ML20248L771

Western Massachusetts Electric 1997 Annual Rept. Supporting Info,Encl

ML20248L771
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Site:	Millstone, Seabrook
Issue date:	12/31/1997
From:	WESTERN MASSACHUSETTS ELECTRIC CO.
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r WeSien! MaSSacUseffs 9906110350 980430 ADOCK 05000245 Elecin.e PDR PDR g The Northeast Utilities System L

John H. Forsgren Michael G. Morris Dennis E. Welch Execu;ive Vice President and Chairman Vice President-Environmental. Chii:f Financial Officer Safety and Ethics Hugh C. MacKenzie Bruce D. Kenyon President Roger C. Zaklukiewicz President-Nuclear Group Vice President-Bruce D. Kenyon Transmission and Distribution HuEh C. MacKenzie President-Nuclear Group Patricia A. Wood J hn H.Forsgren Clerk Michael G. Morris Executive Vice President and Chairman Chief Financial Officer Theresa H. Allsop A" '** I#' Chery1 W. Gris6 Senior Vice President O. Kay Comendul Assistant Clerk Rot,ert P. Wax Senior Vice President, Deborah L. Canyock Secretary, Assistant Clerk Assistant Controller-and General Counsel Management Information and 8 ervie n S u get Robert G. Abair Vice President and Chief Lori A. Mahler Administrative Officer Assistant Controller-David H. Boguslawski Vice President-Energy Delivery Michael J. Mahoney I Assistant Controller-Ronald G. Chevalier Rate Regulation Vice President-Fossil / Hydro Engineering and Operations Thomas V. Foley Assistant Secretary John B. Keane Vice President and Treasurer Margaret L. Morton Assistant Secretary Vice President-Retail Marketing Robert C. Aronson Assistant Treasurer-John J. Roman Treasury Operations Vice President and Controller David R. McHale Frank P. Sabatino Assistant Treasurer-Finance Vice President-Wholesale Marketing i Lisa J. Thibdaue Vice President-Rates, Regulatory Affairs and Compliance l l l l February 28,1998 L

l I 1997 Annual Report Western Massachusetts Electric Company Index i t Contents Page Consolidated Balance Sheets................................. 2-3 e Consolidated Statements of Income........................... 4 Consolidated Statements of Cash Flows....................... 5 Consolidated Statements of Common Stockholder's Equity...... 6 Notes to Consolidated Financial Statements.................. 7 Report of Independent Public Accountants.................... 38 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 39 Selected Financial Data..................................... 49 Statements of Quarterly Financial Data...................... 49 Statistics...................................... 50 Preferred Stockholder and Bondholder Information............ Back Cover 1 e

PART I. FINANCIAL INFORMATION WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS At December 31, 1997 1996 1 (Thousands of Dollars) 1 ASSETS Utility Plant, at' original cost: Electric (Note.1H)........................................ ~$ 1,284,288 $ 1,257,097 Less: Accumulated provision for depreciation.......... 559,119 503,989 725,169 753,108 Construction work in progress............... 19,038 15,968 . Nuclear fuel, net................... 30,907 30,296

Total net utility plant...............................

775,114 799,372 Other Property and Investments: Nuclear decommissioning trusts, at market..... 102,708 83,611 Investments in regional' nuclear generating ' companies, at equity.................................... 15,741 15,448; -Other, at cost........................................... 4,900 4,367 123,349-103,426 Current Assets: Ca-h.... 4 105-67 Investments in securitizable assets (Note 10)............ 25,280 Receivables, less accumulated provision for uncollectible accounts of $50,000 in 1997 and of $2,121,000 in 1996 (Note 10).................... 2,739 40,168 Accounts receivable from affiliated companies............ 3,933 3,525 Taxes' receivable........... 10,768 1,778 Accrued utility revenues ~(Note 10)......,................. 12,394 Fuel, materials and supplies, at. average cost............ 5,860 5,317 Prepayments and other..... 14,945 12,262 63,630 75,511 - Deferred Charges: Regulatory assets (Note 1H)... '211,377 210,852 Unamortized debt expense..................... 2,695 1,866-Other............................................ 2,963 888 217,035 213,606 Total Asset's......................................... 1,179,128 $ 1,191,915 The accompanying-notes are an integral part of these financial statements. 2

I WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS At December 31, 1997 1996 (Thousands of Dollars) . CAPITALIZATION AND LIABILITIES capitalization: Common stock--$25 par value--authorized and outstanding 1,072,471 shares in 1997 and 1996. 26,812 26,812 Capital surplus, paid in.... 151,171 150,911 Retained earnings. 50,225 97,045 Total commca stockholder's equity.. 228,208 274,768 Cumulative preferred stock-- $100 par valuc-- authorized 1,000,000 shares; outstanding 200,000 shares in 1997 and 1996; $25 par value--authorized 3,600,000 shares; outstanding 840,000 shares in 1997 and 1996 Preferred stock not subject to mandatory redemption..... 20,000 20,000 Preferred stock subject to mandatory redemption.. 19,500 21,000 Long-term debt. 386,849 334,742 Total capitalization.. 654,557 650,510 Obligations Under Capital Leases (Note 8)......... 217 29,269 Current Liabilities: Notes payable to banks... 15,000 Notes payable to affiliated company.. 14,350 47,400 Long-term debt and preferred stock--current portion.... 11,300 14,700 Obligations under capital leases--current portion.... 32,670 2,965 .4 Accounts payable.. 30,571 26,698 Accounts payable to af filiated cor panies. 21,209 20,256 ' Accrued taxes.. 522 2,659 Accrued interest.. 3,318 5,643 Nuclear compliance (Note 11B)...... 13,800 11,800 Other...... 2,446 4,754 145,186 136,875 Deferred Credits: Accumulated deferred income taxes..... 241,036 245,253 Accumulated deferred investment tax credits.... 23,364 24,833 Deferred contractual obligations (Note 2).............. 93,628 84,598 Other. 21,140 20,577 l 379,168 375,261 Commitments and Contingencies (Note 11) f Total Capitalization and Liabilities.. 1,179,128 $ 1,191,915 The accompanying notes are an integral part of these financial statements. 3

WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Operating Revenues............................ $ 426,447 $ 421,337 $ 420,434 Operating Expenses: Operation.- Fuel, purchased and net interchange power. 140,976 115,691 86,738 Other..................... 155,399 148,697 143,000 Maintenance.................................. 81,466 56,201 37,447 Depreciation................................. 39,753 39,710 37,924 Amortization of regulatory assets, net....... 6,428 9,170 19,562 Federal and state income taxes (Note 7)...... (15,926) 5,995 14,060 Taxes other than income taxes................ 19,316 19,850 18,639 Total operating expenses............... 427,412 395,314 357,370 Operating (Loss) / Income........................ (965) 26,023 63,064 i i Other Income: Equity in earnings of regional nuclear generating companies..................... 1,524 1,800 1,771 Other, net.4 (1,106) 1,153 1,232 { Income taxes.............. 1,026 1,068 262 Other income, net...................... 1,444 4,021 3,265 ) 1 Income before interest charges. 479 30,044 66,329 I i Interest Charges: l Interest on long-term debt................... 26,046 24,094 26,840 l Other interest............................... 3,109 2,028 356 Interest charges, net. 29,155 26,122 27,196 Net (Loss ) / Income.............................. $ (2 8, 6 7 6 ) $ 3,922 $ 39,133 ) i The accompanying notes are an integral part of these financial statements. 4

I WESTERN MASSACHUSE"ITS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Operating Activities: Ne t. ( Los s ) / Income........................................... $ (28,676) $ 3,922 $ 39,133 Adjustments to reconcile to net cash-from operating activities: Depreciation.J....... 39,753 39,710 37,924 Deferred income taxes and investment tax credits, net..... (2,040) (3,439) 3,418 -Deferred M111 stone-3 return............................... 7,146 Recoverable energy costs, net of amortization............. (8,184) (10,517) 1,285 Amortization of nuclear refueling outage, net of deferrals' 8,819 6,188 (8,857) Other sources of cash..................................... 27,804 21,248 32,266 Other uses of cash........................................ (21,215) (10,270) (8,039) Changes in working capital: Receivables and accrued utility revenues 29,415 (1,853) (1,933) Fuel, materials and supplies........... (543) (203) (285) Accounts payable.......................................... 4,826 20,875 _ 11,669) ( Sale of receivables and accrued utility revenues (Note 10) 20,000 Investment in securitizable assets (Note 10)..,.. (25,280) Accrued taxes......... (2,137) (805) (3,474) Nuclear compliance, net (Note 11B)........................ 2,000 11,800 Other working capital (excludes cash)............... (16,882) (8,144) 1,256 Net cash flows from operating activities............... 27,660 68,512 88,171 Financing Activities: Issuance of long-term debt.................. 60,000 Net (decrease) / increase in short-term debt.................. (18,050) -23,350 24,050-Reacquisitions and retirements of long-term debt......., (14,700) (34,550) Reacquisitions and retirements of preferred stock.......... (36,500) (15,675) Cash dividends on preferred stock........................... (3,140) (5,305) (4,944) Cash dividends on comon stock.............................. (15,004) (16,494) (30,223) Net cash flows from/(used for) financing activities........... 9,106 (34,949) (61,342) Investment Activities: Investment in plant: -Electric utility plant............ (26,249) (23,468) (27,084) Nuclear fuel....... (8) 541 75

Net cash flows used for investments in plant................

(26,257) (22,927) (27,009) NU System Money Pool........... 8,750 Investment in nuclear decommissioning trusts................. (9,645) (9,794) (8,503) Other investment activities, net.................... (826) (977) 46 Het cash flows used for investments........... (36,728) (33,698) (26,716) Net Increase / (Decrease) ' In Cash For The Period................ 38 (135) 113 Cash - beginning of period.................................... 67 202 89 Cash -;end of period............................. 105 $ 67 $ 202 . Supplemental Cash Flow Information: Cash paid /(refunded) during the year for: Interest, net of amounts capitalized........................ 28,711 $ 21,725 $ 25,551 Income taxes........ (1,121) $ 7,816 $ 14,385 Increase in obligations: Niantic-Bay Fuel Trust..................................... 660 $ 669 $ 7,851 l l The accompanying notes are an integral part of these financial statements. 5 l

i WESTERN MASSACHUSETTS ELECTRIC COMPAIG AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY l Capital Retained Common

Surplus, Earnings Stock Paid In (a)

Total (Thousands of Dollars) B31cnce at January 1, 1995............... $26,812 $149,683 $111,586 $288,081 Net income for 1995.................. 39,133 39,133 Cash dividends on preferred stock.............................. (4,944) (4,944) Cash dividends on common stock....... (30,223) (30,223) Loss on the retirement of preferred stock.............................. (256) (256) Capital stock expenses, net.......... 499 499 Baltnce at December 31, 1995............. 26,812 1S0,182 115,296 292,290 Net. income for 1996.................. 3,922 3,922 Cash dividends or preferred stock.............................. (5,305) (5,305) Cash dividends on common stock....... (16,494) (16,494) Loss on the retirement of preferred stock.............................. (374) (374) Capital stock expenses, net.......... 729 729 Baltnce at December 31, 1996............. 26,812 150,911 97,045 274,768 Net, loss for 1997.......... (28,676) (28,676) . Cash dividends on preferred stock.............................. (3,140) (3,140) Cash dividends-on common stock....... (15,004) (15,004) Capital stock expenses, net.......... 260 260 .Baltnce at December 31, 1997............. $26,812 $151,171 $ 50,225 $228,208 (c) The company has dividend restrictions imposed by its long-term debt agreements. At December 31, 1997, these restrictions totaled approximately $21.5 million. Tha accompanying notes.are an integral part of these financial statements. 6

Woctern Macccchusotto Electric Compnny and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A. About Western Massachusetts Electric Company Western Massachusetts Electric Company and Subsidiary (WMECO or the company), The Connecticut Light and Power Company (CL&P), Holyoke Water Power Company (HWP), Public Service Company of New Hampshire (PSNH) and North Atlantic Energy Corporation (NAEC) are the operating subsidiaries comprising the Northeast ~ Utilities system (the NU system) and are wholly owned by Northeast Utilities (NU). The NU system furnishes franchised retail electric service in ] Connecticut, New Hampshire and western Massachusetts through CL&P, PSNH, WMECO and HWP. The fifth wholly owned subsidiary, NAEC, sells all of its entitlement to the capacity and output of the Seabrook nuclear power plant (Seabrook) to PSNH. In addition to its franchised retail service, the NU system furnishes firm and other wholesale electric services to various municipalities and other utilities, and participates in limited retail access programs, providing off-system retail electric service. The NU system serves about 30 percent of New England's electric needs and is one of the 25 largest electric utility systems in the country as measured by revenues. Other wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, - administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. Northeast Nuclear Energy. Company (NNECO) acts as agent for the NU system companies and other New England utilities in operating the Millstone nuclear generating facilities. In addition, CL&P and WMECO each have established a special purpose subsidiary whose business consists of the purchase and resale of receivables. For information regarding WMECO's subsidiary,'see Note 10, " Sale of Customer Receivables and Accrued Utility Revenues." B. Presentation The consolidated financial statements of WMECO include the accounts of its wholly owned subsidiary. Significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts i of assets and liabilities and disclosure of contingent i liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7 l 1 _ _ _ _ - _ _ _ _ _ _ _ _ - _ _ _ - _ - _ - _ = _ _ - _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ _ - _ _ _ _ - _ _ _ _ _ - _ _ - _ _ _ - _ _ _ _ _ _ _ _ -

Western Massachusetts Electric Comptny stnd Subsidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain reclassifications of prior years' data have been made to conform with the current year's presentation. All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies. C..Public Utility Regulation NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act - of 1935 (1935 Act). NU and its subsidiaries, including WMECO, are subject to the provisions of the 1935 Act. Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. WMECO is subject to further regulation for rates, accounting, and other matters by the FERC and/or the applicable state regulatory commissions. For information regarding proposed changes in the nature of industry regulation, see Note

11A,

" Commitments and Contingencies - Restructuring and Rate Matters." D. New Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)

129,

" Disclosure of -Information about Capital Structure." SFAS 129 establishes standards for disclosing information about an entity's capital structure. WMECO's current disclosures are consistent with the requirements of SFAS 129. During June

1997, the FASB issued SFAS

130,

" Reporting Comprehensive Income" and SFAS 131, " Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for the reporting and disclosure of comprehensive income. To date, WMECO has not. had material transactions that would be required to be reported as comprehensive income. SFAS 131 determines the standards for reporting and disclosing qualitative and quantitative information -about a company's operating segments. This information includes segment profit or loss, certain segment revenue and expense items and segment assets and a reconciliation of these segment disclosures to corresponding amounts in.the company's general purpose financial statements. WMECO currently evaluates management performance using a cost- ' based budget, and the information required by SFAS 131 is not l .available. 'Therefore, these disclosure requirements are not l applicable. Management believes that the implementation of SFAS 130 and SFAS 131 will not have a material impact on WMECO's current disclosures. l L 8 l

Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS See Note 10, " Sale of Customer Receivables and Accrued Utility Revenues," and Note 11C, " Commitments and Contingencies -- Environmental Matters," for information on other newly issued accounting and reporting standards related to those specific areas. E. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Genera ting Companies: WMECO owns common stock of four regional nuclear generating companies (Yankee companies). WMECO's investments in the Yankee companies are accounted for on the equity basis due to WMECO's ability to exercise significant influence over their operating and financial policies. The Yankee companies, with WMECO's ownership interests, are: Connecticut Yankee Atomic Power Company (CYAPC) 9.5% Yankee Atomic Electric Company (YAEC) 7.0 Maine Yankee Atomic Power Company (MYAPC) 3.O Vermont Yankee Nuclear Power Corporation (VYNPC) 2.5 WMECO's investments in the Yankee companies at December 31, 1997 are: (Thousands of Dollars) CYAPC.............. $10,552 YAEC... 1,465 MYAPC...... 2,370 VYNPC.... 1,354 $15,741 Each Yankee company owns a single nuclear generating unit. Under the terms of the contracts with the Yankee companies, the shareholders-sponsors are responsible for their proportionate share of the costs of each unit, including decommissioning. The energy and capacity costs from VYNPC and nuclear decommissioning costs of the Yankee companies that have been shut down are billed as purchased power to WMECO. The electricity produced by the Vermont Yankee nuclear generating facility (VY) is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. YAEC's, CYAPC's and MYAPC's nuclear power plants were shut down permanently on February 26,

1992, December 4,

1996, and August 6,

1997, respectively.

Under ownership agreements with the Yankee companies, WMECO may be asked to provide direct or indirect financial support for one or more of the companies. For more information on the Yankee 9

Wactern Maccachusetts Electric Compeny cnd Subsidiary l L NOTES TO CONSOLIDATED FINANCIAL STATEMENTS companies, see Note 2, " Nuclear Decommissioning," and Note 11F, " Commitments and Contingencies Long-Term Contractual Arrangements." Millstone 2: WMECO has a 19 percent joint-ownership interest in Millstone 1, a 660-megawatt (MW) nuclear generating unit. As of December 31, 1997 and

1996, plant-in-service included approximately'$91 million and $90.2 million, respectively, and the accumulated provision for depreciation included approximately $40.1 million and $37.2 million, respectively, for WMECO's share of Millstone 1.

WMECO's share of Millstone 1 expenses is included in the corresponding operating expenses on the accompanying Consolidated Statements of Income. Millstone 2: WMECO has a 19 percent joint-ownership interest in Millstone 2, a 870-MW nuclear generating unit. As of December 31, 1,997 and

1996, plant-in-service included approximately $162.4 million and $161.4 million, respectively, and the accumulated provision for depreciation included approximately $57.6 million and $51.7 million, respectively, for WMECO's share of Millstone 2.

WMECO's share of Millstone 2 expenses is included in the. corresponding operating expenses on the accompanying consolidated Statements of Income. Millstone 3: WMECO has a 12.24 percent joint-ownership interest in Millstone 3, a'1,154-MW nuclear generating unit. As' of December 31, 1997 and

1996, plant-in-service included

-approximately $378.7 million and $377.7 million,- respectively, and the-accumulated provision for depreciation included .approximately $110.1 million and $99.8 million, respectively, for WMECO's share of Millstone 3. WMECO's share of Millstone 3 expenses is included in the' corresponding operating expenses on the accompanying Consolidated Statements of Income. The three Millstone units are out of service. NU hopes to '{ . return Millstone 3 to service in the early spring of 1998 and j Millstone 2 three to four months after Millstone 3. Millstone 1 has been placed in extended maintenance status. Management is reviewing its - options with respect to Millstone 1, including restart, early retirement and other options. In a draft ruling issued in February 1998, the Connecticut Department of Public Utility Control (DPUC) determined that Millstone 1 was no longer "used and useful" and-ordered it removed from rate base. For more - information regarding - the Millstone units, see Note 2, l " Nuclear Decommissioning," and Note

llB,

" Commitments and ~ Contingencies . Nuclear Performance." F. Depreciation The provision for depreciation is calculated using the straight-line. method based on estimated remaining lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency. 10 1 1

W30 torn Macccchucotto Eloctric Company and Subsidiary EQTES TO CONSOLIDATED FINANCIAL STATEMENTS Except for major f acilities, depreciation rates are applied to the average plant-in-service during the period Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation.'The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3 2 percent in 1997 and 1996-and 3.1 percent in 1995. See Note 2, " Nuclear Decommissioning," for information on nuclear plant decommissioning. WME D s nonuuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future

needs, the economics of the closure-and environmental concerns.

The costs of closure and removal are incremental costs and, for financial reporting purposes, are accrued over the life of the asset as part of depreciation. At -December 31, 1997 and

1996, the accumulated provision for depreciation included approximately $3.2 million, respectively, accrued for the cost of removal, net of salvage for nonnuclear generation property.

G. Revenues Other than revenues under fixed-rate agreements negotiated with certain wholesale, commercial and industrial customers, utility revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission. Regulatory commissions also have authority over the terms and conditions of nontraditional rate making arrangements. At the end of each accounting period, WMECO accrues an estimate for the amount of energy delivered but -unbilled. H. Regulatory Accounting and Assets .The accounting policies of WMECO and the accompanying . consolidated financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71, " Accounting for the Effects of Certain Types of Regulation." Assuming a cost-of-service based regulatory . structure, regulators may permit incurred

costs, normally treated as expenses, to be deferred and recovered through future revenues. Through their actions, regulators also may reduce or eliminate the value of.an asset, or create a liability.

If any portion of WMECO's operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of- [ service based regulatory structure or the effects of j competition, WMECO would be required to write off related l regulatory assets and liabilities unless there is a formal transition plan which provides for the

recovery, through

. established rates, for the collection of approved stranded costs and. to maintain the cost-of-service basis for the remaining regulated operations. At the time of transition, WMECO would be 11

W0 stern Massachusetts Electric Company and Subsidiary [ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS i required to determine any impairment to the carrying costr. of deregulated plant and inventory assets. The staff of the SEC has had concerns regarding the appropriateness of the utilities' ability to continue application of SFAS 71 for the generation portion of their business in a restructured environment. The SEC referred the issue to the Emerging Issues Task Force (EITF) of the FASB 1 which reached a consensus and issued " Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101," (EITF 97-4). The EITF l concluded: (1) the future recognition of regulatory assets for I the portion of the business that no longer que.lifies for application of SFAS 71 depends on the regulators' treatment of the recovery of those costs and other stranded assets from cash flows of other portions of the business still considered to be regulated, and (2) a utility should discont_nue the application of SFAS 71 when a legislative end regulatory plan has been

enacted, which would include transition plans into a

competitive environment, and when the stranded costs which are subject to future rate recovery are determined. EITF 97-4 became effective in August 1997. Electric utility industry restructuring within the state of Massachusetts will be effective March 1, 1998. WMECO has submitted its proposed restructuring plan to the Massachusetts Department of Telecommunications and Energy (DTE), formerly the Massachusetts Department of Public Utilities. If the DTE approves the plan in its current form, WMECO would discontinue the application of SFAS 71.

However, the restructuring legislation enacted by the state of Massachusetts specifically provides for future deferrals and the cost recovery of generation-related assets as contemplated under the plan.

As such, WMECO is not expected to have to write off either its generation-related assets or related regulatory assets. WMECO's generation-related regulatory assets were valued at approximately $188 million at December 31, 1997. The majority of WMECO's regulatory assets are related to its generation business. I I For more information on the WMECO's regulatory environment and the impacts of restructuring, see Note 11A, " Commitments and j Contingencies-Restructuring and Rate Matters," and Management's j Discussion and Analysis of Financial Condition and Results of i Operations (MD&A). SFAS 121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long-lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If j 12

Wsotern M conchusotto Elsctric Comptny end Suboidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS this revaluation is less than the book value of he asset, an impairment loss would be charged to earnings. Management continues to believe it is probable that WMECO will recover its investments in long-lived assets through future revenues. This conclusion. may change in the future as the implementation of restructuring plans within Massachusetts will l. generally require the formation of a separate generation entity that-will be subject to competitive market conditions. As a result, WMECO will be required to assess the carrying amounts of its long-lived assets in accordance with SFAS 121. f The components of WMECO's regulatory assets are as follows: 1 At December 31, 1997 1996 (Thousands of Dollars) Income taxes, net (Note 1I)........... $ 63,716 $ 71,519 Unrecovered contractual obligations (Note 2) 93,628 84,598 Recoverable energy costs (Note 1J) 26,270 17,510 Other................................. 27,763 37,225 $211,377 $210,852 l I. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial l statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See Note 7, " Income Tax Expense" for the components of income tax expense. l The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, which give rise to the accumulated deferred tax obligation is as follows: At December 31, 1997 1996 (Thousands of Dollars) Accelerated depreciation and other plant-related differences....... $223,038 $218,389 Regulatory assets - income tax gross up 30,175 29,457 Other................................. (12,177) (2,593) $241,036 $245,253 13

Wzetorn Macsachusotto Electric CompOny and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS J. Recoverable Energy Costs Under the Energy Policy Act of 1992 (Energy Act), WMECO is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates, like any other fuel cost. WMECO is currently recovering these costs through rates. As of December 31,

1997, WMECO's total D&D deferrals were approximately $11.3 million.

WMECO has a fuel adjustment clause (FAC) which includes energy costs along with capacity and transmission charges and credits that result from short-term transactions with other utilities and from certain FERC-approved contracts among the NU system's operating companies. The Massachusetts restructuring legislation will effectively eliminate the

FAC, effective March 1, 1998.

On August 20, 1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General which allowed WMECO to recaver approximately $15.3 million. of fuel costs for the period September 1997 through February 1998. Under the current FAC' rate, WMECO continues to defer significant costs for future recovery. At December 31, 1997, WMECO's net recoverable energy costs were approximately $26.3 million, which includes approximately $11.3 million of costs related to WMECO's share of the D&D assessment. For additional information regarding recoverable energy costs see the MD&A. K. Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1902, WMECO must pay the United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to customers and paid to the DOE on a quarterly basis. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-peri _,d fuel), payment must be made. prior to the first delivery of spent fuel to the DOE. Until such payment is made, the outstanding balance will continue to accrue interest at the three-month Treasury Bill Yield Rate. At December 31,

1997, fees due to the DOE for the disposal of prior-period fuel were approximately $39.0 million, including interest costs of $23.4 million.

The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent 14

Woctcrn M2cacchucotta Electric Comp:ny and Subsidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS storage site have continually postponed plans for the DOE's long-term storage and disposal site. Extended delays or a default by the DOE could lead to consideration of costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Millstone 1 and 2 are estimated to be adequate until 2004. Storage facilities for Millstone 3 are expected to be adequate for the projected life of the unit. Meeting spent fuel storage requirements beyond these periods could require new and separate storage facilities, the costs for which have not been determined. In November 1997, the U.S. District Court of Appeals for the D.C. Circuit ruled that the lack of an interim storage facility does not excuse the DOE from meeting its contractual obligation to begin accepting spent nuclear fuel no later than January 31, 1998. Currently, the DOE has not taken the spent nuclear fuel as scheduled and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time. 2. NUCLEAR DECOMMISSIONING Millstone: WMECO's nuclear power plants have service lives that are expected to end during the years 2010 through 2025. Upon retirement, these units must be decommissioned. Current decommissioning studies concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning the three Millstone units. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation. The estimated cost of decommissioning WMECO's ownership share of Millstone 1, 2 and 3, in year-end 1997 dollars, is $91.7 million, $82.1 million and $67.8 million, respectively. The Millstone units decommissioning costs will be increased annually by their respective escalation rat 3 Nuclear decommissioning costs are accrued over the expected service life of the units and are included in depreciation expense on the Consolidated Statements of Income. Nuclear decommissioning costs amounted to $6.2 million in 1997 and 1996 and i $5.0 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation i on the Consolidated Balance Sheets. At Decettler 31, 1997 and 1996, l the balance in the accumulated reserve for depreciation amounted to $102.7 million and $83.6 million, respectively. WMECO has established external decommissioning trusts through a 1 trustee for its portion of the costs of decommissioning Millstone 1, 2 and 3. Funding of the estimated decommissioning costs assumes levelized collections for the Millstone units and after-tax earnings l on the Millstone decommissioning funds of approximately 5.5 percent. Q 15 L

Western Msocachucstto Electric'Compcny cnd Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1997, WMECO has collected, through rates, $59.7 million toward the future decommissioning costs of its share of the Millstone units, all of which has been transferred to external decommissioning trusts. Earnings on the decommissioning trusts increase. the. decommissioning trust balance and the accumulated reserve for depreciation. Unrealized gains and losses associated with the decommissioning trusts also impact the balance of the trust and the accumulated reserve for depreciation. Changes in requirements or technology, the timing of funding or dismantling, or adoption of a decommissioning method other than immediate dismantlement would change. decommissioning cost estimates and the amounts required to be recovered. WMECO attempts to recover e sufficient amounts through its allowed rates to cover its expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in rates of WMECO. Based on present estimates and assuming its nuclear units operate to the end of their respective license periods, WMECO expects that the decommissioning trusts will be substantially funded when the units are retired from service. Millstone 1 has been placed in extended status while management is reviewing its options with respect to the unit. These include

restart, early retirement and other options.

Relating to management's consideration of the option to immediately retire Millstone 1 are certain Connecticut state law issues which relate to WMECO as minority owner. In its four-year rate review proceeding,.the.DPUC noted that CL&P may not be able to obtain its remaining investment in Millstone 1 if it were to determine tb the unit had been prematurely shut down due to managemtst imprudence. Additionally, there is a Connecticut statute which may limit CL&P's ability to collect future decommissioning charges related to Millstone 1 if Millstone 1 were to be terminated before the'end of its expected life. At December 31, 1907, WMECO's net unrecovered Millstone 1 plant costs were $50.9 million and the remaining unrecovered decommissioning costs were approximately $44 million. Yankee Companies: VYNPC owns and operates a nuclear generating I-vit with a service life that is expected to end in 2012. WMdCO's ownership share of estimated

costs, in year-end 1997 dollars, of decommissioning this unit is $12.6 million.

On August 6,

1997, the board of directors of MYAPC voted

-unanimously to cease permanently the production of power at its nuclear generating facility (MY). The NU system companies had relied on MY for approximately one percent of their capacity. During November

1997, MYAPC filed an amenCment to its power contracts clarifying the obligations of its purchasing utilities following the decision te cease power production.

During January .1998, the FERC accepted the amendments and proposed rates, subject to refund. At December 31,

1997, the remaining estimated 16

Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS obligation, including decommissioning, amounted to approximately $867.2 million, of which WMECO's share was approximately $26.0 million. On December 4,

1996, the board of directors of CYAPC voted unanimously to cease permanently the production of power at its nuclear generating plant (CY).

During

1996, the NU system companies had relied on CY for approximately three percent of their capacity.

During late December

1996, CYAPC filed an amendment to its power contracts clarifying the obligations of its purchasing utilities following the decision to cease power production.

On February 27, 1997, the FERC approved an order for hearing

which, among other

things, accepted CYAPC's contract amendment.

The new rates became effective March 1, 1997, subject to refund. At December 31,

1997, the remaining estimated obligation, including decommissioning, amounted to $619.9 million, of which WMECG's share was approximately $58.9 million.

YAEC is in the process of decommissioning its nuclear facility. At December 31,

19c7, the estimated remaining

costs, including decommissioning, amounted to $124.4

million, of which WMECO's share was appremimately $8.7 million.

Under the terms of the contracts with MYAPC, CYAPC and YAEC, the shareholder-sponsor companies, including WMECO, are responsible for their proportionate share of the costs of the units, including decommissioning. Management expects that WMECO will continue to be allowed to recover these costs from its customers. Accordingly, WMECO has recognized these costs as regulatory assets, with corresponding obligations. Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including

WMECO, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning.

If current electric utility industry accounting practices for nuclear power plant decommissioning are

changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant.

Management believes that WMECO will continue to be allowed to recover decommissioning costs through rates. 3. SHORT-TERM DEBT Limits: The amount of short-term debt borrowings that may be incurred by WMECO is subject to periodic approval by either the SEC under the 1935 Act or by the DTE. SEC authorization allowed WMECO, as of January 1,

1998, to incur short-term borrowings up to a 17

WatGrn Mncacchucotta Elcctric Comptny ond Suboidicry NOTES TO CONSOLIDATED FINAhCIAL STATEMENTS l maximum of $150 million. In addition, the charter of WMECO contains a provision which restricts the total amount of unsecured debt that it may borrow at any one time. As of January 1, 1998, this charter provision allowed WMECO to incur unsecured borrowings, whether short-term or long-term, up to a maximum of approximately $114 million. Credit Agreements: In May 1997, because of the potential for NU and CL&P to violate their various financial ratio

tests, NU amended the three-year revolving credit agreement (Credit Agreement) with a group of 12 banks.

Under the amended Credit Agreement, CL&P and WMECO are able to borrow, subject to the availability of first mortgage bond collateral, up to $313.75 million and $150 million, respectively. At December 31,

1997, CL&P and WMECO have issued first mortgage bonds to enable borrowings under this facility up to a maximum of $225 million and

$90 million, resp ~:tively. NU, which cannot issue first mortgage

bonds, will be able to borrow up to

$50 million if NU consolidated, CL&P and WMECO each meet certain interest coverage tests for two consecutive quarters. In addition, CL&P and WMECO each must meet certain minimum quarterly financial ratios to access the Credit Agreement. Both CL&P and WMECO satisfied these tests for the quarter ending December 31, 1997. The overall limit for all of the bor.owing system companies under the entire Credit Agreement is $313.75 million. The companies are obligated to pay a facility fee of .50 percent per annum of each bank's total commitment under this Credit Agreement which will expire in November 1999. At December 31, 1997 and 1996, there were $50 million and $27.5 million, respectively, in borrowings under this Credit Agreement. Of these borrowings, $15 million were borrowed by WMECO in 1997 and none were borrowed by WMECO in 1996. In addition to the Credit Agreement, NU, CL&P, WMECO, HWP and The Rocky River Realty Company (RRR) have various revolving credit lines through separate bilateral credit agreements. Under this

facility, four banks maintain commitments to the respectivo companies totaling $56.25 million. NU, CL&P and WMECO may borrow up to the aggregate $56.25 million, whereas HWP and RRR may borrow up to their SEC or board authorized short-term debt limit of $5 million and $22 million, respectively.

Under the terms of this facility, the companies are obligated to pay a facility fee of.15 percent per annum of each bank's total commitment. These commitments will expire in December 1998. At December 31, 1997 and

1996, there were no borrowings and

$11.3 million in borrowings, respectively, under this facility. Under the credit facilities discussed above, WMECO may borrow funds on a short-term revolving basis under its respective agreements, using either fixed-rate loans or standby loans. Fixed rates are set using competitive bidding. Standby loans are based upon several alternative variable rates. The weighted average annual interest rate on WMECO's notes payable to banks outstanding on December 31, 1997 was 6.95 percent. WMECO had no borrowings under these facilities at December 31, 1996. 18 l

Wactorn Macsechusatto Electric Compcny end Suboidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Money Pool: Certain subsidiaries of NU, including WMECO, are members of the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the cash resources of the

system, and. reduces outside short-term borrowings.

NUSCO administers the Pool as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive or pay interest based on the average daily Federal Funds rate.

However, borrowings based on loans from NU parent bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing.

At December 31, 1997 and 1996, WMECO had $14.4 million and $47.4 million, respectively, of borrowings outstanding from the Pool. The interest ate on borrowings from the Pool at December 31, 1997 and 1996 was 5.8 percent and 6.3 percent, respectively. Maturities of short-term debt obligations were for periods of three months or less. For further information on short-term debt, including the ability to access these agreements, see the MD&A. 4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemptions are: December 31, Shares 1997 Outstanding Redemption December 31, December 31, Description Price 1997 1997 1996 1995 (Thousands of Dollars) 7.72% Series B of 1971....... $103.51 200,000 $20,000 $20,000 $20,000 l 1988 Adjustable l Rate DARTS.... 33,500 Total preferred stock not subject to mandatory redemption.... $20,000 $20,000 $53,500 l All or any part of each outstanding series of preferred stock may be redeemed by the company at any time at established redemption prices plus accrued dividends to the date of redemption. l 19

Wootern Ms,csechucetto Elsctric Conp:ny cnd Subsidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION l Details of preferred stock subject to mandatory redemption are: December 31 Shares 1997 Outstanding Redemption December 31, December 31, Description Price

• 1997 1997 1996 1995 _

(Thousands of Dollars) 7.60% Series of 1987....... $25.64 840,000 $21,000 $21,000 $24,000 Less preferred stock to be redeemed within one year, net of reacquired stock.......... 60,000 1,500 1,500 Total preferred stock subject to mandatory redemption..... $19,500 $21,000 $22,500

• Redemption price reduces in future years.

The minimum sinking-fund provisions of the 1987 Series subject to l 4 mandatory redemption at December 31,

1997, for the years 1998 through 2002 is $1.5 million per year.

In case of default on sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If the company is in arrears in the payment of dividends on any outstanding shares of 1 preferred stock, the company would be prohibited from redemption or purchase of less than all of the preferred stock outstanding. All or part of the 7.60% Series of 1987 may be redeemed by the company at any time at an established redemption price plus accrued dividends to the date of redemption subject to certain refunding limitations. l I I 3 20 )

Wootorn Mtsacchusetts Elsctric Compcny and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. LONG-TERM DEBT Details of long-term debt outstanding are: December 31, 1997 1996 (Thousands of Dollars) First Mortgage Bonds: 5 3/4% Series F, due 1997.......... $.14,700 6 3/4% Series G, due 1998.......... 9,800 9,800 6 1/4% Series X, due 1999.......... 40,000 40,000 6 7/8% Series W, due 2000.......... 60,000 60,000 7_3/8% Series B, due 2001.......... 60,000 7 3/4% Series V, due 2002.......... 85,000 85,000 7 3/4% Series Y, due 2024.......... 50,000._50,000 Total First Mortgage Bonds................ 304,800 259,500 ) Pollution Control Notes: Tax Exempt Variable Series A, due 2028... 53,800 53,800 Fees and interest due for spent l fuel disposal costs (Note 1K)........... 39,045 37,055 { Less: Amounts due within one year........ 9,800 14,700 ) Unamortized premium and discount, net..... (996) (913) I Long-term debt, net....................... $386,849 $334,742 l Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1997 for the years 1998 through 2002 are approximately $9.8 million, $40 million, $60 million, $60 million and $85 million, respectively. In addition, there l are annual one-percent sinking-and improvement-fund requirements, currently amounting to $1.5 million for 1998 and 1999 and $900 thousand for 2000 through 2002. Such sinking-and improvement-fund requirements may be satisfied by the deposit of j cash or bonds by certification of property additions. l l All or any part of each outstanding series of first mortgage L. bonds.may be redeemed by WMECO at any time at established l-redemption prices plus accrued interest to the date of j redemption, except certain series which are subject to certain refunding limitations during their respective initial five-year redemption periods. Essentially all of WMECO's utility plant is subject to the lien of its first mortgage bond indenture. As of December 31, 1997 and 1996, WMECO has secured $53.8 million of pollution control notes with second mortgage liens on Millstone 1, junior to the liens of its first mortgage bond indenture. The average effective interest rate on the variable-rate pollution control notes was 3.5 percent for 1997 and 3.3 percent for 1996. 21 l

Wastern Mnecachucetta Electric Comptny cnd Subsidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAX EXPENSE The components of the federal and state income tax provisions (credited) / charged to operations are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Current income taxes: Federal..................... $ (14,277) $7,007 s 7,419 State....................... (635) 1,3c1 2,961 Total current............. (14,912) 8, 3 6.' 10,380 ' Deferred income taxes, net: Federal..................... (652) (1,805) 4,130 State....................... 81 (165) 1,003 Total deferred............ (571) (1,970) 5,133 Investment tax credits, net... (1,469) (1,468) (1,715) Total income tax (credit)/ expense..................... $ (16, 952 ) $4,927 $13,798 The components of total income tax expense are classified as follows: Income taxes charged to operating expenses.......... $(15,926) $5,995 $14,060 Other income taxes (1,072) (1,068) (262) Total income tax (credit)/ expense..................... $(16,952) $4,927 $13,798 Deferred income taxes are comprised of the tax effects of temporary differences as follows: For the Years Ended Dec(mber 31. 1997 1996 1995 (Thousands of Dollars) Depreciation, leased nuclear fuel, settlement credits, and disposal costs............ $ 1,407 32 $9,066 5 Energy adjustment clause........ 3,115 4,102 (1,549) Expenses associated with nuclear outages............... (1,078) (4,633) Demand side management.......... 321 1,557 (1,184) Nuclear plant deferrals......... (3,431) '(2,258) 2,468 Pension......................... 999 (57) (482) Bond redemptions................ (535) (502) (572) Other........................... (1,369) (211) (2,614) Deferred income taxes, net...... $ (571) $ (1,970) $5,133 22

Watern Macacchucetto Elsctric Company F.nd Subsidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Expected federal income tax at 35 percent of pretax income for.... $ (15,970) $2,946 $18,526 Tax effect of differences: Depreciation....................... 1,352 2,280 2,173 Amortization of regulatory assets.. 1,916 1,029 1,665 Investment tax credit amortization. (1,469) (1,468) (1,715) State income taxes, net of federal benefit.................. (309) 776 2,577 Adjustment for prior years' taxes.. (967) (7,702) Dividends received reduction....... (408) (378) (481)

Other, net.........................

(1,097) (258) (1,245) Total income tax (credit) / expense.... 2(16,952) $4,927 $ 13, '7 9 8 8. LEASES WMECO and CL&P may finance up to $400 million of nuclear fuel for Millstone 1 and 2 and their respective shares of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust (NBFT) capital . lease agreement which is scheduled to expire July 31, 1998. The NBFT capital lease agreement, which was amended in February 1998, requires CL&P and WMECO to secure their obligation to repay the NBFT with up to $90 million of first mortgage bonds. CL&P and WMECO will issue these bonds by May 1998. I WMECO and CL&P make quarterly lease payments for the cost of nuclear l fuel consumed in the reactors based on a units-of-production method at rates which reflect estimated kilowatt hours of energy provided plus financing costs associated with the fuel in the reactors. Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to WMECO and CL&P. WMECO has also entered into lease agreements, some of which may be capital leases, for the use of data processing and office equipment,

vehicles, nuclear control room simulators and office space.

The provisions of these lease agreements generally provide for renewal options. The following rental payments have been charged to expense: Year Capital Leases Operatino Leases i 1997..................... $ 1,820,000 $5,968,000 1996..................... 3,598,000 6,410,000 1995..................... 12,553,000 6,398,000 L Interest included in capital lease rental payments was $1,820,000 in 1997, $1,858,000 in 1996, and $1,954,000 in 1995. l l 23 l

Wsstern Massachusetts Electric Comptny and Subsidiary l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance and maintenance, under long-term noncancellable leases, as of December 31, 1997, are: Year Capital Leases Operatina Leases (Thousands of Dollars) 1998.................... $32,700 $ 3,700 l ~ 1999...... 36 3,400 2000.................... 36 3,100 2001.............. 36 2,800 2002.................... 36 2,500 l After 2002.............. 70 18,600 Future minimum lease payments.............. 32,914 S34,100 l Less amount representing interest.............. 14 i i Present value of .-future minimum lease payments........ $32,900 9. EMPLOYEE BENEFITS 1 I A. Pension Benefits The NU system's subsidiaries participate in a. uniform noncontributory defined. benefit retirement plan covering all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment. WMECO's direct portion of the NU system's pension credit, part of which was credited to utility plant, approximated $ (5.7) million in

1997,

$(2.0) million in 1996 and $ (2.7) million in 1995. WMECO's pension (credits)/ costs for 1997, 1996 and 1995 l included approximately $(529)

thousand,

$1.0 million and $0.0 million, respectively, related to workforce reduction programs. Currently, WMECO funds annually r; amount at least equal to that which will satisfy the requirements of the Employee Retirement' Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domastic and international equity securities and bonds. 24

Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of net pension credit for WMECO are: For the Years Ended December 31, 1997 1996 1995 (Thousand of Dollars) Service cost. $ 1,346 $ 2,932 $ 1,645 Interest cost....... 7,858 7,786 7,757 Return on plan assets. (31,874) (22,174) (29,798) Net amortization... 16,944 9.458 17,669 Net pension (credit)...... $(5,726) $ (1,998) $(2,727) For calculating pension cost, the following assumptions were used: For the Years Ended December 31, 1997 1996 1995 Discount rate 7.75% 7.50% 8.25% Expected long-term rate of return 9.25 8.75 8.50 Compensation / progression rate. 4.75 4.75 5.00 The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated benefit obligation, including vested benefits at December 31, 1997 and 1996 of $ (87,278,000) and $ (85,094,000), respectively $( 93,555) $( 91,170) Projected benefit obligation..... $ (10 9,53 6 ) $ (107, 816 ) Market value of plan assets...... 181,028 157,863 Market value in excess of projected benefit obligation... 71,492 50,047 Unrecognized transition amount... (1,727) (1,963) Unrecognized prior service costs. 1,142 1,213 Unrecognized net gain............ (62,370) (46,486) Prepaid pension asset S 8,537 2,811 25

l Westorn Mnosechusetts Elsctric Comptny and Subsidiary ~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31, 1997 1996 l Discount rate........................... 7.25% 7.75% Compensation / progression rate........... 4.25 4.75 l 1 B. Pos". retirement Benefits Other Than Pensions The NU system's subsidiaries provide certain health care benefits, primarily medical and dental, and life insurance ] benefits through a benefit plan to retired employees I (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the company who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care cost. The SFAS 106 obligation has been calculated based on this assumption. WMECO's direct portion of SFAS 106 benefits, part of'which were deferred or charged to utility plant, approximated $2.8 million in 1997, $3.8 million in 1996, and $4.4 million in 1995. WMECO is funding SFAS 106 postretirement costs through external trusts. WMECO is funding, on an annual basis, amounts that have been rate-recovered and which also are tax deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds. The components of health care and life insurance costs are: For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) Service cost.... 355 490 490 Intere:t cost.................. 2,011 2,236 2,544 Return on plan assets...... (2,088) (883) (718) Amortization of unrecognized transition obligation........ 1,641 1,641 1,641 Other amortization, net........ 868 353 473 Net health care and life insurance cost............... $2,787 S3,837 $4,430 l I i l l l l' 26 i

Wactern Masacchusatto Elsctric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For calculating WMECO's SFAS 106 benefit

costs, the following assumptions were used:

For the Years Ended December 31, 1997 1996 1995 Discount rate.................. 7.75% 7.50% 8.00% 'Long-term rate of return - Health assets, net of tax.... 6.00 5.25 5.00 Life assets.................. 9.25 8.75 8.50 The following table represents the plan's funded status reconciled to the Consolidated Balance Sheets: At December 31, 1997 1996 (Thousands of Dollars) Accumulated postretirement benefit obligation of: Retirees............................... $ (23,123) $ (24,614 ) Fully eligible active employees........ (84) (28) Active employees not eligible to retire (4,619) (5,449) Total accumulated postretirement benefit obligation.................... (27,826) (30,091) Market value of plan assets............. 12,838 10,215 Accumulated postretirement benefit obligation in excess of plan assets... (14,988) (19,876) Unrecognized transition amount.......... 24,618 26,259 Unrecognized net gain................... (9,630) (6.765) Accrued postretirement benefit liability ( 3 8,2 ) The following actuarial assumptions were used in calculating the plan's year-end funded status: ] At December 31, 1997 1996 i Discount rate............................ 7.25% 7.75% Health care cost trend rate (a)......... 5.76 7.23 (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.40 percent by l 2001. 27 L

Western Massachusetts Elsctric Comp:ny and Subsiditry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effect of increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $1. 7 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $131 thousand. The trust holding the health plan assets is subject to federal income taxes at a 39.6 percent tax rate. WMECO currently is recovering SFAS 106 costs through rates. 10. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES During 1996, WMECO entered into an agreement to sell up to $40 million of undivided ownership interests in eligible customer receivables and accrued utility revenues (receivables). The FASB issued SFAS'125, " Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," in June, 1996. SFAS 125 became effective on January 1,

1997, and establishes, in part, criteria for concluding whether a transfer of financial assets in exchange for consideration should be

-accounted for as a sale or as a secured borrowing. During May 1997, WMECO had restructured its sales agreement to comply with the conditions of SFAS 125 and account for transactions occurring under this program as a sale of assets. WMECO established a special purpose, wholly owned subsidiary whose business consists of the purchase and resale of receivables. For receivables sold, WMECO has retained collection responsibilities as agent for the purchaser under WMECO's agreement. As collections reduce previously sold receivables, new receivables may be sold. At December 31, 1997, approximately $20' million of receivables had been sold to a third-party purchaser by WMECO, through the use of its special purpose, wholly owned subsidiary, WMECO Receivables Corporation (WRC). All receivables transferred to WRC are assets owned by WRC and are not available to pay WMECO's creditors. For WRC's sales agreement with the third-party purchaser, the receivables were sold with limited recourse. WRC's sales agreement provides for a formula-based loss reserve in which additional receivables may be assigned to the third-party purchaser for costs such as bad debt. The third-party purchaser absorbs the excess amount in the event that actual loss experience exceeds the-loss reserve. At December 31, 1997 approximately $3.0 million of assets had been designated as collateral by.WRC. This amount represents the formula-based amount of credit exposure at December 31, 1997. Historical losses for bad debt for WMECO have been substantially less. During December 1997, Moody's Investors Service downgraded the rating on WMECO's first mortgage bonds. This downgrade brought WMECO's bond ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its 28

Wsatern Mnesechusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. To date, the sponsor has not notified WMECO that it will elect to exercise those rights, and the program is functioning in its normal mode. The WMECO accounts receivable program is terminable if WMECO's first mortgage bond credit ratings experience one more level of downgrade. CL&P's accounts receivable program could be terminated if-its senior secured debt is downgraded two more steps from its current ratings. Concentrations of credit risk to the purchaser under WMECO's agreement with respect to the receivables are limited due to WMECO's diverse customer base within its service territory. For additional information on the accounts receivable program and WMECO's ability to utilize this program, see the MD&A. 11. COMMITMENTS AND CONTINGENCIES A. Restructuring and Rate Matters During November 1997, the state of Massachusetts enacted a comprehensive electric utility industry restructuring bill (legislation). On December 31,

1997, WMECO filed its restructuring plan with the

DTE, as required by the legislation.

The WMECO restructuring plan describes the process by which WMECO will, beginning March 1,

1998, initiate a ten percent rate reduction for all customer rate classes and allow customers to choose their energy supplier.

As part of the plan, the DTE authorized recovery of certain strandable above-market costs (strandable costs). The legislation gives the DTE the authority to determine the amount of strandable costs that will be eligible for recovery by utilities. Costs which will qualify as strandable costs and be eligible for recovery include, but o are not limited to, certain above-market costs associated with generating facilities, costs associated with long-term commitments to purchase power at above-market prices from small power producers and nonutility generators, and + regulatory assets and associated liabilities related to the i generation portion of WMECO's business. l Under the statute, if a distribution company claims that it is unable to meet a price reduction of ten percent initially I and 15 percent ~by September 1,

1999, the distribution company may so state to the DTE and the DTE is provided with the authority to

" explore all possible mechanisms and options within the limits of the constitution" to achieve the mandated rate reductions. The statute indicates that allowing a substitute company to provide standard offer service is one option that can be considered by the DTE. The costs of transitioning to competition will be mitigated through several

steps, including divesting WMECO's non-l nuclear generating assets at an auction to be held as soon 29 l

Westsrn-Maggschusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS as June 1998, and securitization of approximately $500 million in strancable costs by September 30, 1998. NU presently expects to participate, through a competitive affiliate, in the competitive bid process for WMECO's generation resources. Any net proceeds in excess of book -value received from the divestiture of these units will be used to mitigate strandable costs. As required by the legislation, WMECO will continue to operate and maintain its transmission and local distribution network and deliver electricity to all customers. As noted above, the legislation has authorized Massachusetts utilities to finance a portion of the strandable costs through securitization, using rate reduction bonds. .A separate transition charge will be collected over the life of the bonds to recover principal, interest and issuance costs. WMECO's ability to recover its strandable costs will depend on several factors, which include, but are not limited to, continuous recovery of the costs over the transitional period supported by the legislation, the aggregate amount of strandable costs which the company will be allowed to recover and the market price of electricity. Management believes that the company will recover its strandable costs.

However, a change in one or more of these factors could affect the recovery of strandable costs and may result in a loss to the company.

FERC Rate Proceedings: For information regarding the FERC rate proceedings for CYAPC and MYAPC, see Note 2, " Nuclear Decommissioning." B. Nuclear Performance Millstone: The three Millstone units are managed by NNECO. . Millstone 1, 2 and 3 have been out of service since November 4,

1995, February 21,

1996, and March 30,

1996, respectively, and are on the Nuclear Regulatory Commission's f

(NRC) watch list. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. Subsequent to .its January 31, 1996 announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to return Millstone 3 to-6 service in the early spring of 1998 and Millstone 2 three to 30

l ?

Wootorn M2coachucatta Electric Compcny cnd Subsidiary

' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS four months after Millstone 3. Millstone 1 is currently in extended maintenance status, t In 1997, WMECO's share of nonfuel O&M costs expensed for i Millstone totaled $106 million,' including $14 million 1 l reserved for future restart costs. Budgeted nuclear spending levels at Millstone for 1998 will be reduced from 1997

levels, although they will be considerably higher than before the station was placed on the NRC's watch list.

The actual level of 1998 spending will depend on when the units return to operation and the cost of l* restoring them to service. The total cost to restart the units cannot-be precisely estimated at this time. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required.

Management cannot predict when the NRC will allow any of the Millstone units ~ to return to service and thus cannot precisely estimate the total replacement power costs. WMECO "will ultimately incur. Replacement power costs incurred by WMECO attributable to the Millstone outages averaged approximately $5 million per month during 1997, and for 1998 are projected to. average approximately $2 million per month for Millstone.3, $2 million per month for Millstone 2-and $1 million per month for Millstone 1 while the plants remain out of service.

WMECO will continue to expense its replacement power costs in 1998. Based on the current estimates of expenditures and restart

dates, management believes the NU system has sufficient resources to fund the restoration of the Millstone units and related replacement power costs.

If the return to servic. .f Millstone 3 or 2'is-delayed substantially beyond the present restart estimates,. if some financing facilities become unavailable because of difficulties in meeting borrowing i= conditions or renegotiating extensions, if CL&P and WMECO encounter additional significant costs or if any other i significant deviations from management's assumptions occur, j CL&P and WMECO could be unable to meet their cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and attempt to obtain additional sources of funds. The availability of these funds would be dependent upon general market conditions and CL&P's and WMECO's respective credit and financial conditions at that time. For information concerning the ability of WMECO to access its borrowing facilities, see the MD&A. Li tiga tion: CL&P and

WMECO, through

.JECO as

agent, operate Millstone 3 ' at cost, and without profit, under a sharing agreement that obligates them to utilize good l

31

Wectcrn Mncsechusette Elsctric Compzny and Subsidicry LIOTES TO CONSOLIDATED FINANCIAL STATEMENTS utility operating practice and requires the joint owners to share the risk of employee negligence and other risks of operation and maintenance pro-rata in accordance with their ownership shares. This agreement also provides that CL&P and WMECO would be liable only for damages to the non-NU owners for a deliberate violation of the agreement pursuant to authorized corporate action. On August 7, 1997, the non-NU owners of Millstone 3 filed demands for arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior Court against NU and its current and former trustees. The non-NU owners raise a number of contract, tort and statutory claims arising out of the operation of Millstone 3. The arbitrations and lawsuits seek to recover compensatory

damages, punitive

damages, treble damages and attorneys' fees.

Owners representing approximately two-thirds of the non-NU interests in Millstone 3 claimed compensatory damages in excess of $200 million. In addition, one of the lawsuits seeks to restrain NU from disposing of its shares of the stock of WMECO and HWP, pending the outcome of the lawsuit. Management cannot estimate the potential outcome of these suits but believes there is no legal basis for the claims and intends to defend against them vigorously. To date, no reserves have been established for this litigation. At December 31, 1997, the costs related to this litigation for the NU system were estimated to be approximately $100 million for incremental O&M costs and approximately $100 million for replacement power costs. These costs are likely to increase as long as Millstone 3 remains out of service. C. Environmental Matters The NU system is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. The NU system has an active environmental auditing and training program and believes that it is in substantial a compliance with current environmental laws and regulations.

However, the NU system is subject to certain enforcement actions and governmental investigations in the environmental area.

Management cannot predict the outcome of these enforcement acts and investigations. Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations, and other facilities. Changing environmental requirements could also require extensive and costly modifications to WMECO's existing generating

units, and transmission and distribution

systems, and could raise operating costs significantly.

As a result, WMECO may incur significant additional environmental

costs, greater than amounts included in cost of removal and other reserves, in connection with the generation and transmission of 32

l Woctern Mncccchucatta Elcctric Comptny cnd Subcidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS electricity and the storage, transportation and disposal of l by-products and wastes. WMECO may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot be estimated accurately. WMECO has recorded a liability based upon currently available information for what it believes are its estimated l environmental remediation costs that it expects to incur for waste disposal sites. In most

cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes.

At December 31, 1997, the net liability recorded by WMECO for its estimated environmental remediation costs, excluding any possible insurance recoveries or recoveries from third

parties, amounted to approximately

$1.6

million, which management has determined to be the most probable amount l

within the range of $1.6 million to $2.6 million. 1 During

1997, WMECO adopted Statement of Position 96-1,

" Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by i entities to specific situations of recognizing, measuring and i disclosing environmental remediation liabilities. The adoption of the SOP resulted in an increase of approximately $370 thousand to WMECO's environmental reserve in 1997. l WMECO cannot estimate the potential liability for future l claims, including environmental remediation costs, that may ) be brought against it.

However, considering known facts, existing laws and regulatory practices, management does not believe the matters disclosed above will have a material effect on WMECO's financial position or future results of operations.

D. Nuclear Insurance Contingencies Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities in the country covered by the federal government's third-party liability indemnification program, an owner of a nuclear unit could be assessed in proportion to its ownership interest in each of its nuclear units up to $75.5 million. Payments of this I assessment would be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent or $3.8 million, in proportion to its ownership interests in each of its nuclear units, if the sum of all claims and costs from any one nuclear incident exceeds the 33

Watsrn M3ascchusstto Elcctric Compcny cnd Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS maximum amount of financial protection. Based upon its ownership interests in Millstone 1, 2 and 3, WMECO's maximum liability, including any additional assessments, would be $39.8 million per incident, of which payments would be limited to $5 million per year. In addition, through power purchase contracts with MYAPC,

VYNPC, and CYAPC, WMECO would be responsible for up to an additional

$11.9 million per incident, of which payments would be limited to $1.5 million per year. Insurance has been purchased to cover the primary cost of repair, replacement or decontamination of utility property resulting from insured occurrences. WMECO is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessment against WMECO with respect to losses arising during the current policy year is approximately $2.7 million under the primary property insurance program. Insurance has been purchased to cover certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of

repair, replacement, or decontamination or premature decommissioning of utility property resulting from insured occurrences.

WMECO is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessments against WMECO with respect to losses arising during current policy years are approximately $2.2 million under the replacement power policies and $3.8 million under the excess property damage, decontamination and decommissioning policies. The ccot of a nuclear incident could exceed available insurance proceeds. Insurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor. The maximum potential assessment against WMECO with respect to losses arising during the current policy period is approximately $2.2 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments. E. Construction Program The construction program is subject to periodic review and revision by management. WMECO currently forecasts construction expenditures of approximately $185 million for the years 1998-2002, including $27 million for 1998. In addition,- WMECO estimates that nuclear fuel requirements, including nuclear fuel financed through the NBFT, will be approximately $56.4 million for the years 1998-2002, including $8.4 million for 1998. See Note 8, " Leases" for additional information about the financing of nuclear fuel. 34

Wastorn Macocchucotto Elactric Ccmptny end Subsidinry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F. Long-Term Contractual Arrangements Yankee Companies: The NU system companies rely on VY for approximately 1.7 percent of their capacity under long-term contracts. Under the terms of their agreements, the NU system companies pay their ownership (or entitlement) shares of costs,- which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a return on invested capital. These costs are recorded as purchased power expense and are recovered through the companies' rates. WMECO's total cost of purchases under contracts with VYNPC amounted to $3.9 million in 1997, $4.1 million in 1996 and 1995. e The other Yankee generating facilities, MY, CY and Yankee

Rowe, were permanently shut down as of August 6,

1997, December 4,

1996 and February 26, 1992, respectively. See Note 1E, " Summary of Significant Accounting Policies-- Investments and Jointly Owned Electric Utility Plant," for further information on the Yankee companies, and Note 2, " Nuclear Decommissioning," regarding the related decommissioning obligations. Nonutility Generators: WMECO has entered into various arrangements for the purchase of capacity and energy from nonutility generators (NUGs). These arrangements have terms from 15 to 25 years, currently expiring in the years 2008 through 2013, and requires WMECO to purchase energy at specified prices or formula rates. For the 12 months ending December 31,

1997, approximately 14 percent of NU system electricity requirements were met by NUGs.

WMECO's total cost of purchases under these arrangements amounted to $31.2 million in 1997, $29.5 million in 1996, and $28.6 million in 1995. These costs may be deferred for eventual recovery through rates. Hydro-Quebec: Along with other New England utilities, WMECO, CL&P, PSNH and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. WMECO is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M and capital costs of these facilities. 1 [ 35 l

Wastern Massachusetts Electric Compcny and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Estimated Annual Costs: The estimated annual costs of WMECO's significant long-term contractual arrangements are as follows: 1998 1999 2000 2001 2002 (Millions of Dollars) VYNPC................. $ 4.9 $ 4.9 $ 4.8 $ 5.2 $ 5.4 NUGs.................. 35.1 36.8 39.5 41.6 43.8 Hydro-Quebec.......... 3.8 3.6 3.6 3.5 3.4 For additional information regarding the recovery of purchased power costs, see Note 1J, " Summary of Significant Accounting Policies - Recoverable Energy Costs." 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: Cash and nuclear decommissioning trusts: The carrying amounts approximate fair value. SFAS 115, " Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. As a result of this requirement, the investments held in WMECO's nuclear decommissioning trust were adjusted to market by approximately $17.9 million as of December 31, 1997, and $8.4 million as of December 31, 1996, with a corresponding offset to the accumulated provision for depreciation. The amounts adjusted in 1997 and 1996 represent cumulative gross unrealized holding gains. The cumulative gross unrealized holding losses were immaterial for both 1997 and 1996. Preferred stock and long-term debt: The fair value of WMECO's fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. 4 l l l-36

Wootorn Mscoachusetta Electric Comptny cnd Subsidicry NOTES TO CONSOLIDATED FINANCIAL STATEMENTS i The carrying amount of WMECO's financial instruments and the estimated fair values are as follows: Carrying Fair At' December-31, 1997 Amount Value (Thousands of Dollars) i Preferred stock not subject to mandatory redemption................. $ 20,000 $ 16,252 Preferred stock subject to mandatory redemption.................. 21,000 20,580 Long-term debt - First Mortgage Bonds.. 304,800 302,627 Other long-term debt................... 92,845 92,845 Carrying Fair 'At December 31, 1996 Amount Value (Thousands of Dollars) Preferred stock not subject to mandatory redemption................. $ 20,000 $ 15,200 Preferred stock subject to mandatory redemption.................. 21,000 18,404 Long-term debt - First Mortgage Bonds.. 259,500 260,440 Other long-term debt................... 90,855 90,855 The fair values shown above have been reported to meet the disclosure requirements and do not purport to represent the amounts at which those obligations would be settled. i \\ 37

Waetern Mnocachusotte Elsctric Comptny cnd Subsidicry REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board ~of Directors of Western Massachusetts Electric Company: We have audited the accompanying consolidated balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) and subsidiary as ' of-December 31,- 1997 and 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for -each of the three years in the period ended December 31, 1997. These financial statements' are the responsibility of. the Company's. management.. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial -statements are free of material misstatement. An audit includes examining, on a. test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made.by. management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a f reasonable basis for our opinion. i In our. opinion, the financial ' statements referred to above present fairly, in all material respects, the financial position of Western Massachusetts Electric Company and' subsidiary as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut l February 20, 1998 38

l l Western Massachusetts Electric Company l l MANAGEMENT'S DISCUSSION AND ANALYSIS OF l FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains management's assessment of WMECO's (the company) financial condition and the principal factors having an impact on the results of operations. The company is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's consolidated financial statements and footnotes. t FINANCIAL CONDITION Overview The length of the ongoing outages at the three Millstone nuclear plants (Millstone) and the high costs of the recovery efforts weakened 5 WMECO's 1997 net

income, balance sheet and cash flows and will continue to have an adverse impact on the company's financial condition until the units are returned to service.

WMECO had a net loss of approximately $29 million in 1997, compared to net income of approximately $4 million in 1996. T.he poorer financial results in 1997 were due primarily to the fact that all three Millstone units were off line for the entire year in 1997 and spending associated with the recovery efforts was significantly higher in 1997 than it was in 1996. Millstone 3 operated for nearly three months in 1996 and Millstone 2 for nearly two months. As a result, the cost of replacing power ordinarily generated by the Millstone units rose by approximately $15 million in 1997 The total operation and maintenance (O&M) costs at Millstone were approximately $30 million higher in 1997. The higher Millstone costs have caused WMECO to focus closely on maintaining adequate liquidity and reducing non nuclear O&M costs. In July 1997, HMECO successfully sold $60 million of first mortgage bonds. WMECO's access to $90 million of revolving credit lines was renegotiated in the first half of 1997. Also helping to maintain liquidity was the renegotiation in early 1998 of a $100 million credit line used by Niantic Bay Fuel Trust (NBFT) to purchase nuclear fuel for Millstone. Additionally, non nuclear O&M expenses in 1997 were reduced by about $5 million from 1996. Tight cost controls will continue to be essential in 1998 to WMECO's efforts to meet the financial covenante contained in the $313.75 million revolving credit arrangement available

• o WMECO and The Connecticut Licht and Power Company (CL&P).

In

1998, management expects Millstone-related expenses to fall significantly, assuming Millstone 3 and Millstone 2 are returned to service at dates close to current estimates, although the O&M expenses 39

at Millstone 3 and 2 will be considerably higher than before.the station was placed on the Nuclear Regulatory Commission's.(NRC's) watch list. The actual level of 1998 nuclear spending at Millstone will depend on when the units return to operation and the cost of restoring them to service. The company hopes to restart Millstone 3, the newest and largest unit at the site, in early spring of 195 d and Millstone 2 three to four months after Millstone 3. The company cannot restart the Millstone units until it receives formal approval from the NRC. As part of an effort to reduce spending in 1998, Millstone 1 has been placed in extended maintenance status. Management will review its options with respect to Millstone 1 in 1998, including restart, early retirement and ot'ier options. Rate reductionr to customers served by the company are likely to offset a po:'.i',n of the benefit of lower Millstone-related costs. On March 1, 1959 WMECO reduced retail rates by 10 percent in compliance with industrs restructuring legislation passed in November 1997 by the Massachusetts Legislature. The 1997 Massachusetts legislation allowed full retail choice on March 1, 1998. WMECO expects to recover fully its stranded costs through a combination of securitization and divestiture of its no-nuclear generating assets. Millstone Outages WMECO has a 19-percent ownership interest in Millstone units 1 and 2 and a 12.24-percent ownership interest in Millstone unit 3. Millstone 1, 2 and 3 have been out of service since November 4,

1995, February 21, 1996, and March 30, 1996, respectively.

Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the NRC has stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the

design, configuration and employee concern issues that prompted the NRC to place the units on its watch list.

The actual date of the return to service for each of the units is dependent upon the completion of independent inspections, reviews by the NRC and a vote by the NRC Commissioners. In January 1998, NU declared Millstone 3 physically ready for restart, which meant that almost all of the restart-required physical work had been completed in the plant. The NRC currently is conducting a series of inspections to determine, among other things, whether the plant has effective leadership and corrective action and employee concerns programs. The Independent Corrective Action Verification Program, an NRC-ordered independent review of the plant's design and licensing bases, is expected to be completed in March 1998. In 1997, WMECO's share of nonfuel O&M costs expensed for Millstone totaled approximately $106 million, including $14 million reserved for future restart costs. The 1997 costs are net of $12 million of costs which were reserved in 1996. In 1996, WMECO'S share of nonfuel O&M 40 1

o' costs expensed for Millstone totaled approximately $76

million, including $12 million reserved for future restart costs. Management will continue to evaluate the costs to be incurred in 1998 to determine whether adjustments to the existing reserves are required.

Replacement power costs attributable to the Millstone outages totaled approximately $56 million in 1997 compared to $41 million expensed in 1996. These costs for 1998 are forecasted to average approximately $2 million per month for Millstone 3, $2 million per month for Millstone 2 and $1 million per month for Millstone 1 while the plants are out of service. The company has been, and will continue to be, expensing all of the costs to restart the units including replacement power and nonfuel O&M expenses. NU and its subsidiaries are involved in several class action lawsuits and other litigation in connection with their nuclear operations. See the " Notes to Consolidated Financial Statements," Note

11B, for further information on this litigation.

Millstone 1 Management will review its options with respect to Millstone 1 during 1998. The issues that management will consider in evaluating its options include the costs to restart the unit and the economic benefits of the unit's continued operation. Capacity During 1996 and continuing into 1997, WMECO took measures to improve its capacity

position, including obtaining additional generating capacity, improving the availability of the company's generating units and improving the company transmission capability. During 1997, NMECO spent approximately $10 million to ensure availability of adequate generating capacity, of which $6 million was expensed. In 1998, WMECO does not anticipate the need to take additional measures to ensure adequate generating capacity.

Liquidity and Capital Resources ~ Cash provided from operations decreased approximately $41 million in

1997, compared to 1996, primarily due to higher cash expendd tures related to the Millstone outages, and the pay down in 1997 of the 1996 year end accounts payable balance.

The 1996 year end accounts payable balance was relatively hiot due to costs related to a severe December storm and costs associated with the Millstone outages that had been incurred but not yet paid by the end of 1996. Net cash from financing activities increased approximately $44 million, primarily due to the issuance of long-term debt in 1997 and lower reacquisitions and retirements of long-term debt and preferred stock, partially offset by the repayment of short-term debt. WMECO established facilities in 1996 under which they may sell, from time to time, up to $40 million, of its accounts receivable and 41

accrued utility revenues. As of December 31,

1997, WMECO sold approximately $20 million of receivables to third-party purchasers.

NU's, WMECO's and CL&P's three-year revolving credit agreement was amended in May 1997 (the Credit Agreemen;). Under the Credit Agreement, CL&P and WMECO are able to borrow up to approximately $225 million and $90 million, respectively, subject, to a total borrowing limit of $313.75 million for all three borrowers. NU will be able to borrow up to $50 million when NU, CL6P and WMECO have each maintained a consolidated operating income to consolidated interest expense ratio of at least 2.50 to 1 for two consecutive fiscal quarters. Currently, the companies cannot meet this requirement. At December 31,

1997, WMECO had $15 million outstanding under the Credit Agreement.

Each major subsidiary of NU finances its own needs. Neither CL&P nor WMECO has any financing agreements containing cross defaults based on financial defaults by NU, Public Service Company of New Hampshire (PSNH) or North Atlantic Energy Corporation (NAEC). Nevertheless, it is possible that investors will take negative operating results or regulatory developments for one subsidiary of NU into account when evaluating the other NU subsidiaries. That could, as a practical matter and despite the contractual and legal separations among NU and its subsidiaries, negatively affect the company's access to financial markets. In December 1997 and January 1998, Moody's Investors Service (Moody's) and Standard Pcor's (S&P), respectively, downgraded the senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of CL&P and WMECO. This was the fourth time Moody's and S&P have downgraded CL&P and WMECO securities since the Millstone units went on the NRC watch list in 1996. All of the NU system's securities are rated below investment grade and remain under review for further downgrade. Although WMECO does not have any plans to issue debt in the near term, rating agency downgrades generally increase the future cost of borrowing funds because lenders will want to be compensated for increased risk. Additionally, this could also affect the terms and ability of the company to extend existing agreements. The downgrade by Moody's of WMECO's first mortgage bonds to Ba2 in December 1997 brought those ratings to a level at which the sponsor of WMECO's accounts receivable program can take various actions, in its discretion, which would have the practical effect of limiting WMECO's ability to utilize the facility. The WMECO accounts receivable program could be terminated if WMECO's first mortgage bond credit ratings experience one more level of downgrade. l WMECO's ability to borrow under the financing arrangements is dependent on the satisfaction of contractual borrowing conditions. The financial covenants that must be satisfied to permit WMECO to borrow under the Credit Agreement are particularly restrictive and become more restrictive throughout 1998. Spending levels in 1998, particularly for the first half of the year while the Millstone units are expected to be out of service, have been, and will be constrained to levels intended to assure that the financial covenants in WMECO's Credit Agreement are satisfied. However, there is no assurance that 42

these financial covenants will be met as the system may encounter additional unexpected costs from such areas as

storms, reduced revenues from regulatory actions or the effect of weather on sales levels.

If the return to service of Millstone 3 or Millstone 2 is delayed substantially beyond the present restart estimates, if some borrowing facilities become unavailable because of difficulties in meeting borrowing conditions or renegotiating extensions, if the system encounters additional significant costs, or any other significant deviations from management's current assumptions, the currently available borrowing facilities could be insufficient to meet all of WMECO's cash requirements. In those circumstances, management would take even more stringent actions to reduce costs and cash outflows and would attempt to take other actions to obtain additional sources of funds. The availability of these funds would be dependent upon the general market conditions and WMECO's credit and financial condition at that time. Restructuring On November 25, 1997, Massachusetts enacted a comprehensive electric utility industry restructuring bill. The bill provides that each Massachusetts electric company, including WMECO, will decrease its rates by 10 percent and allow all its customers to choose their retail electric supplier on March 1, 1998. The statute requires a further 5 percent rate reduction, adjusted for inflation, by September 1, 1999. In addition, the legislation provides, among other things, for: (i) recovery of stranded costs through a " transition charge" to customers, subject to review by the Department of Telecommunications and Energy (DTE), formerly the Department of Public Utilities (DPU, collectively the DTE), (ii) a possible limitation on WMECO's return on equity should its transition cost charge go above a certain level, (iii) securitization of allowed strandable costs, and (iv) divestiture of nonnuclear generation. WMECO hopes it will be able to complete securitization in 1998. The statute also provides that an electric company must transfer or separate ownership of generation, transmission and distribution facilities into independent affiliates or functionally separate such facilities within 30 business days after federal approval. Additionally, marketing companies formed by an electric company are to be separate from the electric company and separate from generation, transmission or distribution affiliates. On December 31, 1997, WMECO filed its restructuring plan with the DTE consistent with the Massachusetts restructuring legislation. The plan sets out the process by which WMECO, as of March 1, 1998, initiated a 10 percent rate reduction for all customer rate classes and allowed customers to choose their energy supplier. WMECO intends to mitigate its strandable costs through severai

steps, including divesting WMECO's nonnuclear generating plants at an auction to be held as soon as June 30, 1998, and securitization of approximately $500 million of stranded costs.

NU intends to participate through a nonregulated 43

affiliate in the competitive bid process for WMECO's generation resources. Any proceeds in excess of book value received from the divestiture of these units will be used to mitigate stranded costs. As required by the legislation, WMECO will continue to operate and maintain the transmission and local distribution network and deliver electricity to all customers. On February 20, 1998, the DTE issued an order approving, in all material respects, WMECO's restructuring plan on an interim basis. A final decision is expected in 1998. Because WMECO is obligated to reduce rates on March 1, 1998, before the means of financing for restructuring are completed, WMECO's cash flows and financial condition will be negatively affected. These impacts would become significant if there are material delays in, or significantly reduced proceeds from, the divestiture of nonnuclear generation and securitization. Rate Matters - settlement (the Agreement) that In April, 1996, the DTE approved included the continuation through February 1998 of a 2.4 percent rate reduction instituted in June 1994. Additionally, the Agreement terminated certain pending and potential reviews of WMECO's generating plant performance and accelerated its amortization of strandable generation assets by approximately $6 million in 1996 and $10 million in 1997. On August 20,

1997, WMECO filed with the DTE a joint motion for approval of a settlement agreement with the Massachusetts Attorney General for a fuel adjustment clause (FAC) which would allow for a lower rate to WMECO customers for the billing months of September 1997 through February 1998. WMECO is not recovering replacement power costs during this period and has indicated that it would not seek recovery of any of replacement power costs associated with the Millstone outages. WMECO has been expensing and will continue to expense these costs.

The Massachusetts restructuring legislation effectively eliminates the FAC, effective March 1, 1998. Nuclear Decommissioning Connecticut Yankee WMECO has a 9.5 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4,

1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the I

remaining period of the plant's operating license, which would have expired in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings. 44

CY has undertaken a number of regulatory filings intended to implement the decommissioning. In late December 1996, CY filed an amendment to its power contracts with the FERC to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31,

1997, WMECO's share of these obligations was approximately $59 million, including the cost of decommissioning and the recovery of existing assets. Management expects that the company will continue to be allowed to recover such FERC approved costs from its customers.

Accordingly, WMECO has recognized its share of the estimated costs as a regulatory

asset, with a

corresponding obligation, on its balance sheets. Maine Yankee (MY) WMECO has a 3 percent ownership interest in the Maine Yankee (MY) nuclear generating facility. On August 6,

1997, the Board of Directors of Maine Yankee Atomic Power Company (MYAPC) voted unanimously to retire MY. On January 14, 1998, FERC released a draft order on the MYAPC application to amend its power c;mtracts with the owner / purchasers and revise its decommissioning and other charges.

FERC has accepted the proposed application for filing and made the amendments and the proposed charges under the contracts effective on January 15, 1998, subject to refund after hearings. At December 31, 1997, WMECO'S share of the estimated remaining obligation, including decommissioning, amounted to approximately $26 million. Under the terms of the contracts with

MYAPC, the shareholders' sponsor companies, including WMECO, are responsible for their proportionate share of the costs of the unit, including decommissioning.

Management expects that WMECO will be allowed to recover these costs from its customers. Accordingly, WMECO has recognized these costs as a regulatory asset, with a correspondirJ obligation on its balance sheet. Millstone WMECO's estimated cost to decommission its share of the Millstone plants is approximately $242 million in year end 1997 dollars. These costs are being recognized over the lives of the respective units with a portion being currently recovered through rates. As of December 31,

1997, the market value of the contributions already made to the decommissioning

trusts, including their investment

returns, was approximately $103 million. See the " Notes to Consolidated Financial Statements,"

Note 2, for further information on nuclear decommissioning. Environmental Matters WMECO is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. To date, the future estimated environmental remediation liability has not been material with respect to the earnings or financial position of WMECO. At December 31, 1997, WMECO had recorded an environmental reserve of approximately $1.4 million. See the " Notes to Consolidated Financial 45

Sta_ aments," Note

11C, for further information on environmental matters.

Year 2000 Issue The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the change of the century occurs, date-sensitive systems may recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU's systems to process critical financial and operational information incorrectly. The NU system has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systems. The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998. The NU System will utilize both internal and external resources to reprogram or

replace, and test the software for Year 2000 modifications.

The total estimated remaining cost of the Year 2000 project for the NU system is $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the NU system has incurred and expensed approximately $4 million related to the assessment of and preliminary efforts in connection with its Year 2000 project. The costs of the project and the date on which the NU system plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future

events, including the continued availability of certain resources, third-party modification plans and other factors.

However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. If the NU system's remediation plan is not successful, there could be a significant disruption of the company's operations. 4 46

RESULTS OF OPERATIONS Income Statement Variances Millions of Dollars 1997 over/ (under) 1996 1996 over/(under) 1995 Amount Percent Amount Percent Operating revenues 5 1% 1 Fuel, purchased and net interchange power 25 22 29 33 Other operation 7 5 6 4 , Maintenance 25 45 19 50 Amortizat' on of regulatory i assets, net (3) (30) (10) (53) Federal and state income taxes (22) (a) (9) (64) Other income, net (2) (a) Interest on long-term debt 2 8 (3) (10) Net income (33) (a) (35) (90) (a) Percentage greater than 100 Operating Revenues Total operating revenues increased in 1997, primarily due to higher transmission and capacity revenues and higher retail revenues. Retail revenues were higher due to lower price discounts to customers, partially of f set by lower retail sales. Retail kilowatt-hour sales were 1 percent lower in 1997 primarily as a result of mild winter weather. Total operating revenues increased in 1996, primari'y due to higher retail

sales, partially offset by lower fuel and conservation recoveries.

Retail kilowatt-hour sales increased 2.7 percent ($9 million) primarily due to modest economic growth in 1996. Fuel recoveries decreased $6 million, primarily due to the timing of the 4 recovery of costs under the company's fuel clause. Conservation recoveries decreased approximately $6 million primarily due to lower . demand side management costs. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 1997, primarily due to replacement power costs associated with the Millstone outages. Fuel, purchased and net interchange power expense increased in 1996, primarily due to higher replacement power associated with the Millstone outages, partially offset by the timing of the recognition of costs under the company's fuel clause and lower nuclear generation. 47

Other Operation and Maintenance Other operation and maintenance expenses increased in 1997, primarily due to higher costs associated with the Millstone restart effort ($30 million, including a net increase of $2 million in reserves for future costs), higher capacity charges from Maine Yankee ($2 million) and higher costs to ensure adequate capacity ($6 million), partially offset by lower capacity charges from Connecticut Yankee as a result of a property tax refund ($4 million) and lower administrative and general expenses ($5 million) primarily due to lower pensions and benefit costs. Other operation and maintenance expenses increased in 1996, primarily due to higher costs associated with the Millstone restart effort ($33 million, including $12 million of reserves for future costs), partially of fset by lower costs for demand sidc management programs and a 1995 work stoppage. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net decreased in 1997, primarily due to the completion of the amortization of the Millstone 3 unuseful investment in 1996. Amortization of regulatory assets, net decreased in 1996, priinarily due to the completion of the amortization of the Millstone 3 phase-in plans in 1995 and unuseful investment in June, 1996, partially offset by higher amortization as a result of the 1990 rate settlement. Federal and State Income Taxes Federal and state income taxes decreased in 1997, primarily due to lower book taxable income. Federal and state income taxes decreased in 1996, primarily due to lower book taxable income, partially offset by 1995 tax benefits from a favorable tax ruling and the expiration of the 1991 federal ctatute of limitations. 4 Other Income, Net other income, net decreased in 1997, primarily due to costs associated with the accounts receivable facility. Interest on Long-Term Debt Interest on long-term debt increased in 1997 due to the issuance of additional long-term debt. Interest on long-term debt decreased in 1996, primarily due to lower average interest rates as a result of refinancing activities and lower average 1996 debt levels. 48

SELECTED FINANCI AL DATA **' 1997 1996 1995 1994 1993 (Thousands of Dollars) Operating Revenues. $426,447 $421,337 $ 420,434 $ 421,477 $ 415,055 Operating (Loss) Income. (965) 26,023 63,064 70,940 60,348 Net (Loss) Income. (28,676) 3,922 39,133 49,457 40,594*3 Cosh Dividends on ( Common Stock. 15,004 16,494 30,223 29,514 28,785 Total Assets. 1,179,128 1,191,915 1,142,346 1,183,618 1,204,642 e Long-Ter Debt "' - 396.649 349,442 347,470 379,969 393,232 Preferred Stock Not Subject to Mandatory 3 Redemption. 20,000 20,000 53,500 68,500 73,500 Preferred Stock Subject to Mandatory Redemption"' 21,000 21,000 24,000 24,675 27,000 Obl.gations Under Capital Leases"' 32,887 32,234 36,011 36,797 36,902 3* ' Reclassifications of prior data have been made to conform with the current presentation. Includes the cumulative effect of change in accounting for municipal property tax expense, which increased earnings for common shares by $3.9 million. Includes portion due within one year. STATEMENTS OF OUARTERLY PINANCIAL DATA (Unaudited) Ouarter Ended i'i j997 March 31 June 30 Sept. 30 Dec. 31 Operating Revenues. $106,054 $104,130 $111,166 $105,097 operating Income (Loss) 3,865 $ (8,160) $ (2,277) 5,607 Net Income (Loss), $ (1,84 3) $ (14, 85 8 ) $ (9,455) $ (2,520) 1996 Operating Revenues. $114,797 $102,602 $ 99,866 $104,072 Operating Income (Loss) $ 13,692 9,377 4,327 $ (1,373) Net Income (Loss),, 8,109 4,016 (396) $ (7,807) 49 i.

Western Massachusetts Electric Company STATISTICS Gross Electric Average Utility Plant Annual December 31, Use Per Electric (Thousands kWh Sales Residential Customers Employees of Dollars) (Millions) Customer (kWh) (Averace) (December 31) 1997 $1,334,233 4,300 7,121 195,324 507 1996 1,303,361 4,626 7,335 194,705 497 1995 1,285,269 4,846 7,205* 193,964 527 1994 1,271,513 4,978 7,433 193,187 617 1993 1,242,927 4,715 7,351 192,542 657 OEffective January 1, 1996, the amounts shown reflect billed and unbilled sales. 1995 has been restated to reflect this change. i 9 I 50

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Western Massachusetts Electric Com..ny First andRefunding Mortgage Bonds l Trustee and Interest Paying Agent I State Street Bank and Trust Company Corporate Trust Department Two International Place,4th Floor Boston, Massachusetts 02110 Preferred Stock Transfer Agent, Dividend Disbursing Agent and Registrar h Northeast Utilities Service Company Shareholder Services P.O. Box 5006 Hanford, Connecticut 06102-5006 1998 Dividend Payment Dates 7.72% Series B January 1, April 1 July 1, and October 1 7.60% Series February 1, May 1 August 1, and November 1 Address General Correspondence in Care of: Northeast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 Telephone: (860) 665-5000 l d I numummmmmmmes

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Data containedin this AnnualReport are submitted for the sole purpose ofproviding information to 174 Brush Hill Avenue Present security holders about the Company. West Springfield, Massachusetts 01090-0010

lt 4 Form U 60 l Mutual and Subsidiary Service Companies l ANNUALREPORT FOR THE PERIOD Beginning January 1,1997 and Ending December 31,1997 TO THE U. S. SECUnlTIES AND EXCHANGE COMMISSION OF NORTHEAST NUCLEAR ENERGY COMPANY ] A Subsidiary Service Company i Date of incorporation - November 14,1950 State of Soverign Power underwhich Incorporated or Organized - Connecticut Location of Principal Executive Offices of Reporting Company - Selden Street, Berlin, CT. 06037 Name, title, and address of officer to whom correspondence conceming this report should be addressed: John J. Roman, Vice President and Controller, P.O. Box 270, Hartford, Ct. 06141-0270 l Name of Principal Holding Company Whose Subsidiaries are served by Reporting Company: I NORTHEAST UTILITIES 1 .l = s l c 1

\\ INSTRUCTIONS FOR USE ON FORM U-13-60 1 1. TIME OF FILING Rule 94 provides that on or before the first day of May in each calendar year, each mutual service company and each subsidiary service company as to 1 which the Commission shall have made a favorable finding pursuant to Rule 88, and every service company whose application tur approval or declaration l pursuant to Rule 88 is pending shall file with the Commission an annual report on Form U-13-60 and in accordance with the instructions for that form. 2. NUMBER OF COPIES Each annual report shall be filed in duplicate. The company should prepare and retain at least one extra copy for itself in case correspondence with i reference to the report becomes necessary. j 1 3. PERIOD COVERED BY REPORT The first report filed by any company shall cover the period from the date the Uniform System of Accounts was required to be made effective as to that company under Rules 82 and 93 to the end of that calendar year. Subsequent I reports should cover a calendar year. 4. REPORT FORMAT Reports shall be submitted on the forms prepared by the Commission. If the space provided on any sheet of such form is inadequate, additional sheets may be inserted of the same size as a sheet of the form or folded to such size. 5. MONEY AMOUNTS DISPLAYED All money amounts required to be shown in financial statements may be expressed in whole dollars, in thousands of dollars or in hundred thousands of dollars, as appropriate, and subject to provisions of Regulation S-X { (5210.3-0.1(b)). 6. DEFICITS DISPLAYED o Deficits and other like entries shall be indicated by the use of either brackets or a parenthesis with corresponding reference in footnotes. (Regulation S-X, ( 5 210. 3- 0.1 (c) ). 7. MAJOR AMENDMENTS OR CORRECTIONS Any company desiring to amend or correct a major omission or error in a report after it has been filed with the Commission shall submit an amended report including only those pages, schedules, and entries that are to be amended or corrected. A cover letter shall be submitted requesting the Commission to incorporate the amended re duly authorized officer of the company. port changes and shall be signed by a 8. DEFINITIONS Definitions contained in Instruction 01-8 to the Uniform System of Accounts for Mutual Service Companies and Subsidia n Service Companies, Public Utility Holding Company Act of 1935, as amended February 2, 1979 shall be applicable to words or terms used specifically within this Form U-13-60. 9. ORGANIZATION CHART The service company shall submit with each annual report a copy of its current organization chart 10. METHODS OF ALLOCATION The service company shall submit with each annual report a listing of the currently effective methods of allocation being used by the service company and on file with the Securities and Exchange Commission pursuant to the l Public Utility Holding Company Act of 1935. 11. ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED The service company shall submit with each annual report a copy of the annual statement supplied to each associate company in support of the amount of compensation for use in capital billed during the calendar year. i , o I t

4 LISTING OF SCHEDULES AND ANALYSIS OF ACCOUNTS 2 Schedule or Page s Description of Schedules and Accounts Acct. No. No. COMPARATIVE BALANCE SHEET Schedule I 4-5 SERVICE COMPANY PROPERTY Schedule II 6-7 ACCUMULATED PROVISION FOR DEPRECIATION AND AMORTIZATION OF SERVICE COMPANY Schedule III 8 INVESTMENTS Schedule IV 9 ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES Schedule V 10 FUEL STOCK EXPENSES UNDISTRIBUTED Schedule Vi 11 STORES EXPENSE UNDISTRIBUTED Schedule VII 12 MISCELLANEOUS CURRENT AND ACCRUED ASSETS Schedule VIII 13 MISCELLANEOUS DEFERRED DEBITS Schedule IX 14 RESEARCH, DEVELOPMENT, OR DEMONSTRATION EXPENDITURES Schedule X 15 j PROPRIETARY CAPITAL Schedule XI 16 LONG.T2RM DEBT Schedule XII 17 ~ CURRENT AND ACCRUED LIABILTIES Schedule XIII 18 o NOTES TO FINANCIAL STATEMENTS Schedule XIV 19 COMPARATIVE INCOME STATEMENT Schedule XV 20 ANALYSIS OF BILLING - ASSOCIATE COMPANIES Account 457 21 ANALYSIS OF BILLING - NONASSOCIATE COMPANIES Account 458 22 ANALYSIS OF CHARGES FOR SERVICE - ASSOCIATE AND NONASSOCIATE COMPANIES Schedule XVI 23 SCHEDULE OF EXPENSE BY DEPARTMENT OR SERVICE FUNCTION Schedule XVII 24-25 DEPARTMENTAL ANALYSIS OF SALARIES 26 OUTSIDE SERVICES EMPLOYED 27 EMPLOYEE PENSIONS AND BENEFITS Account 926 28 GENERAL ADVERTISING EXPENSES Account 930.1 29 MISCELLANEOUS GENERAL EXPENSES Account 930.2 30 l RENTS 31 1 TAXES OTHER THAN INCOME TAXES Account 408 32 . DONATIONS Account 426.1 33 OTHER DEDUCTIONS Account 426.5 34 NOTES TO STATEMENT OF INCOME Schedule XVIII 35 ! e l 2 1 l le____-_______

d g LISTING OF INSTRUCTIONAL FILING REQUIREM2NTS d Page Description of Reports or Statements No. ORGANIZATION CHART. 36 METHODS OF ALLOCATION 37 ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED 38 SIGNATURE PAGE 39 i I e i l !~ l r I I j e 0

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~ t 9 I ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY f l SCHEDULE I - COMPARATIVE BALANCE SHEET l Give balance sheet of the Company as of December 31 of the current and prior year. j ACCOUNT ASSETS AND OTHER DEBITS AS OF DECEMBER 31 l 1997 1996 SERVICE COMPANY PROPERTY (Thousands of Dollars) 101 Service company property (Schedule II) 39,152 $ 38,117 107 Construction work in progress (Schedule II) 2,634 1,556 Total Property 41,786 39,673 108 Less accumulated provision for depreciation and amortization of service company property (Schedule III) 12,867 11,202 Net Service Company Property 28,919 28,471 j - 123 Investments in associate companies (Schedule IV) 124 Other investments (Schedule IV) l Total Investments CURRENT AND ACCRUED ASSETS J A31 Cash 134 Special deposits 115 Working funds 2 2 136 Temporary cash investments (Schedule IV) 141 Notes receivable 2 l ' 143 Accounts receivable 5,255 9,694 144 Accumulated provision of uncollectible accounts i 146 Accounts receivable from associate companies (Schedule V) 152,978 111,590 152 Fuel stock expenses undistributed (Schedule VI) l 154 Materials and supplies 65,829 61,117 163 Stores expense undistributed (Schedule VII) 310 18 165 Prepayments-3,612 5,557 174 Miscellaneous current and accrued assets (Schedule VIII) Total Current and Accrued Assets 227,988 187,978 l DEFERRED DEBITS 181 Unamortized debt expense 125 152 184 Clearing accounts 377 608 186 Miscellaneous deferred debits (Schedule IX) 15,231 5,756 188 Research, development, or demonstration expenditures (Schedule X) - 189 Unamortized loss on reacquired debt 263 190 Accumulated deferred income taxes 20,376 15,197 Total Deferred Debits 36,372 21,713 TOTAL ASSETS AND OTHER DEBITS $ 293,279 $ 238,162 h e u.

0 t [ ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY l SCHEDULE I - COMPARATIVE BALANCE SHEET Give balance sheet of the company as of December 31 of the current and prior year. ACCOUNT LIABILITIES AND PROPRIETARY CAPITAL AS OF DECEMBER 31 1997 1996 PROPRIETARY CAPITAL (Thousands of Dollars) 301 Common stock issued (Schedule XI) 15 $ 15 311 Miscellaneous paid-in-capital (Schedule XI) 15,350 15,350 215 Appropriated retained earnings (Schedule XI) 316 Unappropriated retained earnings (Schedule XI) 864 867 Total Proprietary Capital 16,219 16,232 LONG-TERM DEBT 223 Advances from associate companies (Schedule XII) 224 Other long-term debt (Schedule XII) 18,033 24,182 225 Unamortized premium on long-term debt ( 226 Unamortized discount on long-term debt-debit Total Long-Term Debt 18,033 24,182 CURRENT AND ACCRUED LIABILITIES 231 Notes payable 332 Accounts payable 116,130 71,954 233 Notes payable to associate companies (Schedule XIII) 234 Accounts payable to associate companies (Schedule XIII) 22,716 18,784 336 Taxes accrued 13,742 7,257 337 Interest accrued 338 Dividends declared 500 241 Tax collections payable 921 672 342 Miscellaneous current and accrued liabilities (Schedule XIII) 87,097 81,745 Total Current and Accrued Liabilities 240,606 180,912 DEFERRED CREDITS 253 Other deferred credits 17,235 15,595 255 Accumulated deferred investment tax credits 1,176 1,241 Total Deferred Credits 18,411 16,836 282 ACCUMULATED DEFERRED INCOME TAXES TOTAL LIABILITES AND PROPRIETARY CAPITAL $ 293,279 $ 238,162 b

) ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY 4 4 For the Year Ended December 31, 1997 I ~ i d SCHEDULE II - SERVICE COMPANY PROPERTY BALANCE AT RETIREMENTS BALANCE l BEGINNING OR OTHER AT CLOSE l DESCRIPTION OF YEAR ADDITIONS SALES CHANGES (1) OF YEAR l (Thousands of Dollars) SERVICE COMPANY PROPERTY Account l 301 ORGANIZATION 303 MISCELLANEOUS INTANGIBLE PLANT 304 LAND AND LAND RIGHTS 305 STRUCTURES AND IMPROVEMENTS 306' LEASEHOLD IMPROVEMENTS 307 EQUIPMENT (2) 308 OFFICE FURNITURE AND EQUIPMENT 309 AUTOMOBILES, OTHER VEHICLES AND RELATED GARAGE EQUIPMENT 310 AIRCRAFT AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY (3) 321 STRUCTURES AND IMPROVEMENTS $32,866 $416 $33,282 322 REACTOR PLANT EQUIPMENT 324 ACCESSORY ELECTRIC EQUIPMENT 27 27 ) 325 MISCELLANEOUS POWER PLANT EQUIPMENT 4,045 530 4,575 391 OFFICE FURNITURE AND EQUIPMENT 1,179 89 1,268 SUB-TOTAL 38,117 1,035 39,152 107 CONSTRUCTION WORK IN PROGRESS (4) 1,556 1,078 2,634 TOTAL $39,673 $2,113 $0 $0 $41,786 l (1) PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL: NONE l t. b e

= SCHEDULE II - CONTINUED (2) SUBACCOUNTS ARE REQUIRED FOR EACH CLASS OF EQUIPMENT OWNED. THE SERVICE COMPANY 1 SHALL PROVIDE A LISTING BY SUBACCOUNT OF EQUIPMENT ADDITIONS DURING THE YEAR AND THE BALANCE AT THE CLOSE OF THE YEAR: BALANCE AT CLOSE SUBACCOUNT DESCRIPTION ADDITIONS OF YEAR (Thousands of Dollars) NONE ) (3) DESCRIBE OTHER SERVICE COMPANY PROPERTY: (4) DESCRIBE CONSTRUCTION WORK IN PROGRESS: This account includes simulator upgrade, tools and general plant items, i i 4.

.4 ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY .( For the Year Ended December 31, 1997 9 d: SCHEDULE III ACCUMULATED PROVISION FOR DEPRECIATION AND l AMORTIZATION OF SERVICE COMPANY PROPERTY ADDITIONS OTHER BALANCE AT CHARGED CHANGES BALANCE BEGINNING TO ADD AT CLOSE DESCRIPTION OF YEAR ACCT 403 RETIREMENTS (DEDUCT)I/ OF YEAR (Thousands of Dollars) Account 301 ORGANIZATION 303 -MISCELLANEOUS INTANGIBLE PLANT 304 LAND AND LAND RIGHTS 305 hiTRUCTURES AND IMPROVEMENTS 306-LEASEHOLD IMPROVEMENTS 307 EQUIPMENT 308' OFFICE FURNITURE AND FIXTURES ' 309 AUTOMOBILES, OTHER VEHICLES AND RELATED GARAGE EQUIPMENT 310 AIRCRAFT AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY 321 STRUCTURES AND IMPROVEMENTS 7,744 1,432 2 9,178 322 REACTOR PLANT EQUIPMENT 324 ACCESSORY ELECTRIC EQUIPMENT 13 1 14 325 MISCELLANEOUS POWER PLANT i EQUIPMENT 2,728 162 40 2,930 l 391 OFFICE FURNITURE AND FIXTURES 717 28 0 745 I l 4 l i TOTAL $11,202 $1,623 $0 $42 $12,867 1/' PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL: Depreciation charged to clearing account $40 Removal costs charged to reserve 2 $42 l I

5 ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Er.ded December 31, 1997 ) SCKEDULE IV - INVESTMENTS INSTRUCTIONS : Complete the following schedule concerning investments. i Under Accosmt 124, "Other Investments," state each investment separately, with description, including the name of issuing company, number of shares or principal amount, etc. Under Account 136, " Temporary Cash Investments," list each investment separately. BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR ACCOUNT 123 - INVESTMENT IN ASSOCIATE COMPANIES NONE ACCOUNT 124 - OTHER INVESTMENTS NONE ACCOUNT 136 - TEMPORARY CASH INVESTMENTS NONE i TOTAL l l ,, ~. I

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 SCHEDULE V - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES INSTRUCTIONS: Complete the following schedule listing accounts receivable from each associate company. Where the service company has provided accommodation or convenience payments for associate companies, a separate listing of total payments for each associate company by subaceount should be provided. BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) ACCOUNT 146 - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES Northeast Utilities System Money Pool $75,000 $98,600 Tha Connecticut Light and Power Company 28,344 43,284 W;ctern Massachusetts Electric Company 6,686 10,144 Northeast Utilities Service Company 1,768 918 North Atlantic Energy Service Corporation 6 Northeast Utilities Public Service Company of New Hampshire (208) 26 I TOTAL $111,590 $152,978 ANALYSIS OF CONVENIENCE OR ACCOMMODATION PAYMENTS: See page 10A for details. +. l. . ~.

t ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY l l For the Year Ended December 31, 1997 \\ SCHEDULE V - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES INSTRUCTIONS: Complete the following schedule listing accounts receivable from each associate company. Where the service company has provided accommodation or convenience payments for associate companies, a separate listing of total payments for each associate company by subaccount should be provided. TOTAL DESCRIPTION PAYMENTS (Thousands of Dollars) ANALYSIS OF CONVENIENCE OR ACCOMMODATION PAYMENTS: 1 The Connecticut Light and Power Company $306 Western Massachusetts Electric Company 46 i Public Service Company of New Hampshire 3 North Atlantic Energy Service Corporation 210 Northeast Utilities Service Company 9,534 TOTAL $10,099 Convenience payments result primarily from the following items: Engineering Services $5,096 Nuclear Compiinnce 1,747 Consulting Services 969 Corr:puter Equipment & Supplies 456 Temporary Personnel Services 1,295 Miscellaneous (197 items) 536 TOTAL ] $10,099 I -10A- ~.

