ML20082L393

1994 Annual Rept to Shareholders Boston Edison

ML20082L393
Person / Time
Site:	Pilgrim
Issue date:	12/31/1994
From:	Gina Davis, May T BOSTON EDISON CO.
To:
Shared Package
ML20082L385	List: BECO-LTR-95-042, Forwards 1994 Annual Rept to Shareholders Boston Edison & Securities & Exchange Commission Form 10-K ML20082L393
References
NUDOCS 9504210142
Download: ML20082L393 (44)

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,tY.bMh4 d 4 w93 fW FINANCIAL HIGHLIGHTS: ,

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years ended December 31,

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2 $109,257 $ 102,513 + 6.6%

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$1.775 52.28

$1.715

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• Pasout ratio 73% 75 % - 2.7%

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Book value per share 520.11 519.42 + 3.6%

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h Return on aserage common equity 12.1 % 11.9% + 1.7% i s

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n. y Besten,Ed /. u i. n,v @. m pka. J.M Int,hr> iew w ith CEO Tom Mav. .7 ja es J. .'y.,a. . .

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GM . ,1w c-AB UT-THECOMPANY:

y Itoston Edison is a public utility engaged principally in the generation, purchase, transmission, distribution and sale of eledric energy. It was incorporated in 1886.

We supply electricity at retail to an area of approximately 590 square miles with-ON THE COVER:OUR NEW ENERGY in 30 miles of Boston, encompassing the City of Boston and 39 surrounding cities MANