv~

• *n or Perate 8PProximately 40 properties where oil

, begun to foct s on how the changes in the electric utility indus.

or hazardous materials were previously spilled or released. We

also continue to face ponible liabihty as a potentially 'responsa. non reductions by 1999 or years thereafter, The extent of any

- ble party in the cleanup of appmrimately ten multi-party har. additional emission restrictions and the cost of any further mod-

crdous waste sites in Massachusetts and other states where we - ilicatiom is uncertain at this time, )

fare alleged to have generated, transported or disposed of haz. Public concern continues regarding electromagnetic fields -

ardous waste at the sitese Refer to Note L6. to the _ (EHF) anociated with electric transmission and distribution

_ Consolklaird financial Statements for more information regard. facilities and appliances and wiring in buildings and homes.

h in6 ar.stdous waste issues, duch concerns have included the possibility of adverse heahh

_ in Octobet 1996, tLe Accounting Standards Executive effects caused by EMF as well as perceived effects on property

Comm' ice of the American Institute of Certified Public values. Some scientific reviews conducted to date have suggest-Accountants hsued Statement ofIbition 96-1. Environmental ed associations between EMF and potential health effects, while

Remediation Liabilities, effeedve in 1997. Tids statement con- other studies have not substantiated such anodations. The tains authoritative guidance on specific accounting issues that National Research Council recently reported that there is no are prnent in the recog;,ition, measurement, display and disclo-conclusive evidence that exposure to EMF fmm power lines an!

sure of envimamental ternediation liabilities.- We do not believe appliances presents a heahh hazard. The isnel of scientists, that this statement will have a material effect on our financial working with the National Academy of Sciences, report that

_ position or results of operations, more than 500 studies over the last several years have produced Uncertainties continue to exist with respect m the disposal no proof that EMF causes leukemia or other cancers or harms Lof both spent nuclear fuel and low-level radioactive waste _ humm health in other ways. We coatinue to support research (LLW) resulting from the operation of pilgrim Station. The into the subject and are participating in the funding ofindus-United States Department of Energy (DOE) is responsible for try-spon ored studies. We are aware that public concern regard-the ultimate disposal of spent nuclear fuel: however, there are ing EMF in some cases has resuhed in litigation, in opposition uncertaimies regarding the DOE's sshedule of acceptance of to existing or proposed facilities in proceedings before regulators spent fuel for disposal. In 1995 we regained access to the LLW or in requests for legislation or regulatory standards concerning disposal facility located in Barnwell, South Carolina. Refer to EMF leve ls. We have addressed issues relative to EMF in vari-

%te E to the Consolidated Fmancial Statements for father ous legal and regulatory proceedings and in discussions with discussion regarding spent nuclear fuel and LLW disposal, customers and other concerned persons; however, to date we The 1999 Clean Air Act Amendments require a significant have not been significantly affected by these developments. We re.luction in nationwide emissions of sulfur dioxide from fossil continue to closely monitor all aspects of the EMF issue. 23 fuel fired generating units. Sulfut dioxide emissions will be Litigat. ion restricted through a market based system of allowances, in 1996 we sold sulfur dioxide allowances related to the years 2000 to We were named as a party in lawsuits by Subaru of New 2010 that are expected to be in excess of our needs. pmceeds England, Inc. and Subaru Distributors Corporation. The plain.

fmm the sale of these allowances were recorded as a regulatory rifts claimed certain automobiles tored on lots in South Boston liability as it is pmbable that we will be required to refund the suffered pitting damage caused by emissions from our New proceeds to customers. We have the option to repurchase certain Bmton Station generating unit. In February 1997, we settled of these alkmances at specified prices from 2000 to 2010. We the lawsuit bmught by Subaru Distributors Corporation. The currendy do not anticipate exercising these options; however, settlement did not have a material impact on our financial posi-their potential exercise will be based on numemus factors, tion or results of operations. The Subaru of New England, Inc.

o . including the timing of the Retail Access Date. As discussed in lawsuit is still pending.

the Ibitioning in the indtistry section, under our settlement Refer to Note L7. to the Consolidated Financial agreement we have agreed to the divestiture of our fossil generat. Statements for more information on these lawsuits and other ing plants no later than six months after the Retail Access Date legal matters in which we are involve 1.

(the later of January 1,1998 or the date when retail access is Saf harbor cautionary statement inade available to all cmtomers of Massachusetts investor. owned utilitied, if regulatory approval is not obtained or is delayed, it We occ si nally .nake forward-looking statements such as fore.

is possible that we could continue to operate these units. Other casts and projections of expected future performance or state.

provisions of the 1990 Clean Air Act Amendments involve limi- ents of our plans and objectives. These forward-looking state.

4 tations on emissions of nitmgen oxides from existing generating ments may be contained in filings with the Securities and

. units. Combust on i system modifications made to New Boston Exchange Commissina press releases and oral statements. l

- and Mystic Stations, including the intallation oflow nitrogen Actual results coutJ potentially differ materially from these oxides burners at New Boston, have allowed the units to meet statements. Therefore, no assurances can be given that the oui-the pmvisions of the 1995 standards. Depending upon the out, comes stated in such firward looking statements and estimates

come of certain Massachusetts Department of Environmental will be achieved.

protectitm air quality modeling studies currently in progress, the The preceding sections include certain forward-looking continued operation of these units could n quire additional emis- natements about the efTects of the industry restructui:ng 1

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pmecu and our related settlement cgreement, our joint ven. rates, technology and the prices and availability of opereting j tures, op roting roults, Pilgrim Station's performance, supplia could materially affect our projected operating results,  !

Connecticut Yankee and environmental and legal luun. Pilgrim Statiorn performance could differ from our expec. l The effects of the industry restructuring pntea currently. tations. The station's capacity factor could be impacted by j underway at the MDPU and our related settlement agreement changes in regulations or by unplanned outages roulting from  :

could 6fter from our expectations. His could occur as regula-taey dccisions and negoti ated settlements between utilitie and :

certain operating conditions, The ultimate liability related to the shutdown of

'l intenenors are fmalired. in addition, the development of a - Connecticut Yanker could difTer from the current otimate, in ,!

competitive electric generation raarket, the impacts of actual addition, although not anticipated, it is pouible that some por. 3 ctraric supply and demand in New England and legislative . tion of our share of post operation costs may not be recoverable  !

action rnay affect the dtimate rnults of the industry restructur. fmm ultimate customers. l ing and our settlement agreement. -The impacts of various environmental and legal inues  :

The timing and activities of our joint ventures as well as could difTc from our expectations. New regulations or changes ,

out actual invottaents may difier from our expectations. ,o existing regulations could impose additional operating  ;

This could occur it required regulatory approvals are delayed requirements or liabilities other than capected. The effects of i or not obtame 1. :hanges in specific hazardous wasic site conditions and cleanup The impacts of our continued cost control procedurn on technology could affect our ntimated cleanup liabilities. The out operating results could differ from our expectations. The impacts of changen in available information and circumstances i effects of chango in economic conditions, tax rain, interest regarding legal inues could affect our estimated litigation costs.

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Consolidated St:t:ments cfInccm3 years ended December 31, (in thousands, except earnings per share) 1996 1995 1994 i

Operating revenues $ 1,666,303 - $ 1,628,503 $ 1,544,735_

Operating rupenses:

588,893 535,806 513,825 Fuel and purchased power 417,372 -458,196 443,545 Operations and maintenance Restructuring costs 0 34,000 0 185,494 153,339 148,845 Depreciation and amortization 0 0 19,791 Amortization of deferred costs of cancelled nuclear unit 30,825 45,125 35,438 Demand side management programs 107,086 106,361 100,015 Taxes-property and other 88,703 68,276 54,798 incorne taxes 1,418,373 1,401.103 1,316,257 {

Total operating expenses 247,930 227,400 228,478 Operating income' 698 (575) 3,979 Other income (cxpense), net 248,628 226,825 232,457 Operating and other income Intsrest charges:

94,823 106,640 102,570 Long term debt 14,551 12,642 12,343 Other Allowance for borrowed funds used during construction (2,292) (4,767) (7,478)

Total in'.orest charges 107,082 114,515 107,435,  ;

141,546 112,310 125,022 l Net income ~

15,365 15,571 15,765 Preferred stock dividends Earnings available for common shareholders $ 126,181 5 96,739 $ 109,257 25 Weighted average common shares outstanding 48,265 46,592 45,338

. Earnings per share of common stock $ 2.61 $ 2.08 $ 2.4 t Ccnsolidated Statements of Retained Earnings  ;

years ended December 31, 1994 l (in thousands) 1996 1995 Balance at the beginning of the year $ 257,344 $ 247,004 $ 218,292 Net income 141,546 '12,310

. 125,022  !

Subtotal 398,890 359,314 _ 343,314 Cash c"vidends declared:

Preferred stock 15,365 15,571 15,765 Common stock 90,834 86,399 80,545

. . Subtotal 106,199 101.970 96,310 Provision for preferred stock redemption and issuance costs (a) 905 0 0 Balance at the end of the year $ 291,786 $ 257.344 $ 247,004 (a) Refer to Note B.7. to the Consolidated Financial Statements. 3

- The accompanying notes are an in..gral part of the consolidated financial statements, f

Consolidated Bal:nce Sheets Dacember 31,

' (in thousands) 1996 1995

~~

Assets Utihty plant in service, at original cost = $ _4,393,585 $ 4,315.422 ,

Less: accumulated depreciation 1,550,317 5 2,843,268 1,439,996 $ 2,875,426 Nucl:ar fuel 351,453 302,594 Less: accumulated amortaation 268,509 82,944 251,951 -50,643 *i

~

i Construction work in' progress 30,376 29,573 Net utility plant 2,956,568 2,955,642 Investmentr;in electric companies, at equity 23,054 23,620 j Nuclear decommissioning trust 132,076 102,894 j Current assets: r

, Cash and cash equivalents 5,651 5,841 I

. Accounts receivable 233,024 219,114 ,

Accrued unbilled revenues 34,922 37,113 i Fuel, materials and supplies, at average cost 57,075 59,631  ;

Other 45,146- 375,818 23,607 345,306 Deferred debits:  !

Regulatory atsets-power contract' 88,963 21,396 Other regulatory assets 113,063 128,699  ;

Other 39,729 59,613 i Total assets $ 3,729,291 $ 3,637,170 f

g Cepitalization and Liabilities <

Comtnon stock equity $ 1,036,424 $ 989,438

- Cumulative preferred stock:  !

Nonmandatory redeemable series 119,954 119,677

• Mandatory edeemable series 81,465 84,837 Long-term debt 1,058,644 1,160,223 Current liabilities:  ;

Long-term debt / preferred stock due within one year- $ 102,667 $ 102,667 Notes payable 201,454 126,441 Accounts payable 13',083 133,474 Accrued interest 24,378 25,113 Dividends payable 25,343 25,351  ;

Other - 115,812 603,737 138,044 551,090 Dcierred credits:

Power contracts: ._

88,963 21,396 Accumulated deferred income taxes 498,718 497,282 Accumulated deferred investment tax credits 58,899 62,970

. Nuclear decommissioning liability 133,388 113,288 Other - 49,099 36,969 Commitments and contingenc_ies Total capitalization and liabilities $ 3,729,291 $ 3,637,170'

- The accompanying notes are an intepal part of the consolidtted financial statemeats.

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Consolidated St:tements cf Ccsh Fl:ws y2:rs end:d December 31, (in thousands) 19V6 1995 1994 Operating at:tivities:

Net income 5 141,546 $ 112,310 $ 125,022 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation a.id amortization 228,259 202,294 203,222 Deferred income taxes and investment tax credits (4,057) (25,193) (8,276)

Allowance for borrowed funds used during construction (2,292) (4,767) (7,478)

Net changes in:

Accounts receivable and accrued unbilled revenues (11,719) (34,626) (20,701)

Fuel, materials and supplies (2,171) 7,202 3,093 Accounts payable 609 2,978 23,196 Other current assets and liabilities (44,514) 26,485 35,217 j Other, net 50,921 23,975 14,847 N:t cash provided by operating activities 356,582 310,658 368,142 Iny: sting activities:

Plant expenditures (excluding AFUDC) (151,045) (180,822) (198,771)

Nuclear fuel expendituret (52,967) (13,621) (21,934) ,

Demand side management expenditures 0 0 (37,007)  !

Sale of plant assets, net (106) 3,018 15,972 Nuclear decornmissioning trust investments (29,182) (20,063) (16,771)

Electric cornpany investments 566 1,058 (386)

N:t cash used in investing activities (232,734) (210,430) (258,897) y Financing activities:

Issuances:

Common stock 12,559 64,888 10,634 Long term debt 0 125,000 15,000 Redemptions:

Preferred stock (4,000) (2,000) (2,000) long-term debt (101,600) (100,600) (50,000)

Not change in notes payable 75,013 (88,345) 10,635 Dividends paid (106,010) (100,152) (95,460)

Nst cash used in financing activities (124,038) (101,209) (111,191)

Not decrease in cash and cash equivalents (190) (981) (i,946)

Cash and cash equivalents at the beginning of the year 5.841 6,822 8,768

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Cash and cash equivalents at the end of the year $ 5,651 $ 5,841 $ 6,822 Supplemental disclosures of cash flow information:

Ccsh paid during the year for:

Interest, net of amounts capitalized 5 100,810 $ 104,011 $ 99,287 income taxes $ 98,668 $ 96,180 $ 46,074 The acrompanying notes are an integral part of the consolidated financial statements.

1 N:tes t3 Consolld:ted Fin:ncl:I St:t:m:nts l 1

Nota A. Nature of Operatioru We ne an invntor-owned regulated public utility operating in the energy and energy servien businns. This imludn the generation, purchase, transmission, distribution and sale of electric energy and the development and irnplementation of electric demand side m:nagement programs. A portion of our generation is produced by our wholly owned nudcar generating unit, Pilgrim Nudear Power Station. We supply electricity at retail io an area of 590 r,quare miles,induding the city of Dmton and 39 surrounding citin end towns. We aho supply eintricity at wholnale for rnale to other utilities and municipal electric departments. Electric operating ,

revenun were 88% retail and 12% wholesale in 1996. We aho conduct unregulated activitin through our wholly oc x1 subsidiary, limion Energy Tuhnology Gmup (llETG).

]

Through BETG and its subsidiaries we are engaged in cestain nonutility businnses,induding energy utilitation and conserva.

tion. construction inanagement and district energy. In Dnember 1996, llETG signed a joint venture aprectnent with Rnidential Commuaications Network, Inc., curreruly known as RCN Telecom senico, Inc. (RCN), to form a limited liability company to pro. 1 vide local and long-distance telephone service, ykleo, high-speed Internet aans and other telecommunications-related services (the I

"Telnommunications Venture"). The unregulaini entity will be ownnt up to 49% by BETG, with RCN having the day to-day man.

agement roponsibility. The joint venture agreement is subjnt to a number of conditions which must be satisGed before formal oper-ations begin, including the obtaining of(criain regulatory approvals, in January 1997 BETG, through one ofits wholly owned sub.

sidiatin, signed definitive agreements with Williams Energy Servico Company (WESCO), a subsidiary of The Williams Companies, ,

Inc., to form EnergyVision,1 I C, an smregulated limited liability company. This " Energy Marketing Venture" will market electricity, natural gas and energy related 6ervico to retail cmtomers in the six New England states. BETG, thmugh its mbsidiary, and WESCO cach own 50% of the new company which began operatiom in February 1997.

In January 1997, we announced a plan to form a hokling company structure. The holding company structure, which is subject to shatchohler and regulatory approvals, is intended to pmvide increased financial, managerial and organizational flexibility in order to better gmsition us to operaic in the changing eintric utility indmity, it will permit m to take advantage of nonutility businca opportunities in a more timely manner. In addition, the holdmg company structure will clearly separate our regulated and unregulat.

ed lines of bminess enabling us to pursue nonutility businns venturn in a manner comistent with the electric utility industry rniruc-turing principles outlined by the Mauachmetts Department of Public Utilitin (MDPU). The holding company structure is a welb

1. ntablishni form of organiration for wmpanies conducting multiple lines of businns, particu'arly entitin engaging in Imth regulated and unregulated activities. All invntor-owned Manachusetts elniric utilities, other than Boston lilimn, are currently organiicd in a holding company structure.

Refer aim to Note C to thne Ccmsolidated Financial Statements for potential changes in the nature of our operations as a resuit of the clatric utility indmity rntructuring.

Note B. Significant Accounting Policies

1. Bisis of Consolidation and Accounting The conmlidaint rinancial statements indude the activities of our wholly ownni subsidiarin, liartmr Electric Energy Company (llEEC) and BETG. All signiGcant imercompany tramactions have been climinated. Certain redauiGcations have been made to the prior year data to conform with the current presentation.

We foHow acwunting policin prnuibed by the Federal Energy Regulatory Commiuion (FERC) and the MDPU. We are aho subject to the auounting and reporting rnjuirements of the Sccurities md Exchange Commiulon. The consolidated financial state-ments conform with generally accepted anount;ng principles (GAAP). As a rate-regulatal company we are subject to Statement of Financial Acmunting Standards No. 71, Accounting for the EfTnts of Certain Types of Regulation (SFAS 71), under GAAP The application of SFAS 71 rnults in dilTerences in the timing of recognition of certain expemn from that of other businesses and indus-trict The preparation of financial statements in (onformity with GAAP requires m to make estimates and auumptiom that affect the reportal amounts of auets and liabilities and discimures of contingent assets and liabilities at the date ofihe financial statements and the reported amounts of revenues and expensa during the reporting period. Actual rnuhs could differ from these niimates.

2. R: venues -

We rnord estimain of revenues for dectricity usni by our customers but not yet billed at the end of each accounting period.

3. Forecasted Fuel and Purchased Power Rates The raic charged to setail cmiomers for fuel and purchasni power allows for fuel and purchased power costs which are not induded in our base rates to be billed to cmiomers using a forecasted rate. The difference between actual costs and the amounts billed to cus, tomers is recorded as an adimtment to fuel and punhased power expenses and is induded in accounts receivable on the consolidated

Id:me sheet until subsequent rain are tdjusted. The MDPU has the right to reduce our subwquent fuel and purchased power rain if they find th:t we have been unreemnable or impruoent in the operztion of out generating units or in purchasing fuel.

4. Utilit h Utility Aut 4 m r rid

• si mit of mmtruction. 'the msts of replacements of pmperty units are capitalized. Maintenance and

, re p h q uptemerc ro sor items are expensed as incurred. The original cmt of property retired, net of sab;ge value, and the

> Y o atm rn wd at rt M to accumulated depicciation.

3#1.v;M7 :M%( fuel Amortiration uy*. s .uinty plant is computed on a straight-line basii ming mmposite rain ba ed on the niimated utefullivo of the 3aa , s petty. Excluding the adjutment discmsed below, the overall composite depreciation rain wne 3.26% 3.28%

iJ "  ;.1995 and 1994, rnpectivdy.

3 Upm tiae completion of a review of our dutric generating units, we determined that our oldnt and least efUcient fouil units (Mystic 4,1 and 6) are unlikely to provide mmpetitively priad power twyond the year 2000. Therefore, during the second quarter ni1996, we reviwd the estimated remaining emnomic livn of thne units to five years retroactive to the beginning of the year. The cffect of this change in naimate is an annual increase to depreciation expeme of $22 million.

'Ihe cost of decomminioning Pilgrim Station is exduded from our depreciation rates, llefer to Note E to these Conmlidated financial Statements for a discuuion of nudcar demmmisuoning. The mit of nudear fuel is amortized based on the amount of energy Pilgrim Station prmlucn. Nudear fuel expense alm indodes an amount for the estimated costs of ultimately disposing of spent nudcar fuel and (br aucuments for the demniamination and decommissioning of United Stain Department of Energy nudear enrichment facilitin. Thne costs are remvered from our cmtomers through fud rates.

6. beferred Nuclear Outage Costs We tiefer the incremental miti anociated with nudear refuding outagn when incurred and amottlic them over future perimh. In 1995 we changed the amortization perimi fmm five years to two years. The two-year amortization period is consistent with the two.

year cyde between nudcar refueling outagn at Pilgrim Station.

7. Costs Anociated with issuance and Redemption of Debt and Preferred Stock Consistent with our rnovery in electric rain, we defer discounts, rnlemption premiums and rdated costs asociated with the redemp-tion and luuance oflon;eterm debt and prefened simk. The mits retaint to long-term debt are recognirni as an addition to interest expense over the life of the debt or replacement dcht, lleginning in 1996, consistent with an accounting order received from the I l.itC, we reflect costs rdated to preferrni stock rnlemptions and issuancn as a direct reduction to retainni carnings over the average life of the replacement preferred simk serin.

8. Allowance for Borrowed Funds Used During Construction (AFUDC)

AFUDC reprnents the niimated cmts to finance utility plant construction. In acconlance with regulatory acmunting, AFUDC is induded as a mst of utility plant and a reduction of current internt charges. Although AFUDC is not a current murce of cash income, the costs are recoverni from customers over the service life of the related plant in the form ofincreased revenues collected as a anuit of higher depreciation npense. Our AFUDC rain in 1996,1995 and 1994 were 5.87% 6.35% and 4.45% topectivdy, and reprnented only the cmt of short-term debt.

9. Cash and Cash Equivalents Cash and cash equivalents are comprised of highly liquid wcurities with maturitin of 90 days or less when purchased. Outstanding (hnks are induded in cash and accounis payable until they are prnented for payment.

10. Allowance for Doubtful Accounts Our accounts reveivable are substantially recoverable. This recovery occurs both fmm customer payments and from the portion of cmtomer chargo that provides for the recovery of bad debt expeme. Accordingly, we do not maintain a significant allowance for doubtful accounts balance.

11. Regulatory Assets llegulatory anets reprnent msts incurred which are expectni to be collected from customers through future charges in accordance with agreements with our regulators. These costs are expensed when the corresponding revenues are received in order to appropriate.

_ ly nutdi revenues and expensn. The majority of thne costs is currendy being recovned fmm customers over varying time periods.

- No return on investment is being carned on the regulatory auets.

l Rq:ulaicay aucts c msisted of the folknving: )

December 31, 1996 1995 l Power contracts 5 88,963 $ 21.396 Redemption premiums 31,052 36,832 Income taxes, net 47.483 46,121 Postretirement benehts costs 15,009 15,009 Decontamination and decommissioning 13,190 13,968 -

Nucl:ar outage costs 3,432 13,471 )

Oth:r 2,897 3,298

$ 202,026 5 150,095 .

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12. Earnings Per Share of Common Stock 1.atning per share of common simk is calculaint by dividing net income, after the payment of preferred stock dividends, by the

- weighted average comtnon shares outstanding during the year.  !

Noto C, Electric Utility industry in Dnembet 1996, we reached a $ctilement agreement with the Manachmetts Attorney General and the Mauachmetts Division of Enctgy Raources that, if approved by the MDPU. allows all retail electric customers in our service area to choose their electricity supplier (referred to as retail accen) beginning as early as January 1,1998. As part of the settlement, we have agreed to divest our fouil generating plants no later than six months after the commencement of retail access. Accordingly, other than Pilgrim Nuclear Power Station, we will no longer own any clutricity generating facilities. The rain of our retained electric delivery bminns will con-tinue to be regulated by the MDPU and will include a non-bypanable accos charge fur the collection of our stranded co.ts. Thne costs indude the above-market commitments under existing purchased power contracts, our net generation plant invntment, nuclear dnommluioning commitments and regulatory auets relaird to our generation bmincu. Implementation of the settlement will be ,

subject to enactment of enabling legislation by the Manad setts kgidature and rulings by the FERC,

1. in the traditional icvenue requirements model, our electric revenues have been based on the cost of providing electric service. As t ruch, we are subj, ct to certain accouating standards that are not applicable to other bminean and industrin in general. We believe that we currently meet the criteria ofihne standards. SFAS 71 requirn us to defer recognition of certain costs when incurred when we expeci to receive future rate recovery ofihne costs. The Securities and Exchange Comminion has reccmly begun to focus on how the changn in the electric utility industry have afTected utilitin' ability to continue to apply regulatory accounting. The 6nal ruin inued by the MDPU or the enactment oflegidation in Manachusetts could, in the near ictm, cause us to no longer meet the criteria for application of SFAS 71 for mme of our operations. Should this occur, we would be required to take an immediate noncash charge to income for all of our JTected regulatory anets and 'he above-market portion of purchased power contracts. In addition, a write 4 town of utility plant aucts would be required under Statement of Financial Accounting Standards No.121, Accounting for the impairment oflong l.ived Aucts and for long l.ived Aucts to be Disposed Of, if competitive or regulatory change results in a prob.

ability that future cash flows will not be sumcient to recover our invntment in those aucts liased on our settlement agreement we <

expect to recover all strandable cmts through a non bypanable acteu charge to be paid by our delivery business customers. Under our settlement agreement, our delivery bminess will remain subject to ate regulation and, therefore, will continue to meet the criteria ofihne actounting standards. As noted earlier, under our settlement agreement we expect to continue to operate Pilgrim Station with the ability to collect stranded costs related to the unit. Although not anticipated based on our settlement agreement, the nonre-covery of strandable cosis could have a material impact on our roults of operations and Snancial condition. Ilowever, iflaws are ent.cted or regulatory decisions are made that do not olTer Manachusetts electric utilities an opportunity to recover previoudy reviewed, prudently incurred commitments to provide service to our customers, we believe we have strong legal arguments to chal-lenge such laws or decisions. We will actively purme the full recovery of stranded costs and are prepared to take the action necessary to protect the interats of our shareholders.

Out 1992 $citlement agreement provided us _with two annual retail base rate increases of $29 million efTective in November 1993 .

and November 1994 and an eight-year annual performance adjmtment charge. We did not make a base rate 6 ling upon the expira-

- tion of the settlement agreement in 1995, therefore baie rates have remained in efTect at their 199$ levels.

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Nota D. Income Ex:s inwme taxes are enounted for in accoidance with Statement of Financial Accounting Standards No.109, Accounting (br income Tam ($fAS 109), SFAS 109 tequirn the recognition of deferred tax assets and liabilisin for the future tax effects of semimrary differ-ences letween the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 109 we recorded net tegulatory ascis of $47.5 million and $46.1 million and curresponding net increases in accumulated deferred income taxes as of December 31, 1996, and December 31.1995, respectively. The regulatory assets represent the additional future revenues to be wlkried from cus-tomers for deferred income taxn.

,- Accumulated deferred income iaxn consisted of the following:

December 31, (in thousands) 1996 1995 Dalstred tax liabilities:

Plant related $532,390 5521,280 Other 95,642 95,148-628,032 616,428 D ferred tax assets:

Plant related 8,406 12,590 investment tax credits 38,005 40,632 Other - 82,903 65,924 129,314 119,146

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Not accumulated deferred income taxes $498,718 $497,282 No valuation allowances for deferred tax aiscis are deemed necessary.

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Previoudy deferred investment tax credits are amortized over the ntimated lives of the property giving rise to the credits.

Components of i:1Come tax espen%c Were as follows: y years ended December 31, (in thousands) 1996 1995 1994 Current income tax expense $92,760 $93,469 $63,358 Deferred income tax expense 14 (21,115) (4,468)

Investment tax credits (4,071) (4,078) (4,092)

Income taxes charged to operations 88,703 68,276 54,798 Taxes on other income:

Current (721) (1,729) 2,550 Deferred 0 0 284 (721) (1,729) 2,834 Total income tax expense $87,982 $66,547 $57,632 The efTective income in rates reflected in the consolidated financial statements and the reasons for their difTerences from the statutory federalincome tax rate were as follows:

1996 1995 -1994 5Istutory tax rato 4

35.0% 35.0 % 35.0 %

St:ta income tax, net of federal income tax benefit 4.3 4.3 4.3 i Innstment tax credits (1.8) (2.3) (2.3)

Rscrsal of deferred taxes settlement agreement - -

(5.5)

Othed 0.7 0.1 (0,1)

Effective tax rate 38.2% 37.1 % 31.4 % -

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Noto E, Nuclxt Decommissioning and Nucim Wasto Dispossi 1, Nuclear Decommissioning When Pilgrim Station's operating license npirn in 2012 we will be required to decomminion the plant, We rnord an otimate of

- dnumminioning costs in depreciation npense on the conmlidated statements ofincome over Pilgrins expected service life.

Dnomminioning npense was $12 million, $14 million and $15 million in 1996,1995 and 1994, rnpectivdy, The ntimate used to determine our annual npense is based on a 1991 study that documents a cost of approximately 5328 million to decomminion the plant using the

• green f dd* metimd, which provida for the plant site to be completely rotoned to its original state. The cost nii. ,

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. mate was incm;mrated in our 1992 retail settlement agreement. We rueive recovery of the annual npeme through charges to out retail customers and from other utility companin and municipalitin whidi purchase a contracted amount of Pilgrins electric genera.

tion. The funds we colint from dnomminioning chargo are depmited in an external trust and are rntricted to use for decc..nmis.

tioning and related expenso. The net earnings on the armt funds, which are alm restricted, increase the nudear decommissioning trust balance, thus enlucing the amount to be colluted from cmtomers.

The 1991 dnumminioning study was panially updaird for internal planning purposes in order to evaluate the potential impact oflong. term spent fud storage optiom roulting from delays in the United States Department of Energ) (DOE) spent fuel removal program. Refer to part 2 beh>w for a discimion of spent fuel ternoval. The partial update indicain an estimated duomminioning cost of $400 million in 1991 dollars based upon a revised spent fud removal schedule and utilization of dry spent fuel storage tech.

nology No further update is currently available however, we will continue to monitor DOE spent fuel removal scheduln and devel. ,

opments in spent fuel storage inhnology along with their impact on the deconuniuloning niimate. We anticipate that we will be permittnl to ruover out actual uhimate dnomminioning costi from our retail and contract customers.

In libruary 1996, the Financial Accounting Standards floard (FAsil) inued proposed new rules for accounting for liabilities rdated to dosure and removal oflong-lived aucts, whish indude dnomminioning of nudear generating facilities. If these proposed ruin are adopted we would be required to retroactivdy rnognire the entire naimaint liability for decommiuloning cmts on the bal.

ance sheet, offset by an addition to utility plant. The plant addition would be depreciated over Pilgrim's temaining expected r,crvice l life. The liability would be meament based on the prnent value of ntimated future cash flows. The cumulative efTut of adoption of thne proposed ruin wuld rnuit in the recognition of a regulatory anet to be recoverrd from cmtomers to the extent that the present value difference in the liabihty between when the liability was incurred and when the ruin are adopted exceeds the depreciation

- 32 npense previomly rnognited for duommiuioning. In addition, trust fund earnings would be reported on the income statement.

Depending on the roulis of the FAstl's reddiberation of certain inun regarding thne propmed rules, it plans to inue either a final '

statement or revised propmed ruin in the snond gaaner of 1997.

2. Spent Nuclear Fuel i The spent fud storage facility at Pdgrim Station is expected to provide storage capacity thmugh approximately 2003. We have a >

liceme amendment fmm the Nudcar Regulatory Comminion to modify the facility to provide sufficicnt nom for spent nudcar fuel generated thmugh the end of PilgrinA operating liceme in 2012: however, any further modifications are subject to review by the MDPU. We are actively exploring the feasibility of other spent fuel storage facilitin and inhnologin, induding proposed participa-tion in a limited liability mmpany 0.1.C) which would undutake construction of a private spem fud uorage facility in the uate of Utah or other hications. Our participation in this !I C requirn approval by the MDPU and is currently the subject of a petition seeking mrh approval, in July 1996, the U.S. Court of Appeah for the District of Columbia Circuit ruled that the DOE is obligated to begin taking spent nudcar fuel for digmsal in 1998. The decision was in response to petitions filed by us and other internted parties in 1994 sceling dnlaratory rulings concerning this obligation. In December 1996, the DOE notified us and other nuclear plant owners that it would be unable to begin acceptance of spent nudear fud for disposal in 1998. Along with other internted panics, we again filed a petition with the U.S. Court of Appeals for the Disuict of Columbia Circuit seeking dedaratory rulings concerning enforcement  ;

and remedin for DOE's failure to accept spent fuel for disposal in a timdy manner, Under the Nudear Waste iblicy Act of 1982 it is

- - the uhimaic respomibility of the DOE to permanently dispose of spent nudcar fuel. We currently pay a fee of $1.00 per net ,

megawanhour sold from Pilgrim Station generation under a nudcar fuel disposal contract with the DOE. The fee is collected from cmtomers through fud chargo. The DOE has been conducting scientific nudin evaluating a potential spent nudcar fud repository site at Yucca Mountain, Nevada. The imiential site, however, has encountered substantial public and political opposition and the DOE has publidy statal that it will be unable to begin aneptance of spent nudcar fud for disposal by the date specified in the Nudcar Wasic lblicy Act. We cannot predict at this time whether or on what schedule the DOE will eventually comtruct a spent fud repository or what the dTect will be of any delays in such construction.

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

3. L NLevel Radi=ctiva W:sta We repined aness to low level radioactive waste (1.lW) digmsal facilitin located in liarnwell South Carohna, in 1995. This site is (urrently the only disposal facility available to m. legislation has been enacted in Manachusetts establishing a regulatory proms for managing the state's 1.1.W. Induding the puible siting, Ikeming and wmtruction of a disposal facility within the state, or, ahernative-ly, an agreement with one or mme other states. Prnding the wnstructi on of a disposal facility within the state or the adoption by the state of wme other 1l.T management promiure, we will wntinue to monitor the situation and invntigate other available options.

Noto F. Corporate Restructuring In 1995 we streamlined the corporate organization and reorganized the mmpany into separate bminns units in order to strengthen our wmpetitheness in the changing eintric energy ma:Let, in wnjunction with this reorganisation we offered enhanced retirement pm-grams and implemented a special severance program to reduce employee stalling levels. Under the enhanced retirement programs 330 employen cleoed to tetire, and 149 ernployen whme positions wne climinated becarue eligible for benefits under the $pecial severance program. These pmgrams rnuhed in a $34 million pre tax charge (520.7 milhon net of tax) over the third and fourth quarters of i I

1995. The charge comisted of $24 million for the retirement programs and $10 million for the severance program. The enhanced retirement progratus were offered to 211 employen at least 55 years old, with different years of service rnluirements for management and union employm. The programs provided for supplemental salary payments and waivers of the early retirement pension reduction and the medical and life imurance benefits years of service requirement. The special severance pmgram, which applied to management and supgert permnnel, was pnnided for all employees whose positiam were climinaird in the reorganisation. Severance benefits pro-viJed induded salary payments, mrJical imurance and outplacement servic-s As of December 31,1996, there was no material obliga-tion remaining for thne pmgrams.

Nots G. Pensions and Other Postretirement Benefits

1. Pensions We have a defined benefit funded retirement plan with certain wntributory featurn that covers substantially all employees, lienefiti are based upon an employee's years of service and highnt eligible averige mmpemation during the last ten years of credited employ-ment. Our funding policy is to wntribute an arnount each year that is not ins than the minimum rniuired contribution under federal law or greater than the maximum tax deductible amount. The retirement plan aucts comist of equities,lmnds, money market funds, a imurance wntracts and real ntate fimds.

We aho have a supplemental retirement plan fiir certain management employees. lienefits under this plan are based on final com-pemation upon retirement. The plan h not funded. The plan's mst and benefit obligation amounts are incluhd in the following pen-sion infinnution for 1995 and 1996. Amounti related to the plan prior to 1995 were not material to our total pemion costs.

Net remion mit mmisted of the following wmponents:

years ended December 31, (in thousands) 1996 1995 1994 Current service cost - benehts earned $13,452 511,339 $15,057 Interest cost on projected benefit obligation 32,325 31,789 33,961 Actual net (return)/ loss on plan assets (40,335) (72,192) 214 Net amortiration and deferral 17.064 49,557 (32,169)

Not pension cost $22,506 $20,. 73 $17,063 In accordance with our 1992 settlement agreement we deferred the difference ber,veen the net pemion wst of the retirement plan and its annual funding amount through 199% Net remion (mts recognised in 1995 and 1994 were $28.2 million and $25.0 million, entwtively, We med the following assumptions for calculating pemion cmt:

1996 1995 1994 Discount rate 7.25% 8.25% 7.00 %

Expected long-term rate of return an assets 10.00 % 10.00% 10.00 %

Cornpensation increase rate 3.90% 3.90% 4.50 %

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

'lhe plzni funded status were ci follows:

December 31, 1996 1995 (in thousands)

Supplemental Supplemental  !

Retirement Retirement Retirement Retirement Plan Plan Plan Plan -

Actuarial present value of accumulated benefit obligationt ,

Vested $ 316,101 $ 7,576 $ 377,272 $ 8,748 Non-vested 10,867 943 13,902 1,409

$ 326,968 $ 8,519 $ 391.174 $ 10,157 Total (a)

Plan assets at fair value $ 331,299 5 0 $ 358,572 $ 0 Projected obligation for service rendered to date (400,561) (9,199) (476,666) (11,036)

Projected beneist obligation in excess of plan assets (69,262) (9,199) (118,094) (11,036)- i Unrecognized prior service cost 11,238 9,436 12,283 10,223  ;

Unrecognized not loss /(ga;ri) 78,853 (1,141) 82,935 252 l' Unrecognized not obligation 7,130 0 8,064 0

. Additional miniinum liability (b) 0 (7,615) (17,790) (9,596)

Net pension prepayment /(liability) $ 27,959 $ (8,519) $ (32,602) $ (10,157) .

(a) The accumulated bene 0t obligation at December 31,1995, includes $13.5 million related to the enhanced retirement programs offeted in 1995 as distuned in Noic F to these C<msolidated Financial Statements.

(b) 5tatement of Financial Accounting Standards No. 87 Emplovers' Accounting for Pensions (SPAS 87), requires the recognition of an additional minirnum liability for the excen of accuruulated bene 6ts over the fair value of plan assets and accrued remion costs. In 3 accordance with SPAS 87 we recorded additional minimum liabilities and correspi nding intangible anets of $7.6 million and $27.4 million on our comolidated balance sheets at December 31,1996 and 1995, respectively.

We used the following assumptions for calculating the plans' year-end funded status:

1996 1995 Discount rate 7.75% 7.25 %

Compensation increase rate 3.90% 3.90 %

We also provide defmed contribution 401(k) plans for substantially all our employees. We match a percentage of employees' vol-untary contributions to the plans. We made matching contributions of $8 million in 1996, $9 million in 1995 and $8 million in

994.

- 2. Other Postretirement Benefits in addition to pension benef*ts, we aho provide heahh care and other benents to our retired employees who meet certain age and years of service eligibility rnjuirements. These postretirement benefits other than pensions (PBOPs) are accounted for in accordance with Statement of Financial Accounting Standards No.106, Employcri Accounting for Postretirement Benefits OtherThan Pensions (SFAS 106). Our 1992 settlement agreement provided us with a phase in to full expense of the PBOP costs incurred under SFAS 106. The .

1992 settlement 4 treement allowed us to defer any costs in excess of the speciGed phase-in amounts to the extent that we funded an vuernal trust. Our funding policy is to generally contribute 100% of PBOP costs to extemal trusts. Therefore, we recorded $23 mil-tion and $17 million of PDOP costiin 1995 and 1994, respectively in accordance with the 1992 settlement agreement. In 1996 we recorded the full PBOP costs incurred under SFAS 106 of $26 million. The net deferred PBOP costs of $15 million resuhing from the xdclayed phase-in are included in regulamry assets as these costs are expected to be recovered from customers in future periods.

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Net postretirement benefus cmt consisted of the following components:

years ended December 31,

- (in thousands) 1996 1995 1994 Curt:nt service cost benefits earned 5 4.616 $ 3,408 5 4,978

Intsr:st cost on accumutated benefit obligation 16,815 13,521 13,632

- Actu:1 return on plan assets - (9,584) (7.151) (187)

Amortization of transition obligation 9,151 9,151 9,151 Nst amortization and deferral 5,209 3,017 (2,581)

Net postretirement benefds cost 5 26.207 $ 21,946 $ 24,993 We used the following assumptions for calculating pmtreilrement benefits cost:

-1996 1995 1994 Discount rate 7.25% 8.25% 7.00 %

bpected long-term rate of return on assets 9.00 % 9.00 % 9.00 %

Health care cost trend rate 7.00% 7.00 % 9.00 %

The health care cost trend rate is assumed to decrease by one percent in 1997 and 1998 and to remain at 5% in years thereafter, Changes in the health care cost trend rate will affect our cost and obligation amounts. A one percent increase in the assumed heahh care cmt trend raic would increaw the t<atal service and interest cost components by 7.6% and would increase the accumulated benefit obligation at December 31,1996, by 6.7%

The PitOP progranh funded status was ai follows:

December 31, (in thousands) 1996 1995 35 Trust assets at fair value $ 72,702 $ 51,064 Accumulated obligation for service rendered to c' ate from:

Retirees $ (156,694) $ (110,877)

Active employees eligible to retire (12,644) (31,980) a Active employees not eligible to retire (61,567) (230,905) (53,514) (196,371)

Accumulated benefit obligation in excess of trust assets (158,203) (145,307)

Unrecognized prior service cost (16,274) (17,889)

. Unrecognized net loss 26,663 5,612 Unrecognized transition obligation 146,413 155,564 0 (1,401) $ (2,020)

. Net postretirement benefits liability _

The weighted average discount tate, used to measure the accumulated benefit obligation were 7.75% in 1996 and 7.25% in 1995, The trust assets combt of equities, h >nds and money market funds.

4

Nota H, Capital 5tock D:cemb:r 31, (doll:rs in thousands, except per share amounts) 1996 1995 Common stock equity:

' Common stock, par value $1 per share, 100,000,000 ,

sh:res authorized; 48,509,537 and 48,003,178 shares 7 issued and outstanding: $ 48,510 $ 48,003 '

Pr:mium on common stock 695,723 683,686

• R:t ined earnings 291,786 257,344 Surplus invested in plant 405 405 Total common stock equity $1,036,424 $ 989,438

- Dividends dedared per share of common stock were $1.88, $1.835 and $1.775 in 1996,1995 and 1994, respectively.

Cumulative preferred stock:

Per volve $100 por share,2,890,000 shares authorized; issued and outstanding:

Nonmandatory redeemable series:

Current Shares Redemption ,

Series Outstanding ' Price / Share 4.25% 180,000 $103.625 $ 18,000 $ 18,000 L 4.78% 250,000 $102.800 25,000 25,000

-7J$% 400,000 - 40,000 40,000 8.25% - 400,000 - 40,000 40,000 123,000 123,000 Less: redemption and issuance costs (3,046) (3,323)

- JS Total nonmandatory redeemable series 5 119,954 $ 119,677 Msndatory redeemable series:

Current Shares Rcdemption Series Outstanding Price / Share 7.27 % 400,000 $102.910 $ 40,000 $ 44,000 8.00 % 500,000 - 50,000 50,000 90,000 94,000 Less: redemption and issuance costs (6,535) (7,163) due within one year (2,000) (2,000)

Total mandatory redeemable series - $ 81,465 $ 84,837

'1. Common Stock -

Common stock iuuances in 1994 throup,h 1996 were as follows:

Number Total Premium on (in thousands) - of Shares ' Par Value Common Stock

Baltnce at December 31,1993- 45,129 $ 45,129- $ 612,653 -

Dividend ieinvestment plan 406 406' 10,150 ,

B:l:nce at December 31,1994 45,535 45,535 622,803 Dividend reinvestment plan 468 468 11,404 ,

i New issuances 2,000 2,000 49,479 B 1:nce at December 31,1995 48,003 48,003 683,686 Dividend reinvestment plan _ 507 507 12,037

' B:l nce at December 31._1996 48,510 $ 48,510 $ 695,723 i

2, Cumulative M:ndat:ry R: deem:bb Pr:f:rred Stock

%e e0,000 sharn of 7,27% sinking (tmd serin cumulative prc'errni simk ate currently redeemable at out option at $102.910.

He redemption price dulines annually each May to par value in May 2002. The simk is subject to a mandatory sinking fimd requirement of 20,000 shares each May at par plus surucJ dividends. We also have the noncumulative ol.ilon cath May to rede rdditional shares, not to exceed 20,000, through the sinking fund at 5100 per share plus accrued dividends. In 1996,1995 and 1994, we redeemed, at par value,40,000 sharn,20,000 shares and 20,000 sharn, ropectively, %c redemptions in 1996 indude l t

20,000 shares of optional rnleinptions,  !

.- We are not able to rnleem any part of the 500,000 shares of 8% serin cumulative preferred stock prior to Denmher 2001. He entire series is subject to mandatory redemption in December 2001 at $100 per share, plus antued dividends, l l

Nots 1. Indebtedness December 31, I 1996 1995 l (in thousands)

Long term debt:

Debentures:

5,125%, due March 1996 $ 0 $ 100,000  ;

i 5.700%, due March 1997 100,000 100,000 5.950%, due Mi.rch 1998 100,000 100,000  :

65,000 65,000 6.800%, due February 2000 100,000 100,000  ;

6.050%, due August 2000 150,000 150,000 6.800%, due March 2003 125,000 125,000 7.800%, due May 2010 100,000 100,000 9.875%, due June 2020 '

115,000 115,000 9.375%, due August 2021 60,000 60,000 8.250%, due September 2022 200,000 200,000 7.800%, due March 2023 lotal debentures 1,115,000 1.215,000 #!

(100,000) (100,000)

Less: due within orie year 1,015,000 1,115,060' Net long-term debentures 34,100 35,700 Sawage facihty revenue bonds Less: due within one year (667) (667)

(4,789) (4,810)

Less: funds held by trustee ,

28,644 30,223 Net long-term sewage facihty revenue bonds Massachusetts Industrial Financo Agency bonds:

5.750%, due February 2014 15,000 15/s00 Total long term debt $ 1,058,644 $ 1,150,223  !

Short term debt:

Notus payable:

$ 129,631 $ 75,941 Bank loans 71,823 50,500 Commercial paper

$ 201.454 $ 126,441 Total notes payable

.1.- Long4erm Debt The 9 7/8% debentures duc 2020 are Grst redeemable in June 2000 at a redemption price of 104.483% the 9 3/8% series due 2021 are first inicemable in August 2001 at 104.612% the 8.25% series due 2022 are first redeemable in September 2002 at 103.780%

- and the 7.80% series due 2023 are Grst redeemable in Marsh 2003 at 103.730% No other series are redeemable prior to maturity.

There is no sinking fund icquirement for any serin of our debentures.

Sewage facility revenue bonds were issued by 11EEC. The bonds are tax exempt, subject to annual mandat'ory sinking ftmd

? redemption requirements and mature through 2015, in May 1995 and 1996, we redeemed 50.6 million and $1.6 million, ropec-5

dvely, as ahedulnl. He weighted average intant rate of the bonds is 7.3% A swiion of the prmeeds from the bonds is in roerve  ;

with the truster. If lillC shouki hne imuflident funds to pay for estreordinary espemes we would be required to make additional )

cepit:J wninbuilom or hians to the subsidiary up to a maximum of $1 million. i ne 5 75% tax.esempt unsecured bonds due 2014 are redermable beginning in Ftbruary 2004 at a redemption price of 102% l

%e redemption price decreasn to 101% in February 2005 and to par in Feb4uary 2006.

He aggregate principal amounts of our long term debt (induding IIEEC sinking fund requirement 0 due thfough 2001 are .

l

$101.6 million per year in 1997 sad 1998, $1.6 million in 1999, $166.6 million in 2000 and $1.6 millioa in 2001. ,

2. Short Term Debt We have arrangements with certain banks to provide short.icam credit on imih a mmmitted and an uncommitted and as available basis. We currently have regulatory authority to issue up to $350 million of short. term debt.

We have a $200 million revolving credit aperment with a group of banks. His agreement is intended to provide a standby =

source o[sbolt-terrn borrowingh Under die term 4 of dlis agreernefit We are required to maintain a common equity ratio of not leH l' dian 30% at all times. Commitment fen mmt tw paid on the unused portion of the total agreement unmunt.

Information regarding our short term botrowings, comprised of bank loans and wmmercial paper, is as follown (dollars in thousands) 196 1995 1994 M:ximum short term borrowings $ 272,500 $ 327,769 $ 268,100 ,

Weighted average amount outstanding $ 208,914 $ 165,720 $ 214,640 Weighted average interest rates excluding commitment fees 5.65% 6.21 % 4.47 %  :

Noto J. Fair Value, of FinancialInstruments d

ne following method an assumptions were used to ntimate the fair value of each class of securitin for which it is practicable to  ;

ntimate the value:

t Js Nudcar decommissioning trmu l He cmi of $132.1 million approximain fair value bam! on quotal market prica of securitin heti l

Ccsh and cash equivalento

%e (arrying anmunt of $5.7 million approximain fair value due to the whort term nature of thesc securities. t M ndnory redeemable cumulative preferred simk, sewage facility revenue honds and umecmed debt!

%e fair values ofihne securitin are based upon the quoted market prices of similar issun. Carrying amounts and fair values as of ikemb r 31,1996, are as f(dlowo Carrying Fair in thousands) Amount Value Endatory redeemable cumulative preferred stock $ 83,465 $ 93,900 Sewage facility revenue bonds $ 34,100 $ 35,082 Unsecured debt $ 1,130,000 $ 1,131,363 Noto K. New Accounting Pronouncement In October 1996, the Accoun ing Standards Executive Committee of the American institute of Certified l'ublic Accountants issued Statement ofibsition 961, Environmental Remediation Liabilitics, efTective in 1997. His stairment contains authoritative guidance ,

on specific accounting issun that are prnent ni the recognition, measurement, display and disclosure of environ aental remediation liabilities. We do not believe this statement will have a naterial effect on our financial position or resuhs of operations.

i

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Nota L Commitments tod Contingencies

1. Conteactual Comm.sments At Dnember 31.1996, we had ntimaird contractual obligations for plant and equipment of approximately $8 million.

We have leases for certain facilities and equipment. Our niimated m.. imum remal commitments under both transminion agreements and noncanceliable lean for the years after 1996 are as followc

, (in thousands)-

IW7 $ 22,842 1998 20,042 1999 17,568 2000 16.684 2001 12.067 h:rs thereafter 98,945

~

Total $ 188,148 The total of futurc minimum rental income to be ancived under noncancellable subleases related to the above leases is $455,117.

We wdl capitalire a portion of thne lease remals as part of plant espendituro in the future. The total expense for both lease temals and transmiaion agreements was $26.3 million in 1996, $24.5 million in 1995 and $28.6 million in 1994, net of capitalized expemn of $2.9 million in 1996. 52.7 million in 1995 and $2.4 million in 1994.

We aho have variom outstanding commitments for take or pay and throughput agreements, primarily to supply our New 11oston generating station with natural gas. The fixed and determinable portiom of the obligations are $19.5 million in 1997,1998 and 1999 and $14.6 million in 2000. We are also committed to purchase natural gas at market prices. The total expeme under thne agreements was $49.5 million in 1996, $13.9 million in 1995, and $6.'s million in 1994.

2.Hy' Ouebec We ha . rproximately 11% equity ownership internt in two companies which own and operate trammission facilities to import 39 electrL, from the liydro-Quebec system in Canada. As an equity participant we are required to guarantee, in addition to our own share the total obligatiom of thme participants who do not meet cenain credit criteria. At December 31,1996, our portion of thne guarantees was appmximately $18 million.

3. Yankee Atomic We have a 9.5% equity invntment of appioximately $2 million in Yankee Atomic idectric Company (Yankee Atomic). In 1992 the board of directors of Yankee Atomic decided to permanendy discontinue power operation of the Yankee Atomic nuclear genciating sittion and decomminion the facility.

Yankee Atomic rneived approval from the FERC to continue to collect its investment and decommissioning costs through 2000, the period of the plant's operating liceme. The ntimate of our share of Yankee Atomic's investment and costs of decommissioning is approximately $16.5 million u of Dnember 31,1996. This estimate is recorded on our consolidated balance sheet as a power con.

iract liability and an o0ictting regulatory anet as we continue to collect these costs from our customers in accordance with our 1992 settlement agreement.

4. Connecticut Yankee ~

On December 4,1996, the board of directors of Connecticut Yankee Atomic Power Company (CYAPC) which owns and operarn the Connecticut Yankee nuclear electric generating unit (Connecticut Yankee). unanimously voted to retire the lladdam Neck,

. Connecticut unit. The decision wa basni on an economic analysis of the costs of operating the unit through 20J7, the period ofits operating liceme, compared to the costs of closing the unit and incurring replacement power cmts for the same period. We have a 9.5% equity invntment in CYAPC of approximately $10 million.

The current ntimate of the sum of future payments for the clming, decommissioning and recovery of the iemaining invntment in Connnticut Yankee is appmximately $763 million. Our share of these remaining estimated costs is $72.5 million.

On December 24,1996. CYAPC fded its cost ntimate along with certain amendments to its power contracts with the FERC.

The power contract amendments are doigned to clarify the obligations of CYAPCi power purchasers, including Boston Edison, fol.

' lowing the decision to cease power production, llased upon regulatory precedent, CYAPC belines it will continue to collect from its

. power purchasers its decommissioning costs, the owners' untwovered invntmems in CYAPC and other costs asnciaied with the per.

- mtnent clmure of the unit over the remaining period of the unit's operatingliceme. We expect that we will continue to be allcwed to recover our share of such costs from our customers and, therefore, have recorded our share of these costs on our cimsolidated balance

.- sheet as a regulatory asset with a corresponding power cuntract liability.

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5. Nuden insurtnco i

'the federal Price-Andermn Act cursemly provides approximately $8.9 billion of financial pmtection for public liability daimi and leg:.1 cost. arising from a sinb l e nuclear-related accident. The first $200 million of nuclear liability is coured by commercial insur-  ;

arne. Additional nuden liability lnhurance up to approtimately $8.7 biIhon is provided by a retrospective aucument of up to $79.3 million per incident ! cried on eac h of the 110 nudcar generating units currently licensed to operaie in the United Stain, with a max-  ;

imum aneument of $10 million per reactor per accident in any year.

We have purchased imurance from Nudcar IJutric imurance 1.imited (NEli) to cover some of the costs to pu chase replace- ,

ment power during a proloaged accidental outage and the cost of repair, icplacement, decontamination or decomminioning of our . l utility property enuhing from uncred incidents at Pilgrim Station. Our maximum potential total aunsment for loun which occur [

during cmrent pd cy yurs h $10A million under both the replacement power and excos property damage, decontamination and dnomminioning p>licin. .

6. Hazardous Waste We own or operaic approsimately 40 propenin where oil or haurdous meterials were previously spilled or released. We are required to dean up thne properties in accordarne with a timetable develognd by the Massachmetis Department of Environmental Protection and are continuing to evaluate the costs asmciated with their deanup. There are uncertaintin anociated with thne costs due to the

, tomplexities of deanup technology, regulatory requirements and the paiticular characteristics of the different sites. We aho continue .

to face smible liability as a potentially respomible party in the deanup of approximately ten multi-party haardous waste sito in Mana(huwtts and other stain where we are alleged to have generated, trampor.ed or disposed of hansdous waste at the slics. At the majority ofihne sito we are one of rnany puentially rnpomible parsim and currently expect to have only a small percentage of the potemialliability. Through December 31,1996, we have accrued approximately 57 million related to our cleanup liabilitin. We are unable to fully determine a range of reamnably pmible deanup cmts in nceu of the accrued amount, ahhough based on our auns-ments of the spnific site circumstancn. we do not believe that it is probable ihat any such additional costs will have a material irnpa(t on oui finamial(ondition. Howner, it is teamnably pouible that additional provisions for cleanup cmts that may result from a change in naimatn could have a material impact on the inuhs of a repmting period in the near term.

7. Utigation 40 . We were named as a party in lawsuits by Subaru of New England. Inc. and Subaru Distributors Corporation. The plaintiffs claimed certain automobiln stored on lots in South limion sulTered pitting damage caused by eminions from our New lioston Station gener-ating unit. In February 1997, we settled the lawsuit brought by Subru Distributors Corpuation. The settlement did not have a material impact on our financial pisition or rnuhs of opervions The Subaru of New England, Inc. lawsuit is still pending.

In 1991 we were named in a lawsuit alleging discriminatory employment practicn under the Age Discrimination in Employment Act of 1967 conconing employen affected by our 1988 reduction in force. In December 1996, we reached a settlement of this law-

• suit under which there li no finding or adminion of diariminatory employment prr .es. We anticipate full recovery from out

' insurance arrier for this settlement.

In the normal course of our businen we are aho involved in certain other legal matters. We are unable to fully determine a range of reamnably pmible litigation costs in execu of amounts accrued, ahhough, based on the information currently available, we do not believe that it is probable that any such additional costs will have a material impact on our financial condition. However, it is reamn-ably pmible ihat additional litigation costs that may result from a change m niimates could hase a material impact on the resuhs of a reponing period in the near term.

f 4

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r v * - - - - - - -m- - - --- * *se-ee---- I~*- ~ "4

Nota M. Long T:rm Pow:r Contracts -

1. Long Term Contracts for the Furchase of Electricity We nurchase electric power under sevetallong term contracts for which we pay a aare of the generating unit's capital and 6xed oper-eting costs through the contract npiration date, The total cost of these contracts is included in punhased power expense on our con-solidated income statements. Information relating to these contracts as of December 31.1996, is as folkm:

proportionate share (in thousands)

Units of Debt Contrect Capacity Minimum Outstanding Expiration Purchased (a) Debt Through Cont. Annual Generating Unit Date  % MW Service Exp. Date Cost Canat Unit 1 2002 25.0 141 $ 1,415 $ 5,373 $ 24,399 Mass. Bay Transportation Authority - 1 2005 100.0 34 - - 1,999 Connecticut Yankee Atomic 2007 9.5 - 2,427 12,519 (b)

Ocean State Power Unit 1 2010 23.5 68 4,487 20,447 23,689 Ocean State Power Unit 2 2011 23.5 67 3,538 16,529 24,091 Northeast Energy Associates (c) Ic) 219 - - 124,730 L'Energia (d) 2013 73.0 63 - - 30,920

. MassPowe 2013 44.3 117 11,738 76,524 50,322 Mass. Bay '. ..on Authority - 2 2019 100.0 34 - -

371 Total 743 $ 23,605 $131,392 = $ 280,521 (a) The Noriheast Energy Anociates contract represents 6% of our total system generation capability. The remaining units listed above re;"esent 14.5% in total.

(b) Connecticut Yankee permanently ceased operation in i996. Refer to Note L.4. to these Comolidated Financial Statements for ,

more details.

(c) We punhase approximately 75.5% of the energy output of this unit under two ccntracts. One contract xpresents 135MW and expires in the ye r 2015. The other contract is for 84MW and expires in 2010. We pay for this energy based on a price per kWh actually recched. We do not pay a proportionate share of the unit's capital and 6xed operating costs.

(d) We pay for this ener y based on a price per kWh actually received.

Our total 6xed and variable costs for these contracts in 1996,1995 and 1994 were approximately $281 million (excluding Connecticut Yankee Atomic), $283 million and $286 million, respectively. Our minimum 6xed payments under these contracts for

. . the years af er 1996 are as follown (in thousands) 1997 $ F5,429 1998 87,540 1999 88,401 2000 88,927 2001 91,089 Years thereafter 1,047,479 Total $ 1,488,865 Total present value $ 797,683

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

L 2. Long Term Power Sales In addition to wholesale power sales, we sell a percentage of Pilgrim Station's output to other utilities under long-term contracts.

Information relas!ng to these contracu la as follows:

Contract l Expiration Units of Capacity Sold ,

L Contract Customer Da:e  % MW i

Commonwealth Electric Company 2012 11.0 73.7 Montaup Electric Company 2012 11.0 73.7 Wrious municipatities 2000 (a) 3.7 . -25.0 ,

-- Total - 25.7- 172.4 (a) Subject to certain adjustments.

Under these mntracts, the utilities pay their proportionate sha c of the costs of operating Pilgrim Station and auociated transmis-sion facilities, These msts indude operation and maintenance expenses, insurance, kical taxes, depreciation, decomminioning and a return on upital.

i h

n R: port ofIndependent Accountants  ;

To the Stockholders and Directors of Boston Edison Company  ;

We have audited the accompanying consolidated balance sheets of Boston Edison Company and subsidiaries (the Company) as of [

Darmber 31,1996 and 1995, and the related consolidated statements of income, retained earnings and cash Hows for each of the >

- three years in the period endal December 31,1996. These fmancial statements are the responsibility of the Company's management.

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

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and  !

perform the audit to obtain reasonable assurance about whether the Gnancial statements are free of material misstatement. An audit indudes examining, on a test basis, evidence supporting the amounts and disdosures in the Anancial statements. An audit also  !

Indudes assessing the accounting principles used and sigai6 cant estimates made by management, as well as evaluating the overall Snancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated Anancial statements referred to above present faidy, in all matenal respects, the financial posi- ,

lon of the Company as of December 31,1996 and 1995, and the consolidated results ofits operations and its cash Hows for each of the three years in the period ended December 31,1996,in conformity with generally accepted accounting principles.

%d fu. .

Boston. Massachusetts

! January 23,1997. I t

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Select:d Consolidated Qu:rt:rly Fin:ncl:I D:t3 (Unrudit:d)

(c thousands, except earnings per share)

Balance Available Earnings

• for Common Per Average Operating Operating Net

~

Revenues income inco ne Stock Common Share (a)

. IV96~

First quartvr ' $ 387,849 $ 52,093 $ 25,203 $ 21,313 $ 0.44 Seccc/ r y or 389,756 55,232 27,926 24,086 0.50 THrd quarter 497,968 105,353 80,011 76,194 1.58 Fourth qua'ie: 390,730 35,252 8,406 4,588 0.09 1995 First quartrir $ 379,(78 $ 47,610 $ 20,202 $ 16,300 $ 0.36 Second quarte- 38C;J28 55,683 26,137 22.247 0.48 Third quarts 498,554 102,695 (b) 72,368 (b) 68,478 (b) 1.46 (b) )

Fourth gawa 369,443 21,412 (b) (6.397) (b) (10,286)(b) (0.21) (b)

(a) Ba,cd on the weighted u.cnge tvu.h. t ef conoon shares outstanding during each quarter, di) As discussed in Note l'oscGeeZ1.ed Tinancial Statements, we incurred s.4 million nonrecurring pre-tax charge related to our corporate restructuring over dr & cJ nd fourth qucrters of 1995, Aroums excludir the restructaring charge were as follows:

Balance Available Earnings Operating Net for Common Per Average g income income Stock Common Share 1995 Third quarter 107,779 $ 77.452 $ L,562 $ 1.57 Fourth quarter 36,991 9,182 S,293 0.11 Selected Quarterly Common Stock Data l'olicwing is the reported high and low market value per share of our common stock as reported in the ral/Strurfournaland the divi-dends declared per share for cath of the quarters in 1996 and 1995:

1996 1995 High ~ Low Dividends High Low Dividends First quarter $301/8 $261/4 $0.470 $251/2 $231/8 $0.455 Second quarter 27 1/8) 23 5/8 0.470 27 23 3/8 0.455 Third quarter 75 3/8 21 3/4 0.470 27 1/2 24 1/2 0.455 Fourth quarter 27 21 3/4 0.470 29 1/2 26 3/4 0.470 s

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Selected Cons:lidated Oper: ting Statistics (Unzudited) 1796 1995 1994 1993 1992 Capaciij - MW:

New Boston Station 730 760 760 760 760 Pilgrim Station 670 669 669 670 670 Mystic Station 994 1,005 1,006 1,006 1,005 W F. Wyman Unit 4 37 36 36 36 6 Jet turbines 278 284 287 283 281 Total (a) 2,709 2,754 2,758 2,755 2,752 Contract purchases 1.237 1,274 1,035 938 1,157 Contract sa1es (333) (340) (373) (283) (303)

Net capabihty at year end 3,613 3,oe3 3.420 3.410 3,606 Net capability at peak - MW 3,385 3,466 3,484 3,663 3,587 C:p:bility responsibihty to NEFOOL at peak MW 3,256 -3,306 3,306 3,190 3,396 Company territary:

Hourly peak . MW 2,703 2,785 2,798 2,662 2,545 Load factor 63.4 % 60.0 % 58.9 % 60.5 % 62.5 %

Generating station econorny 10,568 10,348 10,408 10,345 10,234 (BTU / net kWh)

Capability (ne'. kW):

Fossil B6 % 85 % 84 % 84 % 81 %

g Nuclear 14 % 15 % 16 % 16 % 19 %

Generatica (system kWh excluding interchange):

Fossil 69 % 73 % 75 % 68 % 69 %

Nuclear 31 % 27 % 25 % 32 % 31 %

Utitty plant ($ in 000's):

Expenditures $ 151,045 $ 180,822 $ 198,771 $ 246,774 $ 213,827 Retirements 68,688 48,111 45,673 34,147 34,036 Accumulated depreciation 1,550,317 1,439,996 1,344,452 1,258,359 1,177,294 Depreciable plant 4,317,028 4,235,347 3,994,212 3,841,752 3,567,160 Number of utihty employees at year end 3,362 3,812(b) 4,026 4,397 4,540

/

(a) wimer capability audii n.ula (b) M90 at January 1,1996 e.

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Selected Consolld:ted Sal:s St:tistics (Un:udited) 1996 1995 1994 1993 1992 Ebctnc energy (kWh in thousands):

Sources (system output):

G:nerated 10.531,745 10,537,114 9,428,931 9,787,092 11,679,824 Purchased 5,680,194 5,446,542 5,920,065 5,326,224 5.449,225 N w England Pc.wer Pool 1,842,732 1,513,467 1,535,335 1,575,310 932.121 Total 18.054,671 17,497,123 16,884,331 16,686,626 18,06'1,170

- Disposition:

Commercial 7,821,371 7,454,684 7,478,631 7,263,358 7,178,281 Residential 3,549,899 3,563,626 3,534,372 3,477,870 3,413,252 Industrial 1,547,630 1,538,218- 1,539,385 1,580,969 1,671,564 Other (n) 130,678 131,626 130,721 145,242 292,510 Total retail sales 13,049,578 12,688,154 12,683,109 12.467,439 12,555,607 Wholesale and contract sales (a) 3,127,087 2,805,777 2,367,589 2,272,669 2,517,247 New England Power Pool 741,390 884,336 725,439 877,978 1,898,059 Total system 16,918,055 16,378,267 15,776,137 15,618.086 16,970,913 Mscellaneous usage 1,136,616 1,118,856 1,108,194 1,070,540 1,090,257 Total 18,054,671 17,497,123 16,884,331 16,688,626 18,061,170 *

- Kilowatthour sales atinual growth:

Commercial 4.9 % (0.3)% 3.0 % 1.2 % 0.5 %

Residential (0.4)- 0.8 1.6 1,9 0.8 Industrial 0.6 (0.1) (2.6) (5.4) (0.8) 4 Other (0.7) 0.7 (10.0) (50.3) 4.6 Total retail sales (a) 2.8 -

1.7 (0.7) 0.5

. Wholesale and contract sales 11.5 18.5 4.2 (9.7) 51.6 New England Power Pool (162) 21.9 (17.4) (53.7) 51.5

- Total system 3.3 % 3.8 % 1.0 % - (8.0) % 10.1 %

Electric operating revenues by class:

Commercial 50 % 50 % 50 % 49 % 48 %

- Res.idential 27 % 28 % 28 % 28 % 27 %

Industrial 9% 9% 9% 10 % 10 %

Wholer, ate and contract 12 % 11 % 11 % 12 % 13 %

Other 2% 2% 2% 1% 2%

Retail eevenue per kWh 11.11 c 11.12 e 10.68 c 10.33 e 9.55 c l Average number of customers 657,487 653,757 655,707 651,141 646,215 (a) Drective in both November 1995 and F<bruary 1993, a former retail customer became a wholesale customer as allowed under Manachusetts state law.

Certain reclauifications and recalculatiom were made to the data reported in prior years to conform with the method of presentation used in 1996,

Selected Consolidated Financial Statistics (Unaudited) 1996 1995 1994 1993 1992 Operating revenues (000) $ 1,666.303 $ 1,628,503 $ 1,544,735 $ 1,482,159 $ 1,411,753 Datance for common (000) $ 126,181 5 96,739 (a) $ 109,257 $ 102,513 $ 90,748 Per common share:

Earnings 5 2.61 $ 2.08 (a) $ 2.41 $ 2.28 $ 2.10 Dividends dedared $ 1,880 $ 1.835 $ 1.775 $ 1.715 $ 1.655 Dividends paid 5 1.88 $ 1.82 $ 1.76 $ 1./0 $ 1.64 Book value $ 21.37 $ 20.61 $ 20.11 $ 19.42 $ 18.77 Payout ratio 72 % 88 %(a) 73 % 75 % 78 %

Return on average common equity 12.4 % 10.0 %(a) 12.1 % 11.9 % 11.5 %

Year.ond dividend yield 7.0 % 6.4 % 7.6 % 5.9 % 6.2 %

Fixed charge coverage (5fC) 2.91 2.38 2.46 2.22 1.89 Capitalitation:

Total debt 52 % 54 % 56 % 57 % 56 %

Preferred equity 8% 8% 9% 9% 9%

Common equity 40 % 38 % 35 % 34 % 35 %

Long-term debt (000) $ 1,058,644 $ 1,160,223 $ 1,136,617 $ 1,272,497 $ 1,091,073 Mandatory redeemable preferred stock (000) $ 83,465 $ 86,837 $ 88,837 $ 90,837 $ 90,837 Total assets (000) $ 3,729,291 $ 3,637,170 $ 3,608,699 $ 3,468,724 $ 3,286,335 Internal generation after dividends (000) $ 257,446 $ 184,492 $ 217,030 $ 194,209 $ 204,248 Plant openditures (000) $ 151,045 $ 180,822 $ 198,771 $ 246,774 $ 213,838 46 Internal generation 170 % 102 % 109 % 79 % 96 %

Common shares outstanding:

Weighted average 48,264,734 46,591,662 45,337,661 44,959,050 43,143,953 Year end 48,509,537 48,003,178 45,535,477 45,129,227 44,763,055 Stock price:

High 30 1/8 29 1/2 29 7/8 32 5/8 28 1/4 Low 21 3/4 23 1/8 21 1/2 26 3/8 22 1/8 s Year-end 26 7/8 29 1/2 24 29 3/4 27 1/2 Yeat end market value (000) $ 1,303,694 $ 1,416,094 5 1,092,851 $ 1.342,595 $ 1,230,984 Trading volume (shares) 41,105,700 23,078,900 25,095,100 18,729,400 2t,A:.030'.;

Market / book ratio (year-end) 1.26 1.43 1.19 1.53 1.47 Pric e/ earnings iatio (year-end) 10.3 14.2 (a) 10.0 13.0 13.1 (a) Amounts culuding SM million pre-tax restructuring charp are as follows:

Balance for common (000) $ 117,403 Earnings per share $ 2.52 '

Payout ratio 72 %

Return on average common equity 12.2 %

Price / earnings ratio 11.7 %

Certain redawilkations and recalculations were made to the data reported in prior years to conform with the method of presentation med in 1996.

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

Officers Direct:rs Thomas J. hiay, Chairman of the lioard, Penident and Chief a,d William E Connell, Chairman and Chief Executive thecutive Omcer Omcer, Connell Limited Partnership (metals rctyding Alimo Alden, Senior Vke Prnident - Saln, Servicn and and procusing and indmirial production) lluman Rnources a,d f Gary L Countryman, Chairmwn of the lloard and Chief E. Thomas lloulette, Senior Vice Prnident - Nudcar Executive Omccr, Liberty hiatual Imurance Company L Carl Gmtin, Senior Vice Penident Corporate Relations a,c.f Timmas G. Dignan, Jr., Partner, Ropo & Gray

• • ""O '

John J. liiggins, Jr., Senior Via Ptnident b,c.d Charin K. Gifford, Chairman, Ptnident and Chief Ibuglas S. lloran, Sem.or Vice Prn. dent i and G.eneral Counsel Executive Omccr,142nk of Itoston Corporation (bank Jamn J. Judge, Senior Yke Pinident and Treasurer holding company) and The Fint National liank of Ronald A. Irdgett, Senior Vice Ptnident Fouil, Field Service and 1.intric Delivery bf Nehon S. Gifford, Principal,11ce wing Capital (venture William N. Dimoulas. Yke Prnident Information Systems a b.c hiatina S. llorner, Executive Vice President, Teachers Philippe A. Iranguln,Vi e Prnident Strategic Planning /New insurance and Annuity Asmciation and College liuunnw' Retirement li luities Fund Rkhard S. Ilahn, Vice Prnident - Ted .mlogy Rncarch & ac Thomas J. hiay, Chairman of the lloard, Ptnident and Development Chief Executive Omcer, lloston Edison Company Iron J. Obvier, Vice Prnident - Nudear Operatiom and b,d Sherry 11. Penney, Chancellor, University of Station Director hianachusetts at ilosion Robert J. Weafer, Jr., Vice Prnident Finance, Controller and ef lierben Roth, Jr., Former Chairman of the lioard and #

Chief Auountmg Ofhter Chief Lxecutive Omcer, l.FE Corporation (tramc and Thn>dora S. Conviuer, Cink of the Corporation indmtrial procos control systems) e,f Stephen J. Sweeney, Former Chairman of the lloard and Donald Anastasia Auistant Treasurer Chief Executive Omccr llosion Edimn Company '

Wayne R. liigard, Aninant Clerk of the Corpor tion a hiember of Executise Committee b hiember of Audit Finance and Risk hianagement Committee c hiember of Pricing Committee Paul E. Tmngas d hiember of Executive Permnnel Committee 1941 1997 e hiember of Nuclear Oversight Committee Wah the death of Paul E. Tmngn on f hiember of Capital Investment Committee January !8,1997, the leard of dirnmn lost a valuable member. Throughout his career at an clested oEial insluding Uniint Stain Senator, and as a member of '

ihe $5mion Edimn Imard, he mnsistently demomuated permnal courage, a strong

- sense of daency and a voice of reamn.

Ile mmbined those aitributes whh insight, judgment and a sense of humor in bnoming one of the nationi most aniculate and ropecied imhticalleaden.

PaulTmngu bmught ihme ume

, aunbuto to leard delibeiuions, and his pte,u J! be mined i

Important Sharehold r inf;rmati:n the shares transferred in your own name.  ;

if you are internted in rneiving a prospectus to learn more i Shareholder Inquiries about this plan, or if you have questions on an exis;ing account, l If pu have quntionuoncerning your dividend payments, the contact our stock transfer agent. ,

Dbidend Reinvntment and Common Stock Purchase Plan, direct 1 Automatic Monthly investment Program (New) de;msit service, transfer pngedures or mhet stock account matters,

• plese contact our stock tramfer agent at the folk > wing addros: Shareholders who are panicipants in the Dividend

%e first National llank ofIlusion Reinvntment and Common Sn.ck Purchase Plan may now cla llosion FquiSeeve make automatic monthly investments of a specined amount .

Shareholder Services Dhision (not less than $50 per month) through an Automated Clearing Ilouse C'ACH*) withdrawal from their savings or checking ht:il Stort 45-02-09 PO. Ilos 644 account. Once automatic monthly deductions are initiated,

!!aston, h1A 02102-0644 funds will be drawn from your designated bank account on the

'li>ll Free Phone: 1- 2 0 736 3001 25th of each month and will be ininted in common stock on the next investment date. For more information on the if you are submining documents requnting a transfer, addrn,

^""'manc Monthly invssiment Program, or an enrollment ,

change or account conmlidation please use this same addrns f nn, contact our suick transfer agent.

with Mail Stop: 45-01-05.

Safekeeping Program +

Dividend Payments Dates Shareholders who are participants in the Dividend Reinvntment Comr.en and Preferred and Gunnmn Sugk Pur$ ase h Plan can transfer their common -

lit of February, hiay, Augmt and November ,

stock certiGcates mio their plan account for safekeepmg.

T:x Status of 1996 Dividends Dividends on those sharn will be reinvnted automatically like any mher shares held in the plan. 'lii continue receiving cash Generally, unins you are subject to certain exemptiom, all divi-dividends, you must hold your sharn in ceniGcate form. Ibr dends on our common or preferred stock are to be considered aisni3nal information, contact our 5: >ck transfer agent.

100% taxahle. ,

Stock Symbol and Exchange Listings SEC Form 10-K Stockholden may obtain a copy of our annual repon to the hker Symboh IISF.

Securitin and Exchange Commission on Form 10 K, by con.

e New York (NYSE) and lloston stock exchanges tacting our Investor Relations Department.

1997 Annual Shareholders Meeting Quarterly Report to Shareholders All shareholders are invited to attend our Annual Meeting on llencGcial owners of our stock whose shares are registered in Thunday, May 15,1997, at i1:00 A.M. at the First National llank ofllosion, Auditorium, lobby lxvel,100 Federal Streer, nanin other than their own may obtain copies of our Quanerly limion, Massachusetts. Repons in Shareholders by contacting our Investor Relations Department. Note that the Annual Report will continue to be Dividend Payments Direct Deposit Service mailed m beneGcial ownen directly by their bank or broker.

Shareholden receiving Mvidend check, can arrange for electron- Company Contact ic direct deposit. Tramfers , re made on the dividend payment

,U*d"'d 1 ',""Yi"C' datn and conGrmation stater cnts are mailed to shareholders.

'li> take advantage of this cor <enient program, contact out Clerk of the Corporation smck transfer agent as -ned above. Investor & Shareholder Contacts Dividend Reinvestment and Common Stock Philip J. Irmbo Purchase Plan Director, investor Relanons Our Dividend Reinvestment ai ? Common Suwk Punhase Plan (617) 424-3562 (the plan) is available to our commor, and preferred shareholden, our enidential electric customers and employen Panicipants do Jean M. Carella ,

not pay brokerage fees or commissions related to the purchase of Invnt r Relati ns Sp-ctah,st ,

sh.un. Some imponant featurn of the plan are as folkmr (617) 424-26 %

. Optional cash payments invnted monthly Email Address .

. $50 per month minimum not to exceed $40,000 .

trebedison.com pet calendar year

. Safekeeping of common stock ceni6 cates Internet Address 11cne6cial owners of our Stock whose shares are registend in mv.bmmnedimn.com namn other than their own (e.g., a broker or bank nomince) must arrange pirt;cipation with the record holder. If for any General Offices reamn you are unable to arrange participation with your broker 800 lbylston Street or bank nominer, you mmt become a record holder by having- llosion, M A 04.8003

h B

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IPrinted Ed Reepted l'agwe

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& Boston Edison 800 Boylston Stu eet Boston. Massachusetts 02199-8003

UNITED STATE! SEOUE:72E! AN: EXOFJJ;n COMM:!!:0N Washingten, D.C. 20149 TOEM 10-0 lx) Quarterly sepert pursuant to Section 13 er Illd) cf the Securities Exchange Act of 1934 Ter the quarterly period ended Septenker 30, 1997 or

[] Transitten rep rt pursuant to Sectien 13 or liid) of the Securities Exchange Act cf 1934 Ter the transitten period fren.,_ _ to __

Cereassien file nunber 1-1101 E0!7CN ELISON COM W:Y ,

(Exact nant of registrant a* specified in its charter)

Massachusetts 04-1276610

(! tate er ether jurisdicti n cf (2.E.S. Empicyer int:rp;ratien er crgar.izatien) Ider tification N;. .

l f 0 B:ylsten Streel, Besten, Massa:t.usett 02;F9 (Address cf prite pal executive eff.:es) (Zip Cece) l Fegistrant's telephene nunber, including area code: 627-424-2000 ,

Indicate by check mark whether the registrant (1) has filed all repcrts required to be filed by Sectien 13 cr 15(d) cf the Securities Exchange Act cf 1934 during the.preced.ng 12 months (cr for such shorter period that the registrant was required to file.such reports), and (2) has been subject te such filing requirements fer the past 90 days.

Yes x No. _

2ndicate the number of shares outstanding cf each of the issuer's classes cf c mm:n stock,;as cf the latest practicable date.

Class Outstanding at Nevenber 11, 1997 Cema:n Sto:k,~!2' par value 46,514,973 sharer

.. n .. . .- . . - - - ~ - - - . - . . . - . . _ - _ ~.- . . .-_-. - - -.

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l Part I - Financial:Information Item 1, _ Financial Statements Boston Edison Company ,

Consolidated Statements of Income  !

i (Unaudited)

(in thousands, except per share amounts) ,

Three Months Nine Months Ended September 30, Ended Septenber 30, 1997 1996 1997 1996 4

Operating revenues $519,513 $497,956 S1,368,972 $1,275,561 Operating expenses:

Fuel and purchased power -172,744 153,237 518,307 424,367 operations and maintenance 103,418 103,196 303,514 306,434 Depreciation and amortization 53,'24 51,692 144,470 .142,163 [

Demand; side management programs 7,463 8,031 21,560 23,029

-Taxes _ property and other 27,678 26,760 85,573 84,871

. _ Income taxes 46,226 49,522 79,413 81,431 Total operating expenses 411,453 392,438 1,152,837 1,062,295 Operating income 108,060 105,518 216,135 213,266 other income, net 284 484 725 900 Operating and other income 108,344 106,002 216,860 214,166 Interest charges:

Long-term and medium-term debt 23,049 22,847 69,436 71,555 Other 4,148 3,852 12,039 10,952 Allowance for borrowed funds used during construction (271) (708) (949) (1,482)

Total interest charges 26,926 25,991 80,526 81,025 Net income 81,418 80,011 136,334- 133,141 1

Preferred stock dividends 2,919 3,841 10,230 11,548 Earnings available for common

! -shareholders $_78,459 $ 76,170 $ 126,104 j 121,593 Weighted average common shares outstanding 48,515 48,327 48,515 48,198 Earnings per share of coumon stock $1,6g jM j2,60 jM Dividends declared per' share of common stock 10,47 #0,47 JM jM T

The accompanying notes are an integral part of the consolidated financial statements.

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

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~ Boston Edison company Consolidated Balance Sheets l' (Unaudited)~

(in thousands)  ;

September 30, December 31, ,

' 1997 1996

• -  : Assets l ' Utility plant in service, at originalicost .$4,461,325 $4,393,585 .

Less: accumulated depreciation ,1,677,234 1,550,317 2,784,091 2,843,268 i -- -Nuclear fuel, net 71,820 '82,944 Construction work in progress 40,595 30,376 Net utility plant 2,896,506 2,956,588 ,

Nuclear decommissioning trust 148,624 132,076 Equity investments 35,217 23,054 other investments 5,591 7,630 .

' current assets

'

e- Cash and cash equivalents 6,989 5,651-

?

Accounts receivable 220,941 233,024 Accrued unbilled revenues 43,301 34,922

• Fuel, materials and supplies, at average cost 55,952- $7,075

-Prepaid expenses and other 45,893 45,146 Total current assets 373,076 375,818 l

4-Regulatory assets:

l Power contracts 72,839 88,963 Income taxes, net 49,898 47,483 Redemption premiums. 27,943 31,052 ,

Postretirement benefits costs 22,441 15,009 Nuclear outage costa 12,187 3,432 Other 15,086 16,087 Total regulatory assets 200,394 202,026 Other deferred debits 37,149 32,099 Total assets $3,696,557 13.729,291 4 JThe accompanying notes are:an integral part-of the consolidated financial statements.

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Boston-Edison Company Consolidated' Balance Sheets s (Unaudited)  :'

(in thousands) ,

t September 30, December 31, 1997 1996- -)

Capitalization and Liabilities' $

-. common stock equity:

Common stock $ -744,505 $ 744,233 Retained earnings 346,372 292,191 Total common stock equity 1,090,877 1,036,424' Cumulative preferred stock:

Nonmandatory redeemable series 83,000 119,954 Mandatory redeemable. series 77,936 81,465 Total preferred stock 160,936 201,419  ;

Long-term and medium-term debt, 1,057,164 1,058,644

- t Total capitalization 2,308,977 2,296,487 Current liabilities:

Long-term debt / preferred stock due within one year 103,067 102,667 Hotes payable 184,290 201,454 Accounts payable 88,841 134,093 Accrued interest 13,0G3 24,378 Dividends payable 24,748 25,343 other 156,310 115,812 Total current liabilities 570,319 603,737 Deferred credits:

Power cc :racts 72,839 80,963

. Accumulated deferred income taxes 484,633 498,718 Accumulated deferred investment tax credits 53,685 58,899 Nuclear decommissioning liability 149,923 133,388 other. .

56,181' 49,099 Total deferred credits 817,261 829,067 t

Commitments and contingencies Total: capitalization and liabilities $3,696.557 13,729,291

-The accompanying notes are an integral part of the consolidated financial statements.

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- . = .- -- . -. .- - . ~ , . - - , . - ... - - .-. .

Boston-Edison Company Cons'11 dated Statements of Cash Flows (Unaudited)

• i

'(in thousands) s Nine Months Ended September 30, 1997 1996 Operating activities:

Net income $ 136,334- S 133,141-

' Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization- 170,395_ 172,866 Deferred income' taxes and investment

-tax credits (21,707) (13,925)

Allowance for borrowed funds used during construction (949) (1,482) ,

Net changes in:

Accounts' receivable and accrued unbilled revenues 3,704 .(66,787)

Fuel, materials and supplies (172) (1,544)

Accounts payable (45,242) (35,299)

Other current assets and liabilities 27,841 (811)

Other, net (4,590) 28,830 Net cash provided by operating activities 265,614 214,989 Investing activities:

Plant expenditures (excluding AFUDC) (90,900) (98,308)

Nuclear fuel expenditures (2,811) (35,484)

Investments (28,711) (22,846)

Net cash used in investing activities (122,422) (156,638)

Financing activities:

Issuances:

Common stock 144 9,454 Medium-term debt 100,000 0

' Redemptions-Preferred stock (44,000) (4,000)

Long-tera debt (101,600) (101,600)

Net chang

• in notes payable (17,164) 114,734 Dividendr. paid (79,234) (79,452)

Nst cash-used in financing activities (141,854) (60,864)

Net increase (decrease) in cash and cash .

equivalents- _

1,338 (2,513)

-Cash and cash equivalents at beginning of year 5,651 __

5,841 Cash and cash equivalents at end of period S 6,989 $ 34 j28 Supplemental disclosures of cash flow information:

Cash paid:during *.he period-for:

Interest,znet-of amounts capitalized S 87,016 S ~ 87,628 Income taxes 1_ 59,289 S 69,241 The accompanying notes =are an integral past of the consolidated financial statements.

5

)

N :tes to Unaudited Consolidated Financial Statements

' A): Basis of Presentation The. accompanying unaudited consolidated financial statements should_be read in  ;

conjunction with the Boston Edison Company (the Company) 1996 Annual Report on Form 16-K and Forms 10-Q for the periods ended March 31, 1997 and June 30, 1997. The financial information presented as of September 30 has-been prepared from the Company's books and records without audit by independent accountants. Financial information as of December 31 has been derived from the audited financial statements of the Company, but does not include all disclosures required by generally accepted accounting principles (GAAP). In the opinion of the Company's management, all adjustments necessary for a fair presentation of the financial information for the periods indicated have been included.= These adjustments are of a nornal recurring nature, except as separately disclosed in the following notes to these financial statements.

Certain reclasaifications have been made to the prior year data to conform  ;

with the current presentation.

The preparation of financial statements in conformity with GAAP requires the Company to make estinates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The results of operations for the three and nine-month periods ended September 30, 1997 and 1996 are not indicative of the results which may be expected f r _n entire year. The Company's kilowatt-hour (kWh) sales and revenues are typically higher in the winter and summer than in the sprint ind fall as sales tend to vary with weather conditions. In addition, the Company bills higher base rates to commercial and industrial customers during the billing months of June through September as mandated by the Massachusetts Department of Public Utilities (MDPU). Accordingly, greater than half of the company's annual earnings typically occurs in the third quarter.

B) Nature of Operations The Company is an investor-owned regulated public utility operating in the energy and energy services business. This includes the generation, purchase, transmission, distribution and sale of electric energy and the development and

. implementation of electric demand side management programs. A portion of the generation is produced by the Company's wholly owned nuclear generating unit, Pilgrim Nuclear Power Station (Pilgrim). The Company supplies electricity at retail to an area of 590 square miles, including the City of Boston and 39 surrounding cities and towns. It also supplies electricity at wholesale for resale to other utilities and municipal electric departments. Electric operating revenues were 88% retail and 12% wholesale in 1996. In addition, the Company conducts unregulated activities through its wholly owned subsidiary, Boston Energy Technology Group (BETG). Refer to Note A of Item 8 in the Company's 1996 Annual Report on Form 10-K and Note B in Forms 10-Q for 1 the periods ended March 31, 1997 and June 30, 1997 for information regarding the Company's telecommunications and energy marketing joint ventures.  ;

l 6

The company's shareholders approved a proposal by management to adopt a holding company structure at the Annual Shareholders Meeting held in May 1997.

-The holding company, to be called BEC Energy, is subject to the approval _of the MDPU, Federal Energy Regulatory Commission (FERC), Nuclear Regulatory Commission and Securities and Exchange Conadssion. The Company filed for approval with each of the various regulators during the second quarter and received approval from the FERC in September 1997. The Company anticipates that other regulatory agencies will rule on its filings by early 1998.

C") Depreciation Expense In the thi~.d quarter of 1997 the company recorded an $8.7 million nonrecurring charge to depreciation expense in order to reflect the removal of specific nuclear-related intangible assets from its balance sheet.

D) Contingencies The company is an owner or operator of approximately 40 properties where oil or hazardous materials were spilled or released. As such, the Company is tequired to clean up these properties in accordance with a timetable developed

-by the Massachusetts Department of Environmental Protection and continues to evaluate the costs associated with their cleanup. There are uncertainties associated with these costs due to the complexities of cleanup technology, regul.cory requirements and the-particular characteristics of the different sites. The Company also-continues to face possible liability as a potentially responsible party in the cleanup of six multi-party hazardous waste sites in Massachusetts and other states where it is alleged to have generated, transported or disposed of hazardous waste at the sites. The Company is one of many potentially responsible parties and currently expects to have only a small percentage of the total potential liability for these sites. Through Septenber 30, 1997, the Company has approximately 07 million accrued related to its cleanup liabilities. The Company is unable to fully determine a range of reasonably possible cleanup costs in excess of the accrued amount, however based on its assessments of the specific site circumstances, it does not believe that it is probable that any such additional costs will have a material impact on its financial condition. However, it is reasonably poss. ole that additional provisions for cleanup costs that may result from a change in estimates could have a material impact on the results of a reporting

-period in'the near term.

Statement of Position 96-1,-Environmental Remediation Liabilities (SOP 96-1),

became effective in 1997. SOP 96-1 contains authoritative guidance on specific accounting issues related to the recognition, measurement, display and disclosure of environmental remediation liabilities. It requires that an accrual for environmental liabilities include estimates of the costs to perform all elements of the remediation effort including the costs of compensation and-benefits for those' employees expected to devote a significant ,

amount-of time directly to that effort. SOP 96-1 had no material effect on the Company's consolidated results of operations or financial position.

7he Company was named as a party in a lawsuit by Subaru of New England, Inc.

The plaintiff claimed certain automobiles stored on lots in South Boston suf fered pitting damage caused by emissions from New Boston Station. The company settled the lawsuit in September 1997. The settlement did not have a 7

naterial impact on the Ccmpany's consolidated results of operations or-financial position. _

In: December.1996, the board of directors of Connecticu. fankee Atomic Power i Company-(CYAPC), which owns and operates the Connecticut Yankee nuclear _

electric generating unit, unanimously voted to permanently shut down the unit.

This decision was based on an economic analysis of the costs of operating the unit compared _to the costs of closing the unit and incurring replacement power costs through the period of'its operating license. -The Connecticut Department of Public Utility Control-(DPUC) has raised concerns to the FERC regarding CYAPC's estimate of the post-operation costs and the plant operator's prudency prior to the shut down decision. The FERC set CYAPC's request to recover certain post-operating expenses, including decommissioning expenses, for hearing before an Administrative Law Judge. The DPUC subsequently filed testimony?in tae proceeding asserting'the position that the FERC should deny recovery of substantial post-operating costs, including a significant amount related to decommissioning and the return on CYAPC's ut. depreciated investment. 1 The litigation is in its initial stages. The Company, a 9.5% equity investor i in CYAPC and power-purchaser, is currently unable to determine the ultimate outcome of this proceeding or its impact on the Company.

In the normal course of its business the Company is also involved in certain other legal matters. The Company is unable to fully determine a range of reasonably possible legal costs in excess of amounts accrued, although, based on the information currently available, it does not believe that-it is

, probable that any such additional costs will have a material impact on its financial condition. However, it is reasonably possible that additional legal costs that may result from a change in estimates could have a material impact on the results of a reporting period in the near term.

1 E) Income Taxes The following table reconciles the federal statutory income tax rate to the annual estimated effective income tax rate for 1997 and the actual effective income tax rate for 1996.

1997 1996 Statutory tax rate 35.0% 35.0%

i State income tax, net of federal income tax benefit 4.3 4.3 Investment tax credits -(3.4) (1.8) other 0.5 0.3 Effective tax rate 3624% 37.0%

The estimate of the 1997 effective tax rate declined by 0.8% as a result of the favorable: outcome of an Internal Revenue Service (IRS) appeal related to investment tax credits.

__ F) Financing Activity In June 1997, $40 million of 8.25% nonmandatory redeemable series preferred stock was redeemed. The Company also redeemed $2 million of mandatory and

~;-

$2 ndllion of the optional 7.27% sinking fund series preferred stock in May

1997.

8 .

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In March 1997,-$100 million of $.70% debentures matured. These debentures were-replaced'with $100 million of 6.662% bank debt due in 1999.

G); Year 2000 Computer Issue 3 1

- The Company has developed a plan to address the year 2000 computer issue.- Its plan includes modification-of certain applications which will be expensed and-

~

replacement of systems which are not year 2000 compliant which will be

~

capitalized and amortized over future pextods.

H)- Accounting Guidance In July 1997, the Emerging Issues Task Force (EITF) reached consensus on '

specific issues raised related to the application of Statement of Financial Accounting Standards No. 71, Accounting for the Ef fec ts of Certain Types of Regulation (SEAS 71) .

1 The EITF determined that when deregulation legislation is passed or when a j rate order (whichever is necessary to effect change in the jurisliction) that contains sufficient detail for the enterprise to reasonably determine how the transition plan will affect the separable portion of its business being deregulated is issued, the enterprise should stop applying SEAS 71 to that deregulated portion of its business. The EITF further determined that -

regulatory assets and liabilities originating in the separable portion of the business no longer subject to rate regulation should be evaluated on the basis-

- of where the regulated cash flows to realize and settle these regulated assets and liabilities will be derived.

The Company entered into a settlement agreement in July 1997 as discussed in the Outlook for the Future section. Under its settlement agreement, the company's electric delivery business will remain subject to rate regulation and, therefore, will continue to meet *&- criteria for application of SEAS 73.

In addition, the Company's settlement agreement includes a non-bypassable access charge to be paid by its delivery business customers which is designed to recover the remaining net generation utility plant and regulatory assets that originated in its generation business. The company, therefore, does not  !

expect these EITF decisions to have a material effect on its consolidated results of operations or financial position. Affected regulatory assets and liabilities will be separately disclosed. Refer to the Outlook for the Etture section for more information regarding the status of the Company's settlement agreement and legislation in Massachusetts.

' Item 2. Manugement's Discussion and Analysis ,

s Results-of Operations - Three Months Ended September 30, 1997 vs. Three Months Ended Septenber 30, 1996 Earnings per share of common stock for the three months ended September-30, 1997 were $1.62 as compared to $1.58 for the three months ended September 30, 1996.- Sales to the Company's retail customers were generally flat compared to

.1996._ Increases in rales to residential and commercial sectors were partially offset by a decline in the industrial sector. Operations and maintenance expense was consistent with 1996 reflecting the Company's continued cost

- control efforts. Earnings were positively impacted by the favorable outcome 9

m , -

of an IRS appeal related to' investment tax credits. .The comparison of 1997 E and 1996 earnings is also impacted by two depreciation adjustments. A nonrecurring . charge of $0.11 per share was recorded as an increase to depreciation expense in the third quarter of 1997 to reflect the nuclear-related intangible assets adjustment described in Hote C to the Consolidated Financial Statements. The 1996 third quarter earnings reflect a nonrecurring

$0 07 per share adjustment to correct the accumulated depreciation balance of certain.large computer equipment.

The results of operations for the quarter are not indicative of the results which may be expected for the entire year due to the seasonality of the

- Company's kWh sales and revenues. Refer to Note A to the Consolidated Financial Statements. 1 Operating revenues operating revenues increased 4.3% during the third quarter of 1997 as follows:

i (in thousands)

Retail electric revenues $12,031 Wholesale revenues 2,359 Short-term sales and other revenues 7,167 L Increase in opera _tinq revenues $21,557 Retail base revenues in the third quirter of 1997 were consistent with 1996.

This reflects a 1% increase in kWh sales to retail customers. The increase

- occurred in the residential and commercial sectors reflecting the impact of a hot July and a growing economy in the Boston area. These positive factors were partially offset by a decrease in kWh sales to industrial customers reflecting an overall decline in manuf acturing activity in the Company's service territory. The increase in retail electric revenues is due to the timing effect of fuel and purchased power cost recovery. The increase in the company's fuel and purchased power clause revenues reflects the current recovery of substantial prior year undercollections. These higher revenues are offset by higher fuel and purchased power expenses and, therefore, have no net effect on earnings. Performance revenues, which vary annually based on the operating performance of Pilgrim Station, decreased due to a lower forecasted annual capacity factor effective November 1996 reflecting the scheduled refueling and maintenance outage in the first quarter of 1997.

Refer to the Electric Revenues section for more information regarding Pilgrim-Station's performance adjustment charge.

Wholesale revenues increased due to an increase in Pilgrim contract customer revenues compared to 1996. These contract customers are billed for their proportionate share of Pilgrim Station's costs. Revenues in the third quarter

, of 1996 reflected a retroactive billing adjustment due to lower than forecasted actual costs.

4 Short-term sales revenues increased approximately $6 million primarily due to an increase in short-term power purchase requirements resulting from a reduction in the available nuclear energy supply in New England. In addition, a 21% ' increase in generation from the company's fossil units enabled it to Lincrease sales to the power exchange. Revenues from short-term sales result 10

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

t c

in a corresponding reduction to future fuel and purchased power billings to  ;

retail customers and, therefore, have no net effect on earnings.

Qpera ting ' expenses e

Fuel _ and purchased power expenses increased $19.5 million primarily due to the timing.effect of fuel and purchased power cost recovery and an increase in

- Company generation.- Fuel and purchased power expenses are substantially recoverable through fuel and purchased power revenues.

The net increase in depreciation and amortization expense reflects the impact

- of two depreciation adjustments. The increase due to the $8.7 ndllion ,

nontecurring adjustment to nuclear-related intangible assets described in Note C to.the consolidated Financial Statements was partially offset by the_ impact of a- $5.2 ndllion adjustment to correct the accumulated depreciation balance

- of certain large computer equipment in the third quarter of 1996.

The effective annual-income tax rate for 1997 disclosed in Note E to the ,

consolidated Financial Statements reflects the impact of approximately $2

- million from the favorable result of an IRS appeal received in the third ,

quarter related to investment tax credits. The remaining refund will be reflected as a i reduction to income tax expense over the life of the related assets, The decrease in other income is primarily due to an increase in BETG pre-tax losses partially of fset by interest income from the IRS appeal.

Interest charges Allowance for borrowed funds used during construction, which represents the financing costs of construction, decreased primarily due to a lower average

- construction work in progress (CWIP) balance-in 1997. The 1996 average CWIP balance included nuclear fuel purchased in anticipation of Pilgrim Station's scheduled refueling outage in the first quarter of 1997.

Results of Operations - Nine Months Ended September 30, 1997 vs. Nine Months Ended September 30, 1996

- Earnings per share of common stock for the nine months ended September 30, 1997 were $2.60 as compared to $2.52 for the nine months ended September 30, 1996. Operations and maintenance expense in 1997 continued to reflect the

' Company's cost control ef forts as discussed further in the operating expenses section. Earnings were positively impacted by the favorable outcome of the IRS appeal related to investment tax credits received in the third quarter of 1997. In addition, operations and maintenance expense is lower than in 1996 despite an approximately $5 ndllion incremental impact of a severe snow storm

- in April 1997. The comparison of 1997 and 1996 earnings is also impacted by two depreciation adjustments. A nonrecurring charge of $0.11 per share was recorded as-an increase to depreciation expense.in the third quarter of 1997

to. reflect the nuclear-related intangible assets adjustment described in Note C to the Consolidated Financial Statements. Earnings in 1996 reflect a nonrecurring $0.07 per share adjustment to correct the accumulated depreciation balance of certain large computer equipment, 11 i

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

i 1

t The resultsLof operations for the nine months ended September 30, 1997.are not indicative of the results which may_be expected for the entire year due to the ..

. seasonality of the _ Company's .kWh sales and revenues. Refer to Note A to the Consolidated' Financial Statements.