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the. Year Ended December 31, 1997 SCHEDULE VI - FUEL STOCK EXPENSES UNDISTRIBUTED j INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to fuel l stock expenses during the year and indicate amount attributable to each associate company. Under the section headed " Summary" listed below, give an overall report of the fuel functions performed by the service company. l i j 1 DESCRIPTION LABOR EXPENSES TOTAL l 1 (Thousands of Dollars) i 1 ACCOUNT 152 - FUEL STOCK EXPENSES UNDISTRIBUTED S. t I l l 1 11-i W __a_---_.--

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPA!E For tha Year Ended December 31, 1997 SCHEDULE VII - STORES EXPENSE UNDISTRIBUTED INSTRUCTIONS: Report the amount of labor and expenses incurred with' respect to stores txpense during the year and indicate amount attributable to each associate company. \\ DESCRIPTION LABOR EXPENSES TOTAL (Thousands of Dollars) ACCOUNT 163 STORES EXPENSE UNDISTRIBUTED Beginning Balance as of January 1, 1997 $18 Activity for the year: Stores expense undistributed $4,923 $5,924 10,847 The above stores expenses ara billed back to each of the companies listed below: The Connecticut Light & Power Company (3,432) (4,130) (7,562) "4estern Massachusetts Electric Company (802) (965) (1,767) Public Service Company of New Hampshire (46) (55) (101) Nonassociate Companies (see page 22 for list of the companies) (511) (614) (1,125) Stores expense distributed (4,791) (5,764) (10,555) Net Activity for year $132 $160 292 Ending Balance as of December 31, 1997 $310 l -12

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY l 1 l For the Year Ended December 31, 1997 SCHEDULE VIII MISCELLANEOUS CURRENT AND ACCRUED ASSETS INSTRUCTIONS: Provide detail of items in this account. Items less than $10,000 may be I grouped, showing the number of items in each group. i BALANCE AT BALANCE AT 1 i BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR l l (Thousands of Dollars) ACCOUNT 174 - MISC,ELLANEOUS CURRENT AND ACCRUED ASSETS NONE e l TOTAL 4 i j l 13-i i 'S',

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY i For the Year Ended December 31, 1997 SCHEDULE IX MISCELLANEOUS DEFERRED DEBITS INSTRUCTIONS: Provide detail of items in this account. Items less than $10,000 may be grouped, showing the number of items in each group. BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) ACCOUNT 186 - MISCELLANEOUS DEFERRED DEBITS Long term receivable from Rocky River Realty Company (associated company) $6,576 Contractual retainage 800 5,175 Financial system development costs 3,090 2,270 RABBI Trust funding 952 952 Unissued non-inventory stock materials 629 Connecticut sales tax under protest 99 .99 Employee performance payments 92 97 External audit - Millstone Unit No. 3 53 53 Other deferred debits (9 items in 1997 and 5 items in 1996) 41 9 TOTAL $5,756 $15,231 .......... I

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY l For the Year Ended December 31, 1997 5 1 e SCHEDULE X RESEARCH, DEVELOPMENT, OR DEMONSTRATION EXPEND::TURES INSTRUCTIONS: Provide a description of each material research, development, or i demonstration project which incurred costs by the service corporation during the year. DESCRIPTION AMOUNT (Thousands of Dollars) ~ ACCOUNT 188 - RESEARCH, DEVELOPMENT OR DEMONSTRATION EXPENDITURES l EPRI Assessment $70 'EPRI Membership 30 The above. expenses are billed back to each of the casociated companies listed below: The connecticut Light and Power Company (22) Western Massachusetts Electric Company (5) Public Service Company of New Hampshire (6) Nonassociate Companies (see page 22 for list of the companies) (67) TOTAL $0 l 1 l l-1. +.

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 ] SCHEDULE XI PROPRIETARY CAPITAL ( NUMBER OF PAR OR STATED OUTSTANDING CLOSE OF PERIOD ACCOUNT SHARES VALUE NUMBER CLASS OF STOCK AUTHORIZED PER 3 HARE NO. OF SHARES TOTAL AMOUNT (Thousands of Dollars) 201 COMMON STOCK ISSUED 60,000 $10.00 1,500 $15 INSTRUCTIONS: Classify amounts in each account with brief explanation, disclosing the general nature of transactions which give rise to the reported amounts. DESCRIPTION AMOUNT (Thousands of Dollars) ACCOUNT 211 - MISCELLANEOUS PAID-IN-CAPITAL $15,350 ACCOUNT 215 - APPROPRIATED RETAINED EARNINGS j TOTAL $15,350 INSTRUCTIONS: Give particulars concerning net income or (loss) during the year, distinguishing between compensation for the use of capital owed or net loss remaining from servicing nonassociated per the General Instructions of the Uniform Systems of Accounts. For dividends paid during the year in cash or otherwise, provide rate pecentage, amount of dividend, date declared and date paid. BALANCE AT NET INCOME BALANCE AT BEGINNING OR DIVIDENDS CLOSE DESCRIPTION OF YEAR (LOSS) PAID OF YEAR (Thousands of Dollars) ACCOUNT 216. UNAPPROPRIATED RETAINED EARNINGS $867 $1,998 $2,001 $864 TOTAL $867 $1,998 $2,001 $864 Th2 net income is all compensation for use of capital. l Thi dividends are paid as follows: 1 Rate Percentage Amount of Per Share Dividend Date Declared Date Paid j $1,334.00 $2,001,000 11/10/97 11/30/97 i.. ______-__________________-___ _ _______________ ____ _

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t 1 i ANNUAL REPORT OF NORTHEAST NUCLEAR DIERGY COMPANY 4 For the Year Ended December 31, 1997 J SCHEDULE XIII - CURRENT AND ACCRUED LIABILITIES I INSTRUCTIONS: Provide balance of notes and accounts payable to each associate company. j Give description and aneant of miscellaneous current and accrued liabilities. Items less than $10,000 may be grouped, showing the number of items in each group. 4 ) BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR i .............e............................................................................ (Thousands of Dollars) ACCOUNT 233 - NOTES PAYABLE TO ASSOCIATE COMPANIES TOTAL ACCOUNT 234 - ACCOUNTS PAYABLE TO ASSOCIATE COMPANIES The Connecticut Light and Power Company $756 $1,600 W2 stern Massachusetts Electric Company 41 46 Northeast Utilities Service Company 17,534 20,639 Northeast Utilities 95 180 Public Service Company of New Hampshire 203 210 North Atlantic Energy Service Corporation 155 41 TOTAL $18,784 $22,716 ACCOUNT 242. MISCELLANEOUS CURRENT AND ACCRUED LIABILITIES Millstone 3 Funding Liability $47,996 $39,801 P2nsion Cost 30,452 35,855 VEPCO and PECO Incentive Fees 4,752 Performance Reward Program 544 3,485 P;yroll Accrual 2,756 2,748 S2verance Accroal 481 Miscellaneous (2 items) (3) (25) TOTAL $81,745 $87,097

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31.1997 ? SCHEDULE XIV H NOTES TO FINANCIAL STATEMENTS l INSTRUCTIONS: The space below is provided for important notes regarding the financial statements or any I account thereof. Fumish particulars as to any significant contingent assets or liabilities existing at the end of the year. Notes relating to financial statements shown elsewhere in this report may be indicated here by reference l 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIE8 General Northeast Nuclear Energy Company (NNECO or the company) is a wholly owned subsidiary of Northeast Utilities (NU). The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Westem Massachusetts Electnc Company (WMECO), Holyoke Water Power Company and North Atlantic Energy Corporation are the operating subsidiaries of the Northeast Utilities system (the NU system) and are wholly owned by NU. NNECO acts as agent for the NU system companies and other New England utilities in operating the two nuclear generating facilities (Millstone 1 and 2) that are wholly owned by CL&P and WMECO. The cost of the two nuclear units is recorded on the books of the affiliated utility companies in their proportionate ownership s bares. In addition, NNECO acts i as agent in operating a third nuclear generating unit, Mdistone 3, for CL&P, PSNH, WMECO and other nonaffiliated utilities. The cost of Millstone 3 is recorded on ine books of CL&P, PSNH, WMECO and the nonaffiliated utilities based upon their proportionate ownership shares. Other wholly owned subsidiaries of NU provide support services for the NU system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing and other services to the NU system companies. North Atlantic Energy Service Corporation j has operational responsibility of the Seabrook nuclear power plant. All transactions among affiliated companies are on a recovery of cost basis, which may include amounts representing a retum on equity, and are subject to approval of various federal and state regulatory agencies. Public Utilliy Regulation NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act). NU and its subsidiaries, including the company, are subject to the provisions of the 1935 Act Revenues The company provides services to the affiliated utility companies on the basis of recovery of cost plus retum on capital, as defined under the terms of agreements, which have been approved by various federal and state regulatory commissions having jurisdiction over operations of the company and the affiliated utility companies. l Depreciation The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by l the appropriate regulatory agency. l *. 19 e

f i 1 t 1 l ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY 4 For the Year Ended December 31.1997 4 .i SCHEDULE XIV 9 NOTES TO FINANCIAL STATEMENTS ] Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from servi:e, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated i provision for depreciation. The depreciation rates for the several classes of utility plant-in-service are equivalent to a 2,omposite rate of 4.5 percent in 1997 and 1996. 2. LEASES The company has entered into lease agreements with two unaffiliated third parties for the use of nuclear control room simulators (simulators) for Millstone 1 and 2, and CL&P's and WMECO's share of the Millstone 3 simulator. In addition, the company's affiliates have entered into lease agreements for the use of data processing equipment, office equipment, vehicles and office space. NNECO is billed for its proportionate share of these leases through the intercompany billing system. The provisions of these lease agreements generally provide for renewal options. j Rental payments charged to operating expenses for 1997 and 1996 amounted to approximately $4.8 each year, for capital lease rental payments and $6.1 million and $6.8 million, respectively, for operating lease rental payments. Interest included in capital lease rental payments for 1997 and 1996 was approximately $1.6 million and o- $1.8 million, respectively. Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance and maintenance, under long-term noncancellable leases as of December 31,1997, are approximately: Period Capital Leases Operatina Leases (Thousands of Dollars) 1998... $ 4,400 $ 800 1999. 4,400 600 2000......... 4,000 300 2001... 1,900 40 2002. 30 After 2002.. 40 Future minimum lease payments.. 14,700 3.111Q Less amount representing interest.. 2 700 Present value of future minimum lease payments. $12&DQ 3. SHORT-TERM DEBT l Certain subsidiaries of NU, including NNECO, are members of the Northeast Utilities System Money Pool l (Pool). The Pool provides a more efficient use of the cash resources of the NU system, and reduces l outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-l term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool, but may not borrow. Funds may be withdrawn from or repaid to the Pool at any time without prior notice. Investing and borrowing subsidiaries receive and pay interest based on the average daily Federal Funds rate. 19A L-______-_-__-_-_-__-__-__.

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31.1997 a SCHEDULE XIV + NOTES TO FINANCIAL STATEMENTS l l Borrowings based on loans from NU parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31,1997 and 1996, NNECO had no borrowingh outstanding under the Pool. 4. LONG-TERM DEST Detail of long-term debt outstanding is: December 31. 1997 1996 (Thousands of Dollars) 7.67% Senior Notes, due 2000... $18,033 $24,182 Less: Amounts due within one year... 6.011 398 Long-term debt, net....... gjlg22 jZ2,Zad in April 1997, Moody's investors Services downgraded both CL&P's and WMECO's first mortgage bonds. As a result of this downgrade, NNECO's note payments became accelerated as required unde. the terms of the notes. NNECO is now required to make a series of four equal annual prepayments, effectively resulting in the notes being fully repaid by May 2000 rather than the original maturity date in 2019. Therefore, approximately $6 million of the notes has been reclassified as a current obligation. Cash sinking-fund requirements on debt outstanding at December 31,1997 are approximately $6,011,000 for 1998 and 1999, $5,776,000 for 2000 and nothing for 2001 and 2002. 6. PENSION BENEFITS NNECO participates in a uniform noncontributory-defined benefit retirement plan covering all regular NU system employees (the plan). Benefits are based on years of service and employees' highest eligible compensation during 60 consecutive months of empbyment. NNECO's direct portion of the NU system's pension cost, part of which was charged to plant, approximated $5.4 million in 1997 and $7.2 million in 1996. Currently, NNECO funds annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement income Security Act and the Intemal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and intemational equity securities and bonds. 9 19B

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31,1997 SCHEDULE XIV NOTES TO FINANCIAL STATEMENTS The components of net pension cost for NNECO are: At December 31. 1997 1996 (Thousands of Dollars) Service cost.. $ 5,572 5 5,882 Interest cost.. 7,715 7,486 Retum on plan assets. (18,139) (12,461) Net amortization. 10.256 6 335 Net pension cost.. $_5AQ4 3,,,,Z,2B For calculating pension cost, the following assumptions were used: For the Years Ended December 31. 1997 1996 Discount rate. 7.75% 7.50 % Expected long-term rate of retum. 9.25 8.75 Compensation / progression rate. 4.75 4.75 The following table represents the plan's funded status reconciled to the Balance Sheets: At December 31. 1997 1996 (Thousands of Dollars) Accumulated benefit obligation at December 31,1997 and 1996, including vested benefits of $(54,697,000) and $(49,379,000), respectively.. EjgMZZ) $ (63.645) Projected beneftt obligation (PBO).. $(111,394) $(107,001) Market value of plan assets.. 103.949 89E28 PBO in excess of market value of plan assets... (7,445) (17,173) Unrecognized transition amount.. (1,584) (1,729) Unrecognized prior service costs. 3,804 4,062 Unrecognized net gain.. (30.630) (15.612) Accrued pension liability.. $ (35.855) $_I3DA52) The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31. 1997 1996 Discount rate. 7.25% 7.75 % Compensation / progression rate.. 4.25 4.75 19C

i 4 f ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY q b For the Year Ended December 31,1997 2 l SCHEDULE XIV ? NOTES TO FINANCIAL STATEMENTS 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system subsidiaries, including NNECO, prcvide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as Statement of Accounting Standards 106 (SFAS 106) benefits). For current employees and certain retirees, the total SFAS 106 benefit is limited to two timys the 1993 per-retiree health care cost. The SFAS 106 obligation has been calculated based on this assumption. These benefits are available for employees retiring from the NU system who have met specified service requirements. NNECO's direct portion of SFAS 106 costs, part of which were deferred or charged to utility plant, approximated $1.2 million in 1997 and $2.1 million in 1996. During 1997 and 1996, NNECO fundea TWAS 106 postratirement costs through external trusts. NNECO is funding on an annual basis amounts equal to the SFAS 100 costs for the year which also are tax-deductible under the Intemal Revenue Code. The trust assets are invested primarily in equity securities and bonds. The components of health care and life insurance cost are: At December 31. 1997 1996 1 (Thousands of Dollars) i Service cost..................... S 689 $1,009 Interest cost....................... 1,072 1,204 j Retum on plan assets.......... (1,623) (762) Amortization of unrecognized transition obligation.................. 277 277 Other amortization, net........................ _B21 . 330 ) Net health care and life insurance cost............. 31236 12,Q18 The following assumptions were used in calculating SFAS 106 benefit costs: 4 At December 31. 1997 1996 Discount rate............... 7.75 % 7.50 % Long-term rate of retum - health assets, net of tax....... 6.00 5.25 Long-term rate of retum - life assets............ 9.25 8.75 l i e* g* 19D l-l .___._______.___________________.__._J L______._____._______________._____..__._________.____________.________

ANNUAL REPORT CF NORTHEAST NUCLEAR ENERGY COMPANY i For the Year Ended December 31.1997 i SCHEDULE XIV 1 1 NOTES TO FINANCIAL STATEMENTS The following table represents the plan's funded status reconciled to the Balance Sheets: At December 31. 1997 1996 (Thousands of Dollars) Accumulated postretirement benefit obligation of: Retirees... $ (8,335) $ (7,500) Active employees not eligible to retire.. (6.843) (E.889) Total accumulated postretirement benefit obligation.... (15,178) (16.389) Market value of plan assets.. 10.008 7.881 Accumulated postretirement benefit obligation in excess of plan assets. (5,170) (8,508) Unrecognized transition amount............ 4,159 4,436 Unrecognized net loss.. 1.011 4.072 j Postretirement benef!t obligation.. W $__.0 The following actuarial assumptions were used in calculating the plan's year-end funded status: At December 31. 1997 1996 Discount rate....... 7.25% 7.75% Health care cost trend rate (a).. 5.76 7.23 (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.4 percent by 2001. The effect of increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31,1997 by $608,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $71,000. The trust holding the plan assets is subject to federalincome taxes at a 39.6-percent tax rate. 7. NUCLEAR PERFORMANCE The three Millstone units are managed by NNECO. Millstone 1,2 and 3 have been out of service since i November 4,1995, February 21,1996 and March 30,1996, respectively, and are on the Nuclear Regulatory Commission's (NRC) Watch Ust. The company has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units. The actual date of the retum to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a vote by the NRC commissioners. NU hopes to retum Millstone 3 to service in the early spring of 1998 and Millstone 2 three to four months after Millstone 3. Millstone 1 has been placed in extended maintenance i status while management is reviewing its options with respect to the unit. i e* 0

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY FOR THE YEAR ENDED DECEMBER 31, 1997 d SCHEDULE XV l COMPARATIVE INCOME STATEMENT ACCOUNT DESCRIPTION 1997 1996 (Thousands of Dollars) INCOME 457 Services rendered to associate companies $631,692 $409,581 458 Services rendered to nonassociate companies 102,883 62,279 421 Miscellaneous income or loss 4,981 2,505 Total Income 739,556 474,365 EXPENSE Nuclear Power Expenses 517 Operation Supervision and Engineering 140,209 57,959 519 Coolants and Water 4,410 3,931 520 Steam Expenses 30,906 27,385 523 Electric Expenses 11,807 11,729 524 Miscellaneous Nuclear Power Expenses 74,041 61,290 525 Rents 5,579 5,690 528 Maintenance Supervision and Engineering 85,234 41,362 529 Maintenance of Structures 14,799 9,429 530 Maintenance of Reactor Plant Equipment 162,792 106,061 531 Maintenance of Electric Plant 115,900 61,703 532 Maintenance of Miscellaneous Nuclear Plant 663 1,553 Transmission Expenses 560 Operation Supervision and Engineering O O 562 Station Expenses 1,565 1,752 566 Miscellaneous Transmission Expenses 0 0 568 Maintenance Supervision and Engineering 0 0 569 Maintenance of Structures 0 0 570 Maintenance of Station Equipnent 0 31 Administrative and General Expenses 920 Salaries and wages 12,177 11,536 921 Office supplies and expenses 8,153 6,044 922 Administrative expense transferred-credit 0 0 923 Outside services employed 18,588 11,876 924 Property insurance (1,227) 3,142 925 Injuries and damages 4,296 3,164 926 Employee pensions and benefits 18,979 23,571 928 Regulatory commission expense 90 30 930.1 General advertising expenses 0 0 930.2 Miscellaneous general expensen 947 1,699 931 Rents 4,434 3,573 932 Maintenance of structures and equipment 639 257 All other expenses 403 Depreciation and amortization expense 1,623 1,621 400 Taxes other than income taxes 11,239 10,716 409 Income taxes 7,975 6,882 410 Provision for deferred income taxes 837 1,218 411 Provision for deferred income taxes-credit (5,989) (5,478) 411.5 Investment tax credit (65) (66) 426.1 Donations 24 19 426.5 Other deductions 4,121 490 427 Interest on long-term debt 2,007 1,788 430 Interest on debt to associate companies 0 0 431 Other interest expense 805 476 Total Expense 737,558 472,433 Net Income $1,998 $1,932 20-e______-_____-_____

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY e-For the Year Ended December 31, 1997 ANALYSIS OF BILLING ASSOCIATE COMPANIES ACCOUNT 457 DIRECT INDIRECT COMPENSATION TOTAL COSTS COSTS FOR USE AMOUNT NAME OF ASSOCIATE COMPANY CHARGED CHARGED OF CAPITAL BILLED (Thousands of Dollars) 457-1 457-2 457-3 } The Connecticut Light and Power Company $500,909 $3,847 $504,756 Western Massachusetts Electric Company 116,935 900 117,835 Public Service company ) of New Hampshire 9,068 33 9,101 TOTAL $626,912 $0 $4,780 $631,692 O

i ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 ANALYSIS OF BILLING NONASSOCIATE COMPANIES ACCOUNT 458 I DIRECT INDIRECT COMPENSATION EXCESS TOTAL COSTS COSTS FOR USE TOTAL OR AMOUNT NAME OF NONASSOCIATE COMPANY CHARGED CHARGED OF CAPITAL COSTS DEFICIENCY BILLED (Thousands of Dollars) 458-1 458-2 458-3 458-4 Connecticut Yankee Atomic Power Company 424 $ 0$ 424 $ 424 CIntral Maine Power Company 7,961 29 7,990 7,990 C ntral Vermont Public Service 5,517 20 5,537 5,537 Montaup Electric Co. 12,760 46 12,806 12,806 N;w England Power Co. 38,965 139 39,104 39,104 United Illuminating Company 11,728 41 11,769 11,769 Fitchburg Gas & Electric Co. 692 3 695 695 o . Chicopee Municipal Electric 4,322 15 4,337 4,337 Massachusetts Municipal Wholesale 15,379 55 15,434 15,434 Lyndonville Electric Department 156 1 157 157 y' - Connecticut Municipal Electric Coop 3,478 12 3,490 3,490 V;rmont Electric Gen & Trans. 1,136 4 1,140 1,24" $102,518 $ 0$ 365 $ 102,883 $ 0 $102,883 INSTRUCTIONS: Provide a brief description of the services rendered to each nonassociate company: Th3 Company acts as agent in operating Millstone Unit 3 for the nonassociate companies. f l I

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g o ANNUAL REPORT OF NORTEEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 g E SCEEoULE IvII SCEEDULE OF BIPENSE DISTRIBUTION DY ( DEPARTMENT OR SERVICE FUNCTION I i DEPARTMENT OR SERVICE FUNCTION I [ Accoon TOTAL MI n8 TONE MInSTONE mI uSToNE i NUMBER DESCRIPTION OF 17318 AN00NT OVEREEAD IDtIT 51 tEtIT 82 UNIT G3 (Thousands of Dollars) thaelear power Expenses l 517 OPERATION SUPERVISION AND ENGINEERING $140,209 $0 $58,630 $38,388 $43,191 519 C00LANTS AND NATER 4,410 0 1,232 1,503 1,675 520 STEAN EXPENSES 30,906 0 8,663 10,620 11,623 523 ELECTRIC EXPENSES 11,807 0 3,734 3,914 4,159 524 MISCELLANEOUS NUCLEAR POWER EXPENSES 74,041 0 20,656 26,004 27,381 525 EENTS 5,579 1,140 1,444 1,599 1,396 528 MAINTENANCE SUPERVISION AND ENGINEERING 85,234 0 15,368 29,665 40,201 529 38kINTENANCE OF STRUCTURES 14,199 4 4,051 6,265 4,483 530 M&INTENANCE OF REACTOR PLANT EQUIPMENT 162,792 0 24,076 68,677 70,039 531 MAINTENANCE OF ELECTRIC PLANT 115,900 0 7,315 29,493 79,092 533 MAINTENhWCE OF MISCELLANEOUS afUCLEAR PLhMT 663 0 223 223 217 Transmission Espenses 560 OPERATION SUPERVISION AND ENGINEERING 0 0 0 0 0 562 STATION REPENSES 1,565 0 0 0 1,565 l 566 MISCELLANEOUS TRANSNISSIOh EXPENSES 0 0 0 0 0 l 568 MAIsrTENANCE SUPERVISION AND ENGINEERING 0 0 0 0 0 569 MAINTENANCE OF STRUCTURES U 0 0 0 0 570 MAINTENANCE OF STATICIt EQUIPMEBrF 0 0 0 0 0 Administrative and General Empenses $20 SALARIES AND NAGES 12.177 0 3,790 3,832 4,555 921 0FFICE SUPPLIES AND EIPENSES 8,153 0 2,614 2,565 2,974 l's 933 AgggINISTRATIVE EXPMSE TRANSFERRED. CREDIT 0 0 0 0 0 923 OUTSIDE SERVICES EMPLOYED 18,588 0 5,499 5,327 7,762 924 PROPERTY INSURANCE (1,227) 0 (835) (835) 443 925 INJURIES AND m mES 4,296 0 901 1,238 2,157 936 EMPLOYEE PENSIONS AND RENEFITS 18,979 0 5,926 3,114 6,939 328 REQULkTORY CatetISSION EXPENSE 90 0 35 26 29 930.1 GENERAL ADVERTISING EXPENSES 0 0 0 0 0 930.2 MISCELLANEOUS GENERAL EXPENSES 947 0 278 301 368 l 931 RENTS 4,434 0 1,433 1,414 1,587 932 MAINTENANCE OF STRUCTURES AND EQUIPMENT 639 0 191 205 243 All other empenses 403 DEPRECIATION AND AMORTIEATICII EE738558 1,523 0 663 503 457 408 TAIES OTERR TEAM INCONE TAERS 11,239 0 3,316 3,542 4,381 409 INC0esE TAxBS ~7,975 0 4.016 4,010 (51) 410 PRovzSI0er FoR DEFERRED INC0esE TAXES 837 0 419 418 0 I 411 PROVISI0tt FOR DEFERRED INCOBEB TAEES. CREDIT (5,989) 0 (2,995) (2,994) 0 i 411.5 INVESTNENT TAE CREDIT (65) 0 (33) (32) 0 ( 426.1 DOIIATIONS 24 0 8 8 8 l 426.5 CTERR DEDUCTIONS 4,121 0 1,365 1,366 1,390 l 427 INTEREST 005 LOIIG. TERN DIETS 2,007 2,007 0 0 0 f 430 INTEREST ON DEET TO ASSOCIATE CODEPANIES 0 0 0 0 0 l 431 CTERR INTEREST EXPENSE 805 0 401 401 3 l TOTAL IEPENSES. $737,558 $3,147 $172,384 $243,750 $318,267 INSTRUCTI0ttS: Indicate each department or service function. (See Instruction 01 3 General Structure of Accounting Systems Uniform System of Accounts) 24 L

l '4 r P-ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 SCHEDULE XVII KEYS FOR SERVICE FUNCTIONS l' KEYS-SERVICE FUNCTION l The individual generating units for which NNECO provides l service are listed separately on Page 24. l l l != f i l l= 1 I 1 i i i e* e*

s ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 DEPAR'INENTAL ANALYSIS OF SALARIES v N DEPAR*IMENTAL SALARY EXPENSE NAME OF DEPARTMENT INCLUDED IN AMOUNTS BIT.T.m TO ' NUMBER OF

---

PERSONNEL Indicate each dept.

TOTAL PARENT OTHER NON END or service function. AMOUNT COMPANY ASSOCIATES ASSOCIATES OF YEAR J (Thousands of Dollars) MILLSTONE UNIT #1 $28,517 $0 $28,517 $0 436 MILLSTONE UNIT #2 37,118 0 37,118 0 563 MILLSTONE UNIT #3 50,717 0 34,497 16,220 648 l $116,352 $0 $100,132 $16,220 1,647 I 4 I l o h

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li

k ANNUAL REPORT OF NORTEAST WCLEAR EERGY COMPANY l For the Year Ended December 31,1997 OlfrSIDE SERVICES EMPLOYED 1 1 l INSTRUCTIONS: Provide a breakdown by ='Wyrt of outside services esployed. If the aggregate amounts paid to any one payee and included within one subaccount is less than $100.000, only the aggregate number and aucunt of all such payments included wtthin the subaccount need be shown. Provide a subtotal for each type of service. RELATIONSHIP

• A* ASSOCIATE

'M. NOM FROM IHOM PURCHASED ADDRESS ASSOCIATE AMOUNT (Thousands of Dollars) ENGINEERING SERVICES AED E $173 ABB CE NUCLEAR POER M $259 BARTLETT NUCLEAR INC NA $105 l CATARACT,INC. M $3,050 COEINGENCY MAMGEMENT ASSOCIATES NA $590 CONTRACT SOLUTIONS NA $2.809 COOPERS & LYBRAW LLP NA $229 CORE CORP NA $139 DUKE ENGI E ERING & SERVICES INC NA $1.249 ENERCON SERVICES INC NA $347 ENGINEERING PLAN MANAGEMENT. INC. M $499 ENERAL ELECTRIC COMPANY NA $2.024 GENERAL PHYSICS CORP NA $270 J GIV00 CONSULTANTS INC NA $421 JANUS MAMGEENT ASSOCIATES NA $1.422 LINC SYSTEMS CORP M $110 LITTLE HARBOR CONSULTAKIS INC NA $2.127 W M ENGINEERING CORP NA $1.1?S ONSITE NA $624 P & I CONSULTING LTD NA $111 PARSONS POER GROUP INC NA $4.927 PECO NUCLEAR NA $1.169 PERFORMANCE IMPROVEMENT INT *L NA $250 PERFORMANCE MANAGEMENT NA $108 PROTO POWER CORP NA $347 RAYTE0N QUALITY PROGtAMS DIVISION M $3.541 SARGENT & LU WY, LLC NA $4.250 SECORE L L C NA $316 SOUTERN DEVELOPENT & INVESTENT GROUP NA $365 SPEC CONSULTANTS INC NA $423 STONE & EBSTER CONSTRUCTION CO. INC. NA $573 TE IWUS GROUP INC NA $101 TJE INC NA $154 TUCKER ALAN INC NA $552 VIRGINIA POWER NA $3.878 l W D ASSOCIATES INC NA $1.080 XCALIBER CONSULTING GROUP NA $150 YANKEE ATOMIC ELECTRIC CO NA $499 l MISCELIAEOUS (17 PAYEES) NA $406 1 TOTAL ENGINEERING SERVICES 40.772 1

• 27 L

t 4 ANNUAL REPORT OF NORTEAST NUCLEAR EERGY COMPANY ] For the Year Ended December 31. 1997 1 1 9 l OUTSIDE SERVICES D FLOYED 1 INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the. aggregate amounts paid to any one payee and included within one subaccount is less than $100.000, only the aggregate number and amount of all such payments included within the subaccount need be shown. Provide a j subtotal for each type of service. I RELATIONSHIP

• A*. ASSOCIATE M.NON FROM lHOM PURCHASED A00RESS ASSOCIATE AMOUNT (Thousands of Dollars)

LEGAL SERVICES CARMODY & TORRANCE OR M 101 DAY BERRY & HOWARD NA 1.878 l GOODWIN PROCTER & HOAR. LLP M 104 l KILLIAN & GEPHART M 387 NORGAN LEWIS & BOCK!US. LLP NA $2.036 RALPH G BIRD E 169 UPDIKE KELLY & SPELLACY NA 491 WINSTON & STRAWN M 237 TOTAL LEGAL SERVICES $5.403 SECURITY SERVICES BURNS IKTL SECURITY SERVICES E $7.913 EQUIFAX SERVICES INC NA 196 MISCELLA EOUS (1 PAYEE) M 24 TOTAL SECURITY SERVICES $8.133 TELECOMMUNICATION SERVICES AT&T M 169 LUCENT TECHNOLOGIES E 112 SET E $472 MISCELLANEOUS (7 PAYEES) NA 16 l TOTAL TELECOPMMICATION SERVICES $769 l TEMPORARY EMPLOYMEWT SERVICES MNPOER INC M $978 NUCON M $2.346 MISCELLA EOUS (1 PAYEE) NA $12 TOTAL 1EMPORARY EMPLOYENT SERVICES $3.336 f 27A. l

l-ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY (# For the Year Ended December 31. 1997 ? 5 0UTSIDE SERVICES EMPLOYED l INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the' aggregate amounts paid to any one payee and included within one subaccount is less than $100.000, only the aggregate number and amount of all such payments included within the subaccount need be shown. Provide a subtotal for each type of service. RELATIONSHIP

• A* ASSOCIATE
• NA*.NON I

FROM nHOM PLRCHASED ADDRESS ASSOCIATE AMOUNT (Thousands of Dollars) WATER TREATENT SERVICES ECOLOCEM NA $819 TOTAL WATER TREATENT SERVICES $819 COMPWERS SERVICES ALPINE COMPUTER SYSTEMS NA $300 C W COSTELLO & ASSOCIATES INC NA $153 INTERLEAF INC NA $115 PRIDE TECHNOLOGIES INC NA $284 SCIENTECH INC NA $447 TOTAL COMPUTER SERVICES 1.299 OTHER SERVICES BSA ADVERTISING INC NA 111 BURSON MARSTELLER NA 145 COOPERS & LYBRN O NA 128 INVESTCONSULT INC NA $158 TE WINN COMPANY NA 120 MISCELLANEOUS (554 PAYEES) NA 4.754 IUTAL OTER SERVICES $5.416 NORTEAF UTILIITES SERVICE COMPANY (Supplies centralized accounting. a:tuinistrative, data processing. engineering. financial. legal, operational, planntag. purchasing and other services) A $18.623 GRMO TOTAL $84.570 27B. 9

w ANNUAL PIPORT OF WATIEAST WCLIAR EERGY COMPMY for the Year Ended December 31,1997 ] OllTSIDE SERVICES EMPLOYED FOR PAYEES GREATER THAN $100,000 PAYEE NAE DESCRIPTION OF SERVICES RE WERED ENGIEERING SERVICES AED Pf G ECT MANAGEMENT SUPPORT FOR COWITION BASED MAINTENANCE DEPARTMrNT ABB CE NUCLEAR POE R COWUSTION EEINEERING RELATED SERVICES BARTLETT NUCLEAR INC DOSIETRY PROCESSING SERVICES CATARACT,INC. ENGIEERING TECmICAL SUPPORT SERVICES CONTINGENCY MANAGEENT ASSOC RRNISH FIRE PROTECTION SERVICES MILLSTONE FACILITY l CONTRACT SOLifrIONS ENGIEERING RESTART ACTIVITIES ASSESSENT COOPERS & LYBRA W LLP ENGIEERING F.ERVICES Willi REGARD TO COMPLIANCE OF ENVIR0 MENTAL LAWS l A m REGS. AT MILLSTONE i CORE CORP SUPPORT MILLSTOE OPERATIONS DUKE ENG & SERVICES INC ENGINEERING SUPPORT FOR TE MILLSTOE DESIGN ENGIEERING GROUP EERCON SERVICES INC ENGIEERING SERVICES BACKLOG REDUCTION AW LICENSING ACTIVITIES EEIEERING PLM MANAGE INC EEINEERING SERVICES TO SUPPORT FIRE PROTECTION PROGRM VALIDATION GENERAL ELECTRIC COMPANY FIRNISH LOW VOLTAGE SWITCHEAR AW TRANSFORMERS GEERAL PHYSICS CORP CONSULT!E SERVICES TD SUPPORT IhuEPEWENT ASSESSMENT OF RESTART ACTIVITIES J GIV00 CONSULTANTS INC ENGINEERING DESIGN BASIS VERIFICATION, LICENSING VALIDATION SLPPORT JANUS MANAGEMENT ASSOCIATES FURNISH CONSULTING SERVICES IN CONNECTION WITH WATCHLIST MATTERS LINC SYSTEMS CORP PROVIDE READINESS REVIEW DEVELOPENT EFFORT LITTLE HARBOR CONSULTANTS INC IEEPEWENT THIRD PARTY OVERSIGHT OF EMPLOYEE SAFETY CONCERNS PROGRAM AT MILLSTONE WM ENGIEERING CORP ENGINEERING SUPPORT FOR RESTART EFFORTS INCLtDING IEEPEWENT REVIEW ONSITE EEINEERING SERVICES RELATED TD OPERATION AW MAINTENANCE P & I CONSULTING LTD COMITHENT REVIEW AW RESOLVE PARSONS POWER 20UP INC CONSULTING SERVICES TO PROVIDE AN I W EPE W ENT CORRECTIVE ACTION VERIFICATION PROGRM (ICAVP) PECO NUCLEAR MANAGEENT AW ENGIEERING CONSULTING SERVICES AT MILLSTONE PERFORMANCE IMPROVEENT INT *L CONSULTING SERVICES FOR CORRECTIVE ACTION BACKLOG MANAGEMENT AW OPTIMIZATION PROGRM PERFORMANCE MANAGEENT CONSULTING SERVICES TO PROVIDE RESTART EFFORTS PROTO POE R CORP EEIEERING SERVICES TO SUPPORT MILLSTONE DESIGN EEINEERING EOUP RATDEON QUALITY PROG lAMS DIV.FIRNISH ENGIEERING SERVICES TO PROVIDE PIPING AW COMPONENT ANALYSIS SARGENT & LUWY. LLC CONSULTING SERVICES TO PROVIDE AN IEEPEWENT CORRECTIVE ACTION VERIFICATION PROGRM (ICAVP) SECORE L L C PROVIDE SCEDULING SERVICES TO MILLSTDE 50llTHERN DEV & INVEST. GROUP EEIEERING SERVICES ASSOCIATED WITH APPEWIX R ISSUES SPEC CONSULTANTS INC SUPPORT NUCLEAR PRODUCTION. QA/QC INSPECTIONS SERVICES AT MILLSTONE STOE & EBSTER CONST C0 INC SITE MAINTENANCE AW JANITORIAL SERVICES TE IWUS GROUP INC PROVIDE SUPPORT CONTROL DOCUMENTATION FOR ICAVP. PROCESS REVIEW TJE INC SHIFT MANAGEENT CONSULTING SERVICES i TUCKER ALM INC ASSIST IN LEGAL PROCEEDINGS CONCERNING MILLSTOE OlfTAGES VIRGINIA POWER MANAGEMENT AW ENGINEERING CONSULTING SERVICES AT MILLSTONE W D ASSOCIATES INC OPERATIONS, PROCESS. REGULATORY LICENSING & ENGINEERING CONSULTING SERVICES FOR MILLSTONE RESTART EFFORTS XCALIBER CONSULTING GROUP REVIEW ISSUES ON MANAGEENT AW SUPERVISORY PRACTICES AT MILLSTONE YANKEE ATOMIC ELICTRIC CD ENGINEERING SERVICES TO SUPPORT IEEPEWENT ASSESSMENT TEAM LIGAL SERVICES CARMODY & TDRRANCE DR FURNISH LEGAL SERVICES ON AN AS REQUESTED BASIS DAY BERRY & HOWARD RRNISH LEGAL SERVICES ON AN AS REQUESTED BASIS GOODWIN PROCTER & HOAR LLP FURNISH LEGAL SERVICES ON AN AS REQUESTED BASIS 27C-

i *. MNUAL REPORT OF NORTEAST WCLEAR EERGY COMPMY d For the Year Ended December 31,1997 J OllTSIDE SERVICES EMPLOYED FOR PAYEES GtEATER THAN $100.000 PAYEE NAME DESCRI410N OF SERVICES REWERED LEGAL SERVICES (CONTINUED) KILLIAN & EPHART FlRNISH LEGAL SERVICES ON M AS REQlESTED BASIS MORGAN LEWIS & BOCKIUS LLP FURNISH LEGAL SERVICES ON AN AS REQUESTED BASIS RALPH G BIRD CONSULTING SERVICES TO SUPPORT LEGAL PROCEEDINGS FOR HILLSTOE OUTAGES UPDIKE KELLY & SPELLACY FLRNISH EGAL SERVICES ON M AS REQUESTED BASIS WINSTON & STRAbu RRNISH LEGAL SERVICES ON AN AS REQUESTED BASIS l SECLRITY SERVICES BURNS INTL SECURITY SERVICES FURNISH SECURITY SERVICES A m EQUIPMENT FOR BASELINE SECURITY SUPPORT EQUIFAX SERVICES INC FURNISH BACKGt0Um INVESTIGATIONS FOR MILLST0E l i TELECOMUNICATIONSERVJCES l AT&T PROVIDE TELEPHOE SERVICES LUCENT TECWOLOGIES PROVIDE TELEPHONE SERVICES SNET PROVIDE TELEPHONE SERVICES TEMPORARY EMPLOYMENT SERVICES ~ MANPOWER,INC. FURNISH TEMPORARY LABOR SERVICES i NUCON FURNISH TEMPORARY LABOR SERVICES WATER TREATMENT SERVICES ECOLOCEM PROVIDE E TER TREATMENT PURIFICATION SERVICES COMPUTER SERVICES ALPIE COMPUTER SYSTEMS CONSULTING SERVICES FOR DISK CONVERSION WORK C W COSTELLO & ASSOCIATES INC PROVIDE PROGl# MING SERVICES AS NEEDED INTERLEAF INC PROVIDE HARDWARE A W SOFT E RE TROUBLESHOOTING PRIDE TECHNOLOGIES INC PROVIDE COMPUTER EQUIPMENT A W SUPPLIES SCIENTECH INC CONSULTING SERVICES: DATA INTERFACE AW OTER SOFTWARE WORK OTHER SERVICES BSA ADVERTISING INC PROVIDE ADVERTISING SERVICES FOR MILLSTONE BURSON MARSTELLER PROVIDE CONSULTING COMMUNICATION SERVICES COOPERS & LYBRA W CONSULTING FINANCIAL SERVICES INVESTCONSULT INC HUMAN RESOURCES CONSULTING AT MILLSTONE TE WINN COMPANY CONSULTING EDIA TRAINING. VIDEO PRODUCTION l 27D-1 l C________________________

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANUY le* For the Year Ended December 31, 1997 o EMPLOYEE PENSIONS AND BENEFITS ACCOUNT 926 INSTRUCTIONS: Provide a listing of each pension plan and benefit program provided by the service company. Such listing should be limited to $25,000 DESCRIPTION AMOUNT (Thousands of Dollars) Pension Plan $6,299 Supplemental Retirement and Savings Plan 3,529 Post Retirement Medical Benefit - FAS 106 2,266 Early Retirement Program (50) Group Life, Long-term Disability, Hospital and Medical Insurance Expenses 6,923 Other Employee Benefits Expenses 12 TOTAL $18,979 y. .. j I 1 1 i l l * .~ l

C. ?" ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 ' GENERAL ADVERTISING EXPENSES ACCOUNT 930.1 INSTRUCTIONS: Provide a listing of the amount included in Account 930.1, " General Advertising Expenses," classifying the items according to the nature of the advertising and as defined in the account definition. If a particular class includes an amount in excess of $3,000 applicable to a single payee, show separately the name of the payee and the aggregate amount applicable thereto. DESCRIPTION NAME OF PAYEE AMOUNT 1 (Thousands of Dollars) TOTAL J 1 I i 29-L___________________________

l s, ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 d J MISCELLANEOUS GENERAL EXPENSES ACCOUNT 970.2 INSTRUCTIONS: Provide a listing of the amount included in Account 930.2, " Miscellaneous General Expenses," classifying such expenses according to their nature. Payments and expenses permitted by Sections 321(b) (2) of the Federal Election Campaign Act, as amended by Public Law 94-283 in 1976 (2 U.S.C. 5441 (b) (2) ) shall be separately classified. DESCRIPTION AMOUNT (Thousands of Dollars) i Services billed from Northeast Utilities Service $946 Company (an associate company) Other miscellaneous expenses 1 TOTAL $947 h l l-l- l* l-I E

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 RENTS INSTRUCTIONS: Provide a listing of the amount included in Account 931, " Rents," classifying such expenses by major groupings of property, as defined in the account definition of the Uniform System of Accounts. TYPE OF PROPERTY AMOUNT (Thousands of Dollars) Buildings / office space $132 Computtr/ office equipment 179 Vehicles 1,203 Simulator 5,284 Services billed from Northeast Utilities Service Company (an associate company) 4,456 TOTAL $11,254

l J l ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY J For the Year Ended December 31, 1997 TAXES OTHER THAN INCOME TAXES l ACCOUNT 408 l 1 INSTRUCTIONS. Provide an analysis of Account 408, " Taxes Other Than l Income Taxes." Separate the analysis into two groups: (1)Other than U.S. Government taxes, and (2) U.S. Government taxes. Specify each of the various kinds of taxes and show the amounts thereof. Provide a subtotal for each class of tax. KIND OF TAX AMOUNT l i (Thousands of Dollars) l l (1) Other Than U.S. Government Taxes: Connecticut Unemployment $771 Connecticut Insurance Premium Excise Tax 130 Massachusetts Unemployment 8 j Massachusetts Universal Health Tax 1 i Local property 1,226 l Connecticut Sales Tax 6 ) Connecticut Corporate Business Tax (408) Sub-Total 1,734 i (2) U.S. Government Taxes: i l Federal Insurance Contribution Act 7,323 Medicare Tax 2,088 Federal Unemployment 94 Sub-Total 9,505 TOTAL 11,239 I. - N l L______ _

e ANNUAL REPORT OF NDRIMEAST NUCLEAR ENERGY CXNPANY For the Year Ended December 31, 1997 g Dt2mTICNS ACCDUNT 426.1 INSTRUCTIONS: Provide a listing of the amount included in Account 426.1, " Donations," classifying such expenses by irr.:rpose. 'the aggregate nmber and amount of all items of less than $3,0c; may be shown in lieu of details. NAME OF RECIPIENT PURPOSE OF DC2&TICE MOUNr ('rt _. nan of Dollars) Services billed from Northeast Utilities $19 Service Conpany (an associate conpany) 'Ibe Salvation Army 5 TOTAL $24 O 1* e -.- l m O I 1 l l I c_

e 1 o E ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY h For the Year Ended December 31, 1997 ~ 1 OTHER DEDUCTIONS l ACCOUNT 426.5 INSTRUCTIONS: Provide a listing of the amount included in Account 426.5, "Other Deductions," classifying such expenses according to their nature. DESCRIPTION NAME OF PAYEE AMOUNT (Thousands j of Dollars) Executive incentive i compensation plan various Officers $862 l l Services billed from Northeast j Utilities Service company l (an associate company) 1,071 ~ Civil Penalties United States Nuclear Regulatory Commission 2,155 1 Communication services Miscellaneous (46 payees) 32 Miscellaneous (2 items) 1 l j TOTAL $4,121 l l 1 i i i i .O l l l e 9

i. _ - _ _ - _ _ - - - _ -

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1997 5 I SCHEDULE XVIII NOTES TO STATEMENTS OF INCOME INSTRUCTIONS: The space below is provided for important notes regarding the statement of income or any account thereof. Furnish particulars as to any significant increases in services rendered or expenses incurred during the year. Notes relating to l financial statements shown elsewhere in this report may be indicat.cd here by reference, l SO3 Notes to Financial Statements on pages 19 through 19E. t I >~ t I i i l 9

Annual Report of Northeast Nuclear Energy Company Organization Chart (As of December 31,1997) President and ChiefExecutive Officer -Nuclear .7 Senior Vice President and Chief Nuclear Officer - Millstone l I Recovery Officer Recovery Officer Vice President Millstone Unit #1 Millstone Unit #2 Millstone Unit #3 1 ~ e k__.__._______ i

s V~ t NORTHEAST NUCLEAR ENERGY COMPANY METHODS OF ALLOCATION q For the year ended December 31, 1997 i The costs associated with the three Millstone units are billed directly or allocated using one of three methods. The allocation methods are as follows: 1. One-third to each units 2. Number of employees; 3. Net capacity of each unit. If Millstone Unit 3 is not part of the allocation, then the allocated costs to Millstone 1 and 2 are on the basis of one-half to each of the two units.

gs

,~ . e' 'T e k__ ' _._______..2____..________._________________.

- _ _ _ _ _ - - _ _ - - _ _ _ _ - _ - _ _ _ _ _ _ - - _ _ - _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ -. _.. = - _ _ _ _ _ _ _. _ _ _ _ _ _ _. - _ _ _ _ _ _ _ _ _ _ _ _ _ c= ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED The following annual statement was supplied to each associate compaily in support of the amount of compensation for use of capital billed during 1997: In accordance with Instruction 01-12 of the Securities and Exchange Commission's Un! form System of Accounts for Mutual Service Companies and Subsidiary Service Companies, Northeast Nuclear Energy Company submits the following information on the billing of interest on borrowed funds and a return on equity capital to associated companies for the year 1997: (A) Amount of compensation for use of capital billed to (See Note) (B) The basis for billing of interest and return on equity capital to the associated companies is based on the percentage ownership of the individual units. NOTE: For the associate companies and amounts, see " Analysis of Billing - Associate Companies" on page 21. s* o7 i i i l e' e d_______________________._______________--___--_-_1----------__

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY SIGNATURE CLAUSE 1 Pursuant to the requirements of the Public Utility Holding Company Act of 1935 and the rules and regulations of the Securities and Exchange Commission issued thereunder, the undersigned company has duty caused this report to be signed on i its behalf by the undersigned officer thereunto duly authorized. l l NORTHEAST NUCLEAR ENERGY COMPANY (Name of Reporting Company) o" By:/s/ John J. Roman (Signature of Signing Officer) ~ D John J. Roman - Vice President and Controller (Printed Name and Title of Signing Officer) l l Date: April 23,1998 l 0 t

Form U-13-60 i ~ Mutual and Subsidiary Service Companies Revised February 7,1980 ANNUAL REPORT FOR THE PERIOD Beginning Januarv 1,1997 and ending December 31,1997 TO THE U.S. SECURITIES AND EXCHANGE COMMISSION OF North Atlantic Enerav Service Corporation 0 A Subsidiary ___ Service Company i Date of Incorporation: April 1,1992 State or Sovereign Power under which incorporated or Organized: New Hampshire Location of Principal Executive Offices of Reporting Company: Route 1 Lafayette Rd., Seabrook, NH,03874 Name, title and addresc of officer to whom correspondence concerning this report should be addressed: John J. Roman V.P. & Controller P.O. Box 270 Hartford, Ct. 06141-0270 Name of Principal Helding Company Whose Subsidiaries are served by Reporting Company: Northeast Utilities SEC 1916 66 82) 9

5 ~ f INSTRUCTIONS FOR USE OF FORM U-13-60

1. Time of Filina.

Rule 94 provides that on or before the first day of May in each calendar year, each mutual service company and each subsidiary service company as to which the Commission shall have made a favorable finding pursuant to Rule 88, and every service company whose application for approval or declaration pursuant to Rule 88 is pending shall file with the Commission an annual report on Turm U-13-60 and in accordance with the Instructions for that form.