Operating revenues Operating revenues increased 7.3% during the first nine months of 1997 as ,

follows:

(in thousands)

Retail electric revenues $76,461 Wholesale revenues (3,65W Short-term sales and other revenues 20,606 Increase in operatina revenues $93,411 Retail base revenues in'1997 were consistent compared to 1996. Increases due to warmer than normal temperatures in June and July and the stronger' local economy were offset by milder than normal winter conditions and lower industrial sales due to the decline in manufacturing activity in the ccmpany's

service territory. Retail electric revenues increased primarily due to the timing effect of fuel and purchased power cost recovery. The increase in fuel and purchased power clause revenues reflects the current recovery of substantial prior year undercollections. These hither revenues are offset by higher fuel and purchased power expenses and, therefore, have no net effect on earnings. Pilgrim performance revenues, as discussed in the results of, operations for the third quarter, decreased due to a lower forecasted annual

. capacity factor effective November 1996.

The decrease in wholesale revenues reflects lower sales to certain contract customers with the ability to purchase lower costing power elsewhere. The.

Company's sales were adversely impacted by increased energy prices during Pilgrim Station's refueling outage.

Short-term sales revenues increased approximately $17 adllion. As discussed in the results of operations for the third quarter, this is primarily due to an increase in short-term power purchase requirements resulting from the continued reduction in available nuclear energy supply in New England combined with a 48%. increase in the Company's fossil generation allowing for increased sales to the power exchange.

Operating expenses Fuel and purchased power expenses increased $93.9 million. The increase is primarily due to the timing effect of fuel and purchased power cost recovery and'a 40% increase in fossil generation partially offset by a decrease in power exchange purchases.

Operations and maintenance expense decreased $2.9 million. The decrease is the result of lower overall spending f rom the Company's continuing cost control efforts and significantly less overhaul activity in its fossil generating units than in 1996. These decreases were partially offset by costs

, associated with'the April 1997 severe storm that struck the greater' Boston area.

12

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

d The netiincrease in depreciation and amortization expenseLreflects-the impact '

of the two depreciation' adjustments which are discussed in the results of operations f or the third quarter.- ,

Electric Revenues The annual Pilgrim performance adjustment charge provides the Company with opportunities to improve its financial results. 1The most significant potential impact- of this performance incentive is based on Pjlgrim Station's

~

annual capacity factor. Refer to the Electric revenues.section of the-Company's 1996 Annual Report on Form 10-K for detail regarding the annual performance adjustment charge, Pilgrim's actual capacity f actor for the performance year ended October 1997 was 78%.- This is a decrease from the capacity factor of 911 achieved in the perforrance year ended october 1996 in which there was no refueling and maintenance outage. The current performance year's outaye, originally scheduled to be completed _in March 1.997, was extended through April 1997 due to the replacement of Pilgrim's main  ;

-transformer. The power needs usually met by Pilgrim Station were met by other-

-generating plants or purchased from other suppliers during this period.

Liquidity The company continues to supplement internally generated funds with external financings, primarily through the issuance of short-term ecmmercial paper and bank borrowings. The Company has authority from the FERC to issue up to $350 million of short-term debt. The company also has a $200 million revolving credit agreement and arrangements 1with several banks to provide additional short-term credit on a committed as well as on an uncommitted and as available i

basis. At September 30, 1997 the company had approximately $184 nullion of short-term debt outstanding, none of which was incurred under the revolving credit agreement. An additional $30 million line of credit, nonrecourse to the parent company, was obtained by-BETG as of October 1, 1997. Proceeds from this credit arrangement will be used to fund unregulated subsidiary investments while the company's holding company structure is pending approval.

Refer to Note B to the consolidated Financial Statements. The Company has

$220 nullion remaining under its approved long-term financing plan with the MDPU which is available through 1998. Proceeds from issuances under this plan are to be used to refinance short and long-term securities and to fund capital expenditures. The company expects to incur costs relatea to the year 2000 computer issue as discussed in Note G to the consolidated Financial Statements.

Outlook for the Future The Company entered into a-comprehensive settlement agreement with the iMassachusetts Attorney General, the Massachusetts Division of Energy Resources

,and 15 other interested parties in July 1997 to allow retail electric customers the ability to choose-their electricity supplier as_early as January 1,. 1998, contingent upon choice being made available to all customers of Massachusetts investor-owned. utilities-(Retail Access Date). The MDPU conducted public hearings on the settlement agreement in September 1997. The Company is anticipating an order on its agreement by the end of 1997. Refer to the Fositioning in the Industry'section of Item 7 in the Company's 1996 13

, . __ _- ~_ _ -

. _ - _ ~ .

L Annual- P.eport on Form 10-K for more information regarding the Company's settlement agreement.

i Included in the Company's settlement agreement is a provision for the divestiture of its fossil generating assets no later than six months.after the +

Retail Access Date. The Company filed its divestiture plan along with its settlement. agreement in July 1997. Purchase and sale agreements are expected to be signed by December 1997 with completion of the sale anticipated in 1998.

Implementation of the divestiture plan will require certain regulatory approvals including those of the MDPU and FERC. The settlement agreement includes a provision for the continued operation of Pilgrim Station with a new revenue mechanism for recovery of Pilgrim's costs. These costs are recoverable as part of the distribution access charge which is further discussed in Item 7 of the Company's 1996 Annual Report on Form 10-K. The variable component of the access charge is designed to fully recover Pilgrim's fixed operating costs, decommissioning and other post-shutdown costs.

• Severance and employee training costs related to the fossil divestiture will also be recoverable through the distribution access charge.

Implementation of the Company's settlement agreement is subject to the enactment of enabling Massachusetts legislation. Several proposals have materialized from the legislature during October and November of 1997. The must recent of these proposals requires the transition to a competitive generation market beginning March 1, 1998 with an opportunity for utilities to recover their stranded costs. Certain provisions of the proposal are inconsistent with the Company's settlement agreement. Although the Company expects to collect its stranded costs consistent with its settlement agreement, it cannot predict at this time the ultimate outcome of the industry restructuring legislation or the impact on the Company.

Other Matters Safe Harbor Cautionar.y Statement The Company occasionally makes forward-looking statements such as forecasts and projections of expected future performance or statements of its plans and objectives. These forward-looking statements may be contained in filings with the Securities and Exchange Commission, press releases and oral statements.

Actual results could potentially differ materially from these statements.

Therefore, no assurances can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. Refer also to the safe harbor cautionary statements included in the Company's 1996 Annual Report on Form 10-K and Forms 10-Q for the periods ended March 31, 1997 and June 30, 1997.

The preceding sections include certain forward-looking statements about environmental and -legal issues and the company's settlement agreement.

The impacts of various environmental and legal issues could differ from current expectations. New regulations or changes to ixisting regulations could impose additional operating requirements or liabilities other than expected. The effects of changes in specific hazardous waste-site conditions

,; and cleanup technology could affect estimated cleanup liabilities. The 14 i:

l

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

impacts of changes in available information and circumstances regarding legal I issues could affect the estimated litigation costs.

The effects of the industry restructuring process cer.ently underway at the MDPU and the Company's re.ated settlement agreement could dif fer from current expectations'. The impacts of legislative action may af fect the ultimate results of the industry restructuring and the Company's settlement agreement.

i i

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l 15 I

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I-Part II - Other Information.

Item S'. 10ther Information-The 'following additional information is furnished in connection with the ,

Registration Statement on Form S-3 of the Registrant.(File No.- 33-57840),

filed with.the Securities and Exchange Commission on February 3, 1993.

Price vnd dividend information per share oficommon stock:

Price Dividend High Low Paid First-quarter 1997 $27 3/8 $26 $0.470 Second quarter-1997 26 5/8 24 5/8 0.470 Third quarter 1997 30 7/8 26 1/2 0.470 The market value per share of the Company's common stock as of the close of business on November 11, 1997 was $32 1/4 per share as reported in the Wall

. Street Journal.

1 Ratio of earnings to cixed charges and ratio of earnings to fixed charges and preferred stock dividend requirements:

Twelve months ended September 30, 1997:

4 1

Ratio of earnings to fixed charges 2.95 _l l

Ratio of earnings to fixed charges and preferred i stock dividend requirements 2.49 Item 6. Exhibits and Reports on Form 8-K a) Exhibits filed herewith:

Exhibit 4 - Instruments defining the rights of security holders, )

including indentures The Company agrees-to furnish to the Securities and Exchange Commission, upon request,.a copy of any  ;

agreements or instruments defining the rights of holders of any long-term debt whose authorization does not exceed- 10% . of the Company's total' assets. q Exhibit 12 - Computation of ratio of earnings to fixed charges l I

12.1 - Computation of ratio of earnings to fixed. charges j for'the twelve months ended September 30, 1997 12.2 - Computation of ratio of earnings to fixed charges and preferred stock dividend requirements for the twelve months ended September 30, 1997 16

- - - - - ~ ..,

a s

Exhibit 15 - Letter re:unaudited~ interim financial information 15.1-- Report of_ Independent Accountanta-Exhibit 27 - Financial Data Schedule 27.1 - Schedule UT Exhibit 99 - Additional Exhibits 99.1 - Letter of Independent Accountants Re Form S-3 Registration Statements filed by the company on February 3, 1993 (File No. 33-57840) and May 31, 1995 (File No. '3-59693); Form S Registration Statements flesd by the Company on October 10, 1985 (File No. 33-00810), July 28, 1986 (File No. 33-7558), December 31, 1990 -(File No. 33-38434), June 5, 1992 (33-48425), March 17, 1993 (33-59662 and 33-59682) and-April 6, 1995 (33-58457) and in the Form S-4 Registration Statement filed by Boston Edison Holdings, currently known as-BEC Energy, on March 17, 1997 (File No, 333-23439)-

b) RNo Form 8-K was filed during the third quarter of 1997.

! 17 .

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s 5

( h 4

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Signature-w

. Pursuant to the require.nents of the Securities Exchange Act of 1934,: the registrant has-duly cau. sed this report to be signed on'its.' behalf by the undersigned thereunto' duly authorized.. t

?

3 s y

't'.

4 4

0 k.

BOSTON EDISCN COMPANY (Registrant) 3 Date November.12, 1997 /s/ Robert J. Weafer, Jr.

Robert J. Weafer, Jr.

Vice President-Finance, Controller and chief l

-Accounting Officer I

ll_ > ,

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.~. ,

bf I

Exhibit 12.1-Boston Edison Company Computation of Ratio of Earnings to Fixed Charges Twelve _ Months Ended _ September . 30, 1997 (in thousands).

Het income from' continuing operations $144,739 Income taxes 86,617 Fixed charges 118,525 Total $349,881

. Interest expense $108,342 Interest component of rentals 10,183 Total }118tS2}

Ratio of earnings to fixed charges 2 95 i

i i

I 19 5

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

Exhibit'12.2.

Boston Edison Company Computation.of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements- '

Twelve Months Ended September 30,-1997 '

(in thousands)

- Het l'ncome from continuing operations $144,739 ,

Income taxes 86,617 Fixed charges 118,525 Total $349,881

- Interest expense $108,342 Interest component of rentals 10,183 Subtotal 118,525 Preferred stock dividend requirements 22,254 Total $140,779 Ratio of earnings to fixed charges and preferred stock dividend requirements 2.49 a

f 20

+ - ,. - . . - , .-

Exhibit 15.1 J

Report of Independent Accountants To the Stockholdere and Directors ,

of Boston Edison Company

+

- We have reviewed the accompanying consolidated balance sheet of Boston Edison Company (the Company) and subsidiaries as of September 30, .997 and the

- related statements oc income. for the three and nine-month periods ended

- Sentembur 30, 1997 and 1996 and cash flows for the nine-month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the company's management.

We conducted our review in accordance with standards established by the

- American Institute of Certified Public Accountants. A review of interim financial information . consists principally of applying analytical procedures to-- financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than lui audit conducted in accordance with generally accepted auditing standacds, the objective of which in'the expression of an opinion _regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

~ Boston,' Massachusetts COOPERS & LYBRAND L.L.P.

= October 23, 1997 21

,t s

Exhibit 99.1

' - Securities'and Exchange l commission 450-Fifth Street, N.W.

Washington, D.C.--20549--

Re Boston Edison Cor.pany Registration on Form S-3, S-4 and torm S-8 lWe are aware that our report dated October 23, 1997 on our review of the interim financial infornation of Boston Edison Conpany for the period ended September 30, 1997 and included in this Form 10-Q is incorporated by reference-in the' Company's registration statements on Form S-3 (File Nos.. 33-57840 and

.. 33-59693). Form S (File Nos . 33-On810, 33-7558, 33-38434, 33-48425, 31--

59662,-33-59682 and 33-58457) and on Form S-4 filed by Boston Edison' Holdings,

~

currently known as BEC Energy (File No. 333-23439). Pursuant to Rule;436(c).

-under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act.

Boston, Massachusetts COOPERS & LYBRAND L.L.P.

October 23, 1997

)

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UNITED STATES SECURITIES AhD.EXCNANGE COMMISSION-Washington,JD.C.- 20549 FORM 10-Q

_[x) Quarterly' report pursuant to Section 13 or_15(d) of thA Securities

-Exchange Act of:1934 For the quarterly _ period ended September 30, 1997 or

[] Transition report pursuant to Section 13 or 15(d) of the Securities

-Exchange Act of 1934 For the transition period from- to Commission file number 1-2301 BOSTON EDISON CCMPANY (Exact name of registrant as specified in its charter)

Massachusetts 04-1278810 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

800 Boylston Street, Boston, Massachusetts 02199,'

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 617-424-2000 Indicate by check mark whether the registrant (1) has filed all reports required to'be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding ~12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90' days.

.Yes x =No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class Outstanding at November 11,- 1997 common Stock, $1 par value 48,514,973 shares

1 BOSTON EDISON COMPANY 1998 INTERNAL CA'SH FLOW PROJECTION ~ s-FOR PILGRIM UNIT # 1 NUCLEAR POWER STATION (DOLLARS IN THOUSANDS)

-12 Months Ended Projected Year 9/30/97 1DJ Net income After Taxes $144,739 c $145,000 -

Less Dividends Paid (105.792) (105.0001 1

Retained Eamings 38,947 40,000 Adjustments Depreciation and Amortization 225,788 210,000 Deferred Taxes and ITC (11,839) 5,000 AFIDC (1.759) (1.000)

Total Adjustments $212.190 $204.000 Intemal Cash Flow 1251.137 $24(.000 Average Quarterly Cash Flow $ 62.784 5 61.000 Percentage Ownership in All Operating Nuclear Units Pilgrim Unit # 1 = 74.2%

Maximum Total Contingency Liability $10,000 t

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U ITEM (4) NARRATIVE STATEMENTS OF CURTAILMENT OF CAPITAL EXPENDITURES:

Th's Boston Edison Company would be able to curtail $10 million of capital expenditures within any three month period of the next twelve months if it becomes necessary to pay retrospective premiums.

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