2. Number of Conies. Each annual report shall be filed in duplicate. The company should prepare and retain at least one extra copy for itself in case correspondence with reference to the report becomes ncessary.

3. Period Covered by Reoort. The first report filed by any company shall cover the period from the date the Uniform System of Accounts was required to be made effective as to that company under Rules 82 and 93 to the end of that calendar year. Subsequent reports should cover a calendar year.

4. Report Format. Reports shall be submitted on the forms prepared by the Commission. Iftb space provided on any sheet of such form is inadequate, additional sheets may be inserted of the same size as a sheet of the form or folded to such size.

5. Monev Amounts Disolaved. All money amounts required to be shown in financ:al statements may be expressed in whole dollars, in thousands of dollars or in hundred thousands of dollars, as appropriate and subject to provisions of Regulation S-X ('210.3-01(b)).

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6. Qgficits Disolaved. Deficits and other like entries shall be indicated by the use of either brackets or a parenthesis with corresponding reference in footnotes. (Regulation S-X. '210.3-01(c))

7. Maior Amendments or Corrections. Any company desiring to amend or correct a major omission or error in a report after it has been filed with the Commission shall submit an amended report including or4y those pages, schedules, and entries that are to be amended or corrected. A cover letter shall 0 Wbmittsrequesting the Commission to incorporate the amended report changes and shall be signed by a duly authorized officer of the company.

8. Definitions. Definitions contained in Instruction 01-8 to the Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies, Public Utility Holding Company Act of 1935, as amended February 2,1979 shall be applicable to words or terms used specifically within I

this Form U-13-60.

9. Organization Chart. The service company shall submit with each annual report a copy of its current organization chart.

10. Methods of Allocation. The service company shall submit with each annual report a listing of the currently effective methods of allocation being used by the service company and on file with the Securities and Exchange Commission pursuant to the Public Utility Holding Company Act of 1935.

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11. Annual Statement of Compensation for Use of Caoital Billed. The service company shall submit with each annual report a copy of the annual statement supolied to each associate company in support of the amount of compensation for use of capital billed during the calendar year.

l 1 1 l I i

LISTING OF SCHEDULES AND ANALYSIS OF ACCOUNTS Schedule or Page Description of Schedules and Accounts Acct. No. No. Comparative Balance Sheet Schedule 1 4-5 i l l Service Company Property Schedule 11 6-7 Accumulated Provision for Depreciation and Amortization of Service Company Property Schedule lli 8 investments Schedule IV 9 Accounts Receivable from Associate Companies Schedule V 10 Fuel Stock Expenses Undistributed Schedule VI 11 Stores Expense Undistributed Schedule Vil 12 Miscellaneous Current and Accrued Assets Schedule Vill 13 Miscellaneous Deferred Debits Schedule IX 14 Research, Development, or Demonstration Expenditures Schedule X 15 Proprietary Capital Schedule XI 16 Long Term Debt Schedule XII 17 Current and Accrued Liabilities Schedule XIll 18 Notes to Financial Statements Schedule XIV 19 Comparative income Statement Schedule XV 20 Analysis of Billing - Associate Companies Account 457 21 Analysis of Billing - Non-Associate Companies Account 458 22 Analysis of Charges for Service - Associate and Non-Associate Companies Schedule XVI 23 Schedule of Expense by Department or Service Function Schedule XVil 24 - 25 Departmental Analysis of Salaries Account 920 26 Outside Services Employed Account 923 27 2-

C Schedule or Page Description of Schedules and Accounts (cont.) Acet. No. A Employee Pensions and Benefits Account 926 28 General Advertising Expenses Account 930.1 29 Miscellaneous General Expenses Account 930.2 30 Rents Account 931 31 I Taxes Other Than income Taxes Account 408 '32 Donations Account 426.1 33 i Other Deductions Account 426.5 34 Notes to Statement of income Schedule XVill 35 l Description of Reports or Statements Organization Chart - 36 Methods of Allocation 37 Annual Statement of Compensation for Use of Capital Billed 38 1~. Signature Page 39 l l l o- .3 j

l ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION SCHEDULE I - COMPARATIVE BALANCE SHEET Give balance sheet of the Company as of December 31 of the current and prior year. l ACCT ASSETS AND oTHER DEBITS AS or DECEMBER 31 l 1 1997 1996 SERVICE COMPANY PROPERTY trhou.na or collar ) t ( 101 Service company property (Schedule 11) 0 0 107 Construction work in progress (Schedule ll) 0 0 Total Service Company Property 0 0 108 Less accumulated provision for depreciation and amortization of service company property (Schedule Ill) 0 $ 0 l Net Service Company Property 0 $ 0 INVESTMENTS 123 Investments in associate companies (Schedule IV) 0 0 124 Other investments (Schedule IV) 680 0 l Total Investments 680 0 CURRENT AND ACCRUED ASSETS 131 Cash 1,675 725 134 Special deposits 0 0 135 Working funds 0 0 136 Temporary cash investments (Schedule IV) 15 14 141 Notes receivable 0 0 l 143 Accounts receivable 17,475 51,111 l 144 Accumulated provision of uncollectible accounts 0 0 [ 146 Accounts receivable from associate companies (Schedule V) 54 523 152 Fuel stock expenses undistributed (Schedule VI) 0 0 154 Materials and supplies 0 0 l 163 Stores expense undistributed (Schedule Vil) (476) 298 i 165 Prepayments 2,593 3,024 l 174 Miscellaneous current and accrued assets (Schedule Vill) 0 0 Total Current and Accrued Assets 21,336 55,695 l DEFERRED DEBITS 181 Unamortized Debt Expense 0 $ 0 184 Clearing accounts 0 0 186 Miscellaneous deferred debits (Schedule IX) 24,328 20,348 188 Research, development, or demonstration expenditures (Schedule X) 0 0 190 Accumulated deferred income taxes 0 313 Total Deferred Debits 24,328 $ 20,661 TOTAL ASSETS AND OTHER DEBITS 46J44_ $ 76,356 E____________.___..___...__.._____

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION 3 SCHEDULE I - COMPARATIVE BALANCE SHEET Give balance sheet of the Company as of December 31 of the current and prior year. I Acc7 LIABILITIES AND PROPRIETARY CAPITAL AS oF DECEMBER 31 l 1997 1996 PROPRIETARY CAPITAL <rnou..nd. os cott.r.) 201 Common stock issued (Schedule XI) 1 1 l 211 Miscellaneous paid-in-capital (Schedule XI) 9 9 215 Appropriated retained earnings (Schedule XI) 0 0 216 Unappropriated retained earnings (Schedule XI) 2 1 Total Proprietary Capital 12 11 LONG-TERM DEBT 223 Advances from associate companies (ScheduleXII) 0 0 224 Other long-term debt (Schedule XII) 0 0 225 Unamortized premium on long-term debt 0 0 226 Unamortized discount on long-term debt 0 0 Total Long-Term Debt S 0 0 CURRENT AND ACCRUED LIABILITIES 231 Notes payable 0 0 232 Accounts payable .10,352 41,425 ~ 233 Notes payable to associate companies (Schedule Xill) 0 0 234 Accounts payable to associate companies (Schedule Xill) 3,807 1,994 3 c. 236 Taxes accrued 71 376 237 Interest accrued 0 0 238 Dividends declared 0 0 241 Tax collections payable 0 (56) 242 Miscellaneous current and accrued liabilities (Schedulo Xill) 27,912 29,483 . Total Current and Accrued Liabilities S 42,142 73,222 DEFERRED CREDITS 253 Other deferred credits 4,081 3,123 255 Accumulated deferred investment tax credits 0 0 Total Deferred Credits 4,081 3,123 282 ACCUMULATED DEFERRED INCOME TAXES 109 0 TOTAL LIABILITIES AND PROPRIETARY CAPITAL 46,344 $ 76,356 l i

ANNUAL REPORT OF NORTH ATI. ANTIC ENERGY SERVICE CORPORATION F ~ For the Year Ended December 31,1997 SCHEDULE II - SERVICE COMPANY PROPERTY BALANCE AT RETIREMENTS BALANCE BEGINNING OR CTHER AT CLOSE ACCT DESCRIPTION OF YEA ADDITION SALES CHANGES (1 CF YEAR (Thousands of Dollars) SERVICE COMPANY PROPERTY 301 ORGANIZATION 303 MISCELLANEOUS INTANGIBLE PLANT 304 LAND AND LAND RIGHTS 305 STRUCTURES AND IMPROVEMENTS 306 LEASEHOLD IMPROVEMENTS 307 EQUIPMENT (2) NONE 30t' OFFICE FURNITURE AND EQUIPMENT 30 AUTOMOBILES, OTHER VEHlCLES AND RELATED GARAGE EQUIPMENT 310 AIRCRAFI AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY (3) (1) PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL: NONE P. '.

1 l. SCHEDULE 11 - CONTINUED j (2) SUBACCOUNTS ARE REQUIRED FOR EACH CLASS OF EQUIPMENT OWNED. THE SERVICE COMPANY SHALL PROVIDE A LISTING BY SUBACCOUNT OF EQUIPMENT ADDITIONS DURING THE YEAR AND THE BALANCE AT THE CLOSE OF THE YEAR: BALANCE AT CLOSE SUBACCOUNT DESCRIPTION ADDITIONS OF YEAR (Thousands of Dollars) NONE O e 1 (3) DESCRIBE OTHER SERVICE COMPANY PROPERTY: i NONE _7_

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION l For the Year Ended December 31,1997 [ SCHEDULE 111 ACCUMULATED PROVISION FOR DEPRECIATION AND AMORTIZATION OF SERVICE COMPANY PROPERTY ADDITIONS OTHER BALANCE AT CHARGED CHANGES BALANCE BEGINNING TO ADD / AT CLOSE DESCRIPTION OF YEAR ACCT 403 RETIREMENTS (DEDUCT)(1) 0F YEAR (Thousands of Dollars) Account 301 ORGANIZATION 303 MISCELLANEOUS INTANGIBLE PMNT 304 LAND AND LAND RIGHTS 305 STRUCTURES AND IMPROVEMENTS 306 LEASEHOLD IMPROVEMENTS 307 EQUIPMENT NONE 308 OFFICE FURNITURE AND FlXTURES 309 AUTOMOBILES, OTHER VEHICLES AND RELATED GARAGE EQUIPMENT 310 AIRCRAFT AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY AMORTIZATION OF SERVICE COMPANY PROPERTY i (1) PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL: NONE w_________

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 i SCHEDULE IV - INVESTMENTS INSTRUCTIONS: Complete the following schedule concerning investments. - Under Account 124, "Other Investments," state each investment separately, with description, including the name of issuing company, number of shares or principal amount, etc. Under Account 136, " Temporary Cash Investments," list each investment separately. l BALANCE AT BALANCE AT l BEGINNING CLOSE l DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) l ACCOUNT 123 - INVESTMENT IN ASSOCIATE COMPANIES 0$ 0 ~ ACCOUNT 124 - OTHER INVESTMENTS Reliance Assurance - Workmen's Compensation Bond 0 680 l ACCOUNT 136 - TEMPORARY CASH INVESTMENTS l Fidelity Institute Tax Exempt Cash Portfolio 11 12 l Citizens Bank Certificate of Deposit 3 3 l TOTAL 14 $ 695 l _____.____m__.

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 SCHEDULE V - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES INSTRUCTIONS: Complete the following schedule listing accounts receivable from each associate company. Where the service company has provided accommoda-tion or convenience payments for associate companies, a separate listing of total payments for each associate company by subaccount should be i provided. BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) ACCOUNT 146 - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES Northeast Utilities Service Company 364 $ 10 Northeast Nuclear Energy Company 155 41 North Atlantic Energy Corporation 3 2 Public Service Company of New Hampshire 1 1 TOTAL 523,$ 54 ANALYSIS OF CONVENIENCE OR ACCOMMODATION PAYMENTS: NONE

l l-l l, ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION ) For the Year Ended December 31,1997 SCHEDULE VI - FUEL STOCK EXPENSES UNDISTRIBUTED-i INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to fuel stock expenses during the year and indicate amount attributable to each L associate company. Under the section headed " Summary" listed below, give j l an overall report of the fuel functions performed by the service

company, i

l DESCRIPTION LABOR EXPENSES TOTAL l l (Thousands of Dollars) l ACCOUNT 152 - FUEL STOCK EXPENSES NONE UNDISTRIBUTED I 1 i 1 l l L..

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 SCHEDULE Vil - STORES EXPENSE UNDISTRIBUTED l l INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to stores expense during the year and indicate amount attributable to each associate company. l DESCRIPTION LABOR EXPENSES TOTAL l (Thousands of Dollars) ACCOUNT 163 - STORES EXPENSE UNDISTRIBUTED Balance at prior year end 286 $ 12 $ 298 Amount incurred during the year 2,532 315 2,947 The above stores expenses are billed back to each of the companies listed below: Associate Companies: The connecticut Light and Power Company (136) (15) (151) North Atlantic Energy Corporation (1,205) (134) (1,339) Non-Associate Companies (2,008) (223) (2,231) TOTAL (431) $ (45) $ (476)

i ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION j For the Year Ended December 31,1997 ~ SCHEDULE Vill MISCELt.ANEOU.c UURRENT AND ACCRUED ASSETS INSTRUCTIONS: Provide detail of items in this account. Items less than $10,000 may be grouped, showing the number of items in each groim. BALANCE AT BAIANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) ACCOUNT 174 - MISCELLANEOUS CURRENT NONE AND ACCRUED ASSETS j

iQ e ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION [ For the Year Ended December 31,1997 i SCHEDULE IX j MISCELLANEOUS DEFERRED DEBITS INSTRUCTIONS: Provide detail of items in this account. Items less than f.0,000 may be grouped, showing the number of items in each group. BAIANCE AT BAIANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) ACCOUNT 186 - MISCELLANEOUS DEFERRED DEBITS Noncurrent receivable from Joint Owner funding 19,075 23,189 l Westinghouse Reactor Coolant Pump Settlement 987 682 ) North Atlantic Energy Service Corporation Organization Cost 19 0 i Accounting Treatment Change for Payroll 358 328 Miscellaneous (>100 items) (251) 88 i. Pr liminary Engineering for: Security system replacement 10 0 i Administration building addition 11 0 Service water improvements 59 0 1 Integrated reactor vessel head 40 0 i Steam generator blowdown 30 30 Miscellaneous (4 items 1996,4 items 1997) 10 11 TOTAL 20,348 24,328 i L I L'

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION W For the Year Ended Decernbar 31,1997 .I SCHEDULE X RESEARCH, DEVELOPMENT, OR DEMONSTRATION EXPENDITURES INSTRUCTIONS: Provide a description of each material research, development, or demonstration project which incurred costs by the service corporation during the year. l DESCRIPTION AMOUNT l (Thousands of Dollars) ACCOUNT 188 - RESEARCH, DEVELOPMENT OR NONE DEMONSTRATION EXPENDITURES 'eo l I i I ~ -. __________________.._____...m_.

i i. ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 SCHEDULE XI PROPRIETARY CAPITAL NUMBER OF PAR OR STATED ACCOUNT SHARES VALUE OUTSTANDING CLOSE OF PERIOD NUMBER CLASS OF STOCK AUTHORIZED PER SHARE NO. OF SHARES TOTAL AMOUNT (Thousands of Dollars) 201 COMMON STOCK ISSUED 1,000 $ 1.00 1,000 1 l j l l INSTRUCTIONS: Classify amounts in each account with brief explanation, disclosing the l general nature of transactions which give rise to the reported amounts. l l l DESCRIPTION AMOUNT l (Thousands of Dollars) ACCOUNT 211 - MISCELLANEOUS PAID-IN-CAPITAL 9 l 4 l-ACCOUNT 215 - APPROPRIATED RETAINED EARNINGS 0 i TOTAL 9 i INSTRUCTIONS: Give particulars concerning net income or (loss) during the year, distinguishing between compensation for the use of capite.1 owed or net loss remaining from l servicing nonassociated per the GeneralInstructions of the Uniform Systems of Accounts. For dividends paid during the year in cash or otherwise, provide rate i percentage, amount of dividend, date declared and date paid. BALANCE AT NET INCOME BALANCE BEGINNING OR DIVIDENDS AT CLOSE DESCRIPTION OF YEAR (LOSS) PAID OF YEAR (Thousands of Dollars) ACCOUNT 216-UNAPPROPRIATED RETAINED EARNINGS 1$ 1$ 0 2 - i.

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O a 4 o A G rh2i N R E E t I A N N C oic2a E N E O O E ht ig C f N Y N ywnl A N N I C ub G F l I 7 e L V 9 amoo t E O A R 9 r o cf B B E ar co 1 S pf As D e s E 1 sio m. r e T Z Y 3 r N I r nFeg U R G T d e a .t n O O R b I E B e I t pn M H ,i E nd m X D ommon A T r N U e E c E pouia A t C e L M ecl at o s T zt r I D U R eci S et nu E E N d D E ban ao R T T e E T i o d c i gd E A r T R A d H l ot L n C G us aon N gr a I T E osiod A S N h al b O sf oye r Y H a o z ni T L s T e eso ar E I f R Y o T F R i e p O e n s h A O U amemt D T N .h u A paio t r a M mNec r F o t O F ot.sr n c ndo u it T eu ndo G N S S E R o a em I O E t I a O L I icsr a R T P ccs c B T A T E E oaaf e O A S s l oh G CI B M O E nc F I R s t e O L D e e L a phmd B OS S S n S A mot aa M S O RE S M U on e A r n R F FI A

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R N r e O S A M E f T C T T N ssnh a E P O B A eeu C M R R E t r cc et nn nd s N E D G aawie A O F vr N vvo oe VC S HM O ddhrt DE E T R L A a s pin R AT C OE R O A N - T S T I A E I 3C 4 - H N D 2 V 2 G T O E 2O D 2 N O R S A T I T C T C N L N O L S F A L U O U A U A R O T O T T E O O M C C T T S A C C N I N A A k' l L

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 SCHEDULE Xill - CURRENT AND ACCRUED LIABILITIES INSTRUCTIONS: Provide balance of notes and accounts payable to each associate company. Give description and amount of miscellaneous current and accrued liabilities. Items less than $10,000 may be grouped, showing the number of items in each group. BAIANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) ACCOUNT 233 - NOTES PAYABLE TO ASSOCIATE COMPANIES NONE ACCOUNT 234 - ACCOUNTS PAYABLE TO ASSOCIATE COMPANIES Northeast Utilities Service Company 1,588 $ 2,022 Northeast Nuclear Electric Company 0 6 Public Service Company of New Hampshire 173 1,774 Tha Connecticut Light & Power Company 233 1 Miscellaneous (1 item) 0 4 TOTAL 1,994 $ 3,807 ACCOUNT 242 - MISCELLANEOUS CURRENT AND ACCRUED LIABILITIES Accrued payroll and other employee payables 6,714 $ 3,751 Accrued Pension Cost 17,028 20,157 On-hand operations funding from associate companies: North Atlantic Energy Corporation 2,066 1,446 The Connecticut Light & Power Company 233 163 On-hand operations funding from non-associate companies 3,442 2,395 TOTAL 29,483 $ 27,912

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O-01 e a ANNUAL REPORT OF NORTI4 ATLANTIC ENERGY SERVICE CORPORATION FOR THE YEAR ENDED DECEMBER 31.1997 i SCHEDULE XIV ] i NOTES TO FINANCIAL STATEMENTS j l.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES General: North Atlantic Energy Service Corporation (the Company or NAESCO) is a wholly owned subsidiary of Northeast Utilities (NU). De Connecticut Light and Power Company (CL&P), Public ~ Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and Holyoke Water Power Company (HWP) are operating subsidiaries comprising the Northeast Utilities syster.dthe NU system) and are wholly owned by NU. 1 The NU system furnishes retail electric service in Connecticut, New Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP. NAEC sells all ofits capacity to PSNH. In addition to its retail service, the NU system furnishes finn and other wholesale electric services to various municipalities and other utilities. De NU system serves about 30 percent of New England's electric needs and is one of I the 25 largest electric utility systems in the country as measured by revenues. The Company acts as agent in operating the Seabrook Nuclear Power Project (the Project or Seabrook) pursuant to the Seabrook Project Managing Agent Operating Agreement (the Managing Agent Agreement) sad the Seabrook Project Disbursing Agent Agreement (the Disbursing Agent Agreement). The Project is owned jointly by NAEC and CL&P, both wholly owned subsidiaries of NU and nine nonaffiliated New England utility companies as tenants in common with undivided interests (the Seabrook Joint Owners). The cost of the Project is recorded on the books of the Seabrook Joint Owners based upon their proportionate ownership share of the Project. The Company does not have an ownership interest in the Project. De Company is only liable for payroll related expenditures and liabilities. The Seabrook Joint Owners are severally responsible for their respective share of the costs of operating and maintaining the Project. . Ownership percentages of the Project as of December 31,1997 were as follows: OWNERSHIP PARTICIPANTS SHARE Can31 Electric Company 3.52317 % De Connecticut Light and Power Company 4.05985 Great Bay Power Corporation 12.13240 Hudson Light & Power Department .07737 Massachusetts Municipal Wholesale Electric Company 11.59340 Mont-ap Electric Company 2.89989 New England Power Company 9.95766 New Hampshire Electric Cooperative, Inc. 2.17391 North Atlantic Energy Corporation 35.98201 Taunton Munic pal Lighting Plant .10034 The United Illuminating Company 17.50000 SM% 19 l*. J

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1 ANNUAL REPORT OF N6RTH ATLAP' TIC ENERGY SERVICE CORPORATION FOR THE YEAR ENDED DECEMBER 31.1997 ] SCHEDULE XIV NOTES TO FINANCIAL STATEMENTS Other wholly owned subsidiaries of NU provide support services to the Company. Nonheast Utilities Service Company (NUSCO) provides censin administrative suppon to the Company, pursuant to the j Service Agreement between NUSCO and NAESCO acting as agent for the Seabrook Joint Owners, as amended, and to other NU system' companies. Billings from NUSCO recorded by the Company approximated $9,405,000 and $8,937,000 in 1997 and 1996, respectively. PSNH provides cenain services to the Company pursuant to the Service Agreement between PSNH and NAESCO acting as agent for the i Seabrook Joint Owners, as amended. Billings from PSNH recorded by the Company were approximately $971,000 and $369,000 in 1997 and 1996, respectively. Yankee Atomic Electric Company (YAEC) provides services to the Company pursuant to the Nuclear ~ Support Services Agreement between YAEC and NAESCO acting as agent for the Seabrook Joint Owners, as amended. Several Seabrook Joint Owners, or their affiliates, own interests in YAEC as follows: ) Qmig Ownershio Interest The Connecticut Light & Power Company 24.5 % Montaup Electric Company 4.5 j i-New England Power Company 30.0 l Public Service Company ofNew Hampshire 7.0 Billings from YAEC recorded by the Company approximated $7,989,000 and $5,029,000 in 1997 and 1996, respectively. Subsequent to year-end 1997, YAEC's Nuclear Services Division was merged with Duke Engineering Services who is performing similar services for NAESCO. All transactions among affiliated companies, and between YAEC and the Company, re on a recovery of cost Lasis which may include amounts representing a return on equity, and are subject to approval of various federal and state regulatory agencies. Method of Accounting: He accompanying financial statements were prepared in accordance with the Uniform System of Accounts for Mutual and Subsidiary Service Companies, promulgated pursuant to the Public Utility Holding Company Act of 1935, as modified (1935 Act). This system of accounts follows, with modifications, the Federal Energy Regulatory Commission's (the FERC) Uniform System of Accounts and the Managing Agent Agreement, ne financial statements reflect expenses associated with managing, operating, and maintaining the Project, excluding decommissioning costs, propeny taxes, amortization of nuclear fuel, reserves, and book depreciation. Pursuant to the Managing Agent Agreement, NAESCO does not earn a retum on capital and therefore, revenues represent the sum of the Company's operating expenses. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reponed amounts of revenues and expenses during the repor ing period. Actual results could differ from those estimates. 19A

^ C ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION = FOR THE YEAR ENDED DECEMBER 31.1997 SCHEDULE XIV NOTES TO FINANCI AL STATEMENTS Public Utility Regulation: NU is registered with the Securities and Exchange Commission as a holding company under the 1935 Act, and it and its subsidiaries, including the Company, are subject to the i provisions of the 1935 Act. The Company is a registered utility company in the State of New Hampshire and is subject to appropriate regulation by the New Hampshire Public Utilities Commission (NHPUC). The Seabrook Joint Owners, whom the Company represents as agent, are subject to further regulation by the FERC. Therefore, the Company follows the accounting policies prescribed by the FERC. 2. PENSION AND POSTRETIREMENT BENEFITS Pensions: Employees of NAESCO are covered by the NU system's uniform noncontributory-defined benefit plan covering all ofits regular employees. Benefits are based on years of service and employees' highest compensation during five consecutive years of employment. The Company's allocated ponion of the NU system's pension cost for 1997 and 1996, part of which was capitalized and billed as utility plant, approximated $3,129,000 and $3,638,000, respectively. Currently, the NU system funds annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds. The components of net pension cost for the Company (in thousands) are: For the Years Ended December 31, 1997 1996 Service cost 3,512 5 3,749 Interest cost 4,067 3,567 Retum on plan assets (9,947) (6,708) Net amonization 5.497 3.030 Net Pension cost 3.129 $ 3.638 19B

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION FOR THE YEAR ENDED DECEMBER 31.1997 SCHEDULE XIV NOTES TO FINANCIAL STATEMENTS For calculating pension cost, the following actuarial assumptions were used: For the Years Ended December 31, 1997 1996 Discount rate 7.75 % 7.50% Expected long-term rate ofreturn 9.25 % 8.75 % Compensation / progression rate 4.75 % 4.75 % The following table represents the plan's funded status for the Company at December 31 (in thousands): The following actuarial assumptions were used in calculating the Company plan's year end funded status: 1997 1996 Accumulated benefit obligation, including vested benefits at December 31,1997 and 1996 of $27,259,000 and $23,047,0000, respectively $ 35.399 129.877 Projected benefit obligation (PBO) $ 59,416 $ 52,049 Less: Market value of plan assets 57.346 48.656 PBO in excess ofmarket value (2,020) (3,393) Unrecognized transition amount 756 819 Unrecognized p:ior service costs 5,766 6,146 Unrecognized net gain (24.659) (20.600) Accrued pension liability ELO_J 57) $(17.028) The following actuarial assumptions were used in calculating the Company plan's year end funded status: 1997 1996 Discount rate 7.25 % 7.75 % Compensation / progression rate 4.25 % 4.75 % fostretirement Benefits: The Company provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees leaving the Company who are otherwise eligible to retire and have met specified service requirements. The expected cost of postretirement benefits, primarily health and life insurance benefits are charged to expense during the years that eligible employees render service. For current employees and certain retirees, the total postretirement benefit is limited to two times the 1993 per-retiree health care costs. The postretirement benefit obligation has been calculated based on this 19C

) ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION FOR THE YEAR ENDED D_ECEMBER 31.1997 SCHEDULE XIV NOTES TO FINANCIAL STATEMENTS assumption. Actuarially determined total SFAS 106 benefits, part of which were capitalized and billed as utility plant, approximated $674,000 in 1997 and $1,036,000 in 1996. The components of health care and life insurance costs for the years ended December 31 (in thousands) are: 1997 1996 l Service cost $ 475 $ 588 Interest cost 531 561 Return on plan assets (1,051) (500) Net amortization 719 387 Net health care and life insurance cost S 674 $1.036 I The following actuarial assumptions were used in calculating SFAS 106 benefit costs: 1997 1996 Discount Rate 7.75 % 7.50 % Long Term Rate of Return - Health Assets, net of tax 6.00 % 5.25 % Long Term Rate of Return-Life Assets 9.25 % 8.75 % The Company funds its postretirement benefit costs through investments in externsi trusts. The trust assets are invested primarily in equity securities and bonds. l The following table represents the plan's funded status at December 31 (in thousands): 19_97 1996 9 Accumulated postretirement benefit obligation of: Retirees $2,885 $2,836 Active employees fully eligible to retire 26 28 Active employees not eligible to retire 4.688 4.788 l-l Total accumulated postretirement benefit obligation 7,599 7,652 Market value of plan assets 6.447 _ 5.143 l Accumulated postretirement benefit obligation in l excess ofplan assets (1,152) (2,509) l Unrecognized transition amount 2,367 2,525 Unrecognized net (gain) loss (1.116) 233 Prepaid postretirement benefit liability $ 92 $ 249 l l l 4 e 19D I ~ _

ANNUAL REPORT OF NORTH tTL. ANTIC ENERGY SERVICE CORPORATION FOR THE YEAR ENDED DECEMBER 31.1997 SCHEDULE XIV NOTES TO FINANCI AL STATEMENTS The following actuarial assumptions were used in calculating the plan's year end funded status: 1997 1996 Discount Rate 7.25 % 7.75 % Health Care Cost Trend Rate (a) 5.76 % 7.23 % (a) The per capita cost ofcovered health care benefits was assumed to decrease to 4.4 percent by 2001. The effect ofincreasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31,1997 by $322,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $42,000. The trust holding the plan assets is subject to federal income taxes at a 39.6-percent tax rate. 3. LEASES The Company, on behalf of the Seabrook Joint Owners, has entered into operating lease agreements for cenain data processing equipment, oflice equipment, vehicles and offsite facilities. The Company does not enter into c pital leases. Operating lease costs charged to expense approximated $1,498,000 and $1,392,000 in 1997 and 1996, respectively. The provisions of these lease agreements generally provide for renewal options. He Company has no noncancellable leases. 4. FINANCING Each of the Seabrook Joint Owners is responsible for financing its cost of participation in the Project in proportion to its respective ownership share. Such financing is provided to the Project in advance of such costs being incurred. The Company, therefore, has no long-term or short-tenn debt obligations. 5. OTHERINVESTMENTS In order to be self-insured for basic worker's compensation coverage in the State of New Hampshire, financial assurance is required. Funds have been set aside in an interest bearing collateral account for such purpose. He balance at December 31,1997 was approximately $680,000. 19E

k. !o ~ ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATIO,M l I t FOR THE YEAR ENDED DECEMBER 31.1997 SCHEDULE XIV NOTES TO FINANCI AL STATEMENTS l 6. INCOME TAX EXPENSE The components of the federal and state income tax provisions for the year ended December 31 (in thousands) are: 1997 1996 l. Current income taxes: l Federal $(386) $325 State (112) (95) Total current $(498) $ 230 l Deferred income taxes, net: Federal $ 459 $(284) State 47 (29) Total deferred $ 506 $(313) l.* Total income tax expense $ 8 $ (83) i The components of total income tax expense for the year ended December 31 (in thousands) are classified j as follows: 1997 1996 Income taxes chded to operating expenses S8 $(83) Other income taxes 0 0 I Total income tax expense $8 E83) j 8 Deferred income taxes for the year ended December 31 (in thousands) are comprised of the tax effects of l temporery differences as follows: 1997 1996 Software amortization $455 5 (596) Workforce reduction 17 (138) Injuries and damages reserve 94 351 Accrued vacation (20) 51 l Other (40) 19 Defe:Ted income taxes, net .15_06 $(313) 19F e-I

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION } d FOR THE YEAR ENDED DECEMBER 31.1997 SCHEDULE XIV NOTES TO FINANCI AL STATEMENTS A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate l for the year ended December 31 (in thousands) is as follows: 1997 1996 Expected federal income tax at 35 percent of pretax income $3 $ (29) j Tax effect of differences: State income taxes, net of federal benefit (11) (81) ) Other, net 16 27 Total income tax expense $8 $.(83.) l The company, as a wholly-owned subsidiary of NU is included in NU's consolidated return. Income tax expense is detennined on a separate company basis. 19G l e-

P 4 ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION H Y c, FOR THE YEAR ENDED DECEMBER 31,1997 SCHEDULE XV P COMPARATIVE INCOME STATEMENT l Acct DESCRIPTION 1997 1996 l (Thousands of Dollars) INCOME 457 Services Rendered to Associate Companies 71,130 $ 51,541 458 Services Rendered to Nonassociate Companies 106,509 77,177 421 Miscellaneous income or (Loss) 19 35 Total income 177,658 $ 128,753 EXPENSE Nuclear Power Expenses 517 Operation Supervision and Engineering 20,694 $ 19,547 ) 518 Nuclear Fuel Expense 7,504 9,297 519 Coolants and Water 2,236 906 520 Steam Expenses 15,613 9,007 523 Electric Expenses 4,838 1,872 524 Miscellaneous Nuclear Power Expenses 25,906 23,009 528 Maintenance Supervision and Engineering 19,772 11,508 529 Maintenance of Structures 5,155 4,181 530 Maintenance of Reactor Plant Equipment 22,104 3,867 a* 531 Maintenance of Electric Plant 19,221 4,605 532 Maintenance of Miscellaneous Nuclear Plant 758 3,899 Transmission Expenses 570 Maintenance of Station Equipment 28 25 Administrative and General Expenses 920 Salaries and Wages 4,717 3,175 921 Office Supplies and Expenses 1,620 1,560 i 922 Administrative Expense Transferred-Credit (9) (280) 923 Outside Services Employed 2,730 5,250 924 Property Insurance 3,729 3,663 925 Injuries and Damages 1,906 1,817 926 Employee Pensions and Benefits 13,152 14,897 928 Regulatory Commission Expense 6 2,422 930.1 General Advertising Expenses 203 182 930.2 Miscellaneous General Expenses 850 626 935 Maintenance of General Plant 64 8 All Other Expenses 408 Taxes Other Than income Taxes 4,550 3,656 409 income Taxes (498) 230 410 Provision for De' erred Income Taxes 704 41 411 Provision for Deferred income Taxes (197) (354) 426.1 Donations 53 74 426.5 Other Deductions 135 10 431 Other Interest Expense 113 52 Total Expense 177,657 $ 128,752 Net income or (Loss) 1 1

b. ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION k For the Year Ended December 31,1997 ANALYSIS OF BILLING ASSOCIATE COMPANIES ACCOUNT 457 l DIRECT INDIRECT COMPENSATION TOTAL COSTS COSTS FOR USE AMOUNT NAME OF ASSOCIATE COMPANY CHARGED CHARGED OF CAPITAL BILLED (Thousands of Dollars) 457-1 457 - 2 457 - 3 The Connecticut Light and Power 7,212 7,212 Company North Atlantic Energy Corporation 63,918 63,918 TOTAL $ 71,130 0 0 71.130

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION ~ For the Year Ended December 31,1997 ANALYSIS OF BILLING NONASSOCIATE COMPANIES ACCOUNT 458 DIRECT INDIRECT COMPENSATION EXCESS TOTAL NAME CF COSTS COSTS FOR USE TOTAL OR AMOUNT NONASSOCI ATE COMPANY CHARGED CHARGED OF CAPITAL COSTS DEFICIENCY BILLED (Thousands of Dollars) 458-1 458-2 458 - 3 458-4 Canal Electric Company 6,259 6,259 6,259 Great Bay Power Corporation 21,552 21,552 21,552 Hudson Light & Power Dept. 137 137 137 Massachusetts Municipal Wholesale Electric Company 20,594 20,594 20,594 Montaup Electric Company 5,151 5,151 5,151 New England Power Company 17,689 17,689 17,689 New Hampshire Electric Coop. 3,862 3,862 3,862 Taunton Municipal Lighting Plant 178 178 178 United illuminating Company 31,087 31.087 31,087 _$ 106 509_ $ 0 0 $ 106,509 0 $ 106 509_ ! INSTRUCTIONS: Provide a brief description of the services rendered to each nonassociate company: The Company acts as agentin operating Feabrook Station for the nonassociate companies. - 1

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f-t ( ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION f f; For the Year Ended December 31,1997 f SCHEDULE XVil { SCHEDULE OF EXPENSE DISTRIBUTION BY l l DEPARTMENT OR SERVICE FUNCTION I ACCOUNT SERVICE FUNCTION TOTAL SEABRooK U j NUMBER DESCRIPTION oF ITEMS AMOUNT OVERHEAD STATION (Thousands of Dollare) Nuclear Power Expenses 517 Operation Supervision and Engineering 20,694 20,694 518 Nuclear Fuel Disposal 7,504 7,504 I t 519 Coolants and Water 2,236 2,236 520 Steam Expenses 15,613 15,613 l 523 Electric Expenses 4,838 4,838 524 Miscellaneous Nuclear Power Expenses 25,906 25,906 528 Maintenance Supervision and Engineering 19,772 19,772 l 529 Maintenance of Structures 5,155 5,155 l 530 Maintenance of Reactor Plant Equipment 22.104 22,104 531 Maintenance of Electric Plant 19,221 19,221 1 532 Maintenance of Miscellaneous Nuclear Plant 758 758 4 Transmission Expenses I 570 Maintenance of Station Equipment 28 28 Administrative and General Expenses 920 Salaries and Wages 4,717 4,717 t l* 921 Office Supplies and Expenses 1,620 1,620 922 Administrative Expense Transferred-Credit (9) (9) 923 Outside Services Employed 2,730 2,730 924 Property insurance 3,729 3,729 925 injuries and Damages 1,906 1,906 926 Employee Pensions and Benefits 13,152 13,152 928 Regulatory Commission Expense 6 6 ) 930.1 General Advertising Expenses 203 203 930.2 Miscellaneous General Expenses 850 850 l 935 Maintenance of General Plant 64 64 All Other Expenses j 408 Taxes Other Than income Taxes 4,b50 4,550 409 income Taxes (498) (498) 410 Provision for Deferred Taxes 704 704 l 411 Provision for Deferred Taxes (197) (197) l 426.1 Donations 53 53 426.5 Other Deductions 135 135 431 Other Interest Expense 113 113 TOTAL EXPENSES 177,657 0 177,657 INSTRUCTIONS: Indicate each department or service function. (See Instruction 01 -3, General Structure of Accounting System: Uniform System of Accounts) l,-

ANNUAL REPORT OF NORTH ATI. ANTIC ENERGY SERVICE CORPORATION ] For the Year Ended December 31,1997 ] SCHEDULE XVil KEYS FOR SERVICE FUNCTIONS KEYS S_ERVICE FUNCTION The individual unit for which NAESCO provides service is listed separately on Page 24. 9 i

j i ~ l ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION ~ f. For the Year Ended December 31,1997 l DEPARTMENTAL ANALYSIS OF SALARIES NAME OF DEPARTMENT DEPARTMENTAL SAIARY EXPENSE NUMBER OF INCLUDED IN AMOUNTS BILLED TO PERSONNEL Indicate each department TOTAL PARENT OTHER NON END or service function. AMOUNT COMPANY ASSOCIATES ASSOCIATES OF YEAR (Thousands of Dollars) l Stabrook Station $ 61,715 24,712 $ 37,003 837 l l l l l n' i l l l l l l $ 61,715 0 24,712 37.003 837_ i

f' - ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 j u OUTSIDE SERVICES EMPLOYED INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the aggregate amounts paid to any one payee and included within one subaccount is less than $100,000, only the aggregate number and amount of all such payments included within the subaccount need be shown. Provide a subtotal for each type of service. RELATIONSHIP "A"-ASSOCIATE "NA"-NON FROM WHOM PURCHASED ASSOCIATE AMOUNT (Thousands of Doll COMPUTER AND COMMUNICATION SERVICES l KPMG Peat Marwick NA 251 1 Northeast Utilities Service Company A 3,099 Miscellaneous (32 payees) NA 333 l TOTAL COMPUTER SERVICES 3,683 ENGINEERING SERVICES Normandeau Associates NA 920 Northeast Utilities Service Company A 1,794 NUCON Engineering Associates,Inc. NA 301 Rrytheon Engineers & Constructors NA 4,494 Yankee Atomic Electric Co. NA 7,989 Miscellaneous (26 payees) NA 346 TOTAL ENGINEERING SERVICES 15,844

1 l* ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 OUTSIDE SERVICES EMPLOYED RELATIONSHIP "A"-ASSOCIATE "NA"-NON FROM WHOM PURCHASED ASSOCIATE AMOUNT LEGAL SERVICES Northeast Utilities Service Company A 155 Miscellaneous (15 payees) NA 407 TOTAL LEGAL SERVICES 562 SECURITY SERVICES i Green Mountain Security Service of NH NA 4,099 ll' Miscellaneous (14 payees) NA 193 l l, - TOTAL SECURITY SERVICES 4,292 l OTHER SERVICES l Occupational Health Physicians NA 265 l Massachusetts Emergency Management Agency NA 479 Northeast Utilities Service Company A 4,357 1 1 Performance improvement International NA 332 Public Service Company of New Hampshire A 971 Republic Management NA 151 State of New Hampshire NA 226 l 1 1 -27a-1

I ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION i-For the Year Ended December 31,1997 [ OUTSIDE SERVICES EMPLOYED n ) l RELATIONSHIP "A"-ASSOCIATE "NA"-NON FROM WHOM PURCHASED ASSOCIATE AMOUNT OTHER SERVICES (continued) Miscellaneous (347 payees) NA 742 TOTAL OTHER SERVICES 7,523 GRAND TOTAL OUTSIDE SERVICES EMPLOYED 31,904 l i -27b-l. u ____m____ U

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 OUTSIDE SERVICES EMPLOYED FROM WBON PURCHASED DESCRIPTION OF SERVICES COMPUTER AND COMMUNICATION SERVICES KPMG Peat Marwick Provide support for mainframe operating environment and software upgrades. Northeast Utilities Service Company See note Page 27d. ENGINEERING SERVICES Normandeau Associates Provides environmental monitoring services as requested. Northeast Utilities Service Company See note Page 27d. NUCON Engineering Associates, Inc. Provides engineering services as requested. R:ytheon Engineers & Constructors Provides engineering and administrative services as requested. Yankee Atomic Electric Co. Provides engineering, emergency planning, environmental monitoring, and other services. LEGAL SERVICES Northeast Utilities Service Company See note Page 27d SECURITY SERVICES Green Mountain Security Service of NH Provides security services for baseline security support. -27c-

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION i For the Year Ended December 31,1997 OUTSIDE SERVICES EMPLOYED I i i FROM WHOM PURCHASED DESCRIPTION OF SERVICES OTHER SERVICES l Occupational Health Physicians l Provides site medical officer and review of site medical records l and issues. Massachusetts Emergency Management Agency l Provides administration of state emergency management l l agency. l Northeast Utilities Service Company See note Page 27d. Performance improvement international l Provides performance monitoring, trending and improvement [ services as requested. Public Service Company of New Hampshire Provides worker's compensation administration, facilities and miscellaneous service. l~ Republic Management Provides food service for site. l State of New Hampshire Provides administration of state emergency management agency. I i i ( Note: Northeast Utilities Service Company provides centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing and other services. -27d-l I I i L

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION 7 For the Year Ended December 31,1997 EMPLOYEE PENSIONS AND BENEFITS ACCOUNT 926 INSTRUCTIONS: Provide a listing of each pension plan and benefit program I provided by the service company. Such listing should be limited to $25,000. l DESCRIPTION AMOUNT l (Thousands ) of Dollars) Pension Plan 3,430 Employees incentive Plan 3,911 Groi'p Life, Long-term Disability, Hospital .4nd MedicalInsurance Expenses 3,666 j FAS 106 VEBA Funding 524 i Supplemental and Early Retirement Plans 610 j Employee Stock Ownership Plan 905 i Educational Activities 92 ~ Other Employee Benefits Expenses 14 l TOTAL 13,152 I l f' l 1

2 ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 j GENERAL ADVERTISING EXPENSES ACCOUNT 930.1 INSTRUCTIONS: Provide a listing of the amount included in Account 930.1, " General Advertising Expenses," classifying the items according to the and as defined in the account definition. If a particular ela excess of $3,000 applicable to a single payne, show separate: the aggregate amount applicable thereto. l DESCRIPTION NAME OF PAYEE AMOUNT l (Thousands of Dollars) Advertising Winn Company S 5 Science & Nature Center Barker Specialty 23 New England Aquarium 17 Pride Printers 5 Various (46 items) 153 TOTAL 203 _ gg- ~ _ _. _. _ _ _

o. } ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION Q For the Year Ended December 31,1997 MISCELLANEOUS GENERAL EXPENSES ACCOUNT 930.2 ) INSTRUCTIONS: Provide a listing of the amount included in Account 930.2, " Miscellaneous General Expenses," classifying such expenses according to their nature. Payments and expenses permitted by Sections 321(b)(2) of the Federal i Election Campaign Act, as amended by Public Law 94-283 in 1976 (2 U.S.C. 441(b)(2)) shall be separately classified. i l DESCRIPTION AMOUNT l (Thousands of Dollars) Industry and association dues 10 Miscellaneous Payroll Expense 1 Rents 794 Shareholder Services 10 Various (11 items) 35 o' e i TOTAL 850 l i k' :..

\\ ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 l I RENTS ) INSTRUCTIONS: Provide a listing of the amount included in accounts entitled " Rents," classifying such expenses by major groupings of property, as defined in the l account definition of the Uniform System of Accounts. l I l l TYPE OF PROPERTY AMOUNT l (Thousands of Dollars) Computers / Data processing equipment 87 l Communications equipment 149 I l V:hicles 120 1 Buildings 109 Equipment and other 1,033 l-TOTAL 1,498 P l l l 4 ' [.

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 TAXES OTHER THAN INCOME TAXES ACCOUNT 408 INSTRUCTIONS: Provide an analysis of Account 408, " Taxes Other Than income Taxes." Separate the analysis into two groups: (1)Other than U.S. Government taxes, and (2) U.S. Government taxes. Specify each of the various kinds of I . taxes and show the amounts thereof. Provide a subtotal for each class of tax. l KIND OF TAX AMOUNT l (Thousands of Dollars) (1) Other Than U.S. Government Taxes: Insurance Premium Excise Tax 83 Property Tax 1 State Unemployment Tax 70 State Business Tax 273 i' l g Sub-Total 427 l 1 l (2) U.S. Government Taxes: Federal Unemployment Tax 37 FederalInsurance Contribution Act 4,086 Sub-Total 4,123 i TOTAL 4,550 ~

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION '1 c P-l~ For the Year Ended December 31,1997 3 l l l l DONATIONS ACCOUNT 426.1 INSTRUCTIONS: Provide a listing of the amount included in Account 426.1, " Donations," l classifying such expenses by its purpose. The aggregate number and amount of all items of less than $3,000 may be shown in lieu of details. l NAME OF RECIPIENT PURPOSE OF DONATION AMOUNT l (Thousands of Dollars) l = New Hampshire Seacoast United Way Charitable Contributions 4 i ' Seacoast Repertory Theater Charitable Contributions 7 L Miscellaneous (57 items) Charitable Contributions 42 l ? TOTAL 53 i l f' l(.

h. I ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION b-1 For the Year Ended December 31,1997 s OTHER DEDUCTIONS ACCOUNT 426.5 INSTRUCTIONS: Provide a listing of the amount included in Account 426.5, "Other Deductions," classifying such expenses according to their nature. -l DESCRIPTION NAME OF PAYEE AMOUNT l (Thousands of Dollars) Advertising Various 4 Political activities Murphy, S&H 40 ) ~ Executive incentive Compensation Various 91 iQ l i l i l TOTAL 135 l I l l { p- -M-(a l I L -- -

9 ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1997 SCHEDULE XVill NOTES TO STATEMENTS OF INCOME j INSTRUCTIONS: The space below is provided for important notes regarding the financial statements of income or any account thereof. Furnish particulars as to any significant increases in services rendered r expenses incurred during the year. Notes relating to ,inancial statements shown elsewhere in this report may be indicated here by reference. l See Notes to Financial Statements on pages 19 through 19G. m I e ! L__._

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Eno~ed December 31,1997 Ma$ods of Allocation All costs are specific to Seabrook Station and are direct charged. O e l l: l P { s l E____E_.______________.______ _ _.. _ ^ _

o. ~ ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED For the Year Ended December 31,1997 Expenses of Seabrook Station are funded in advance therefore there are no charges for use of capital. I i i g

o e ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION o. SIGNATURE CLAUSE Pursuant to the requirements of the Public Utility Holding Company Act of 1935 and the rules and regulations of the Securities and Exchange Conmmission issued thereunder, the undersigned company hes duly caused this report to be signed on its behalf by the undersigned office thereunto duly authorized. NORTH ATLANTIC ENERGY SERVICE CORPORATION (Name of Reporting Company) By:/s/ John J. Roman ) 'i - (Signature of Signing Officer) John J. Roman - Vice President and Controller (Printed Name and Title of Signing Officer) i Date: April 23,1998 i l00,f C Q-_______-_-________~____________________. _ _ _ -}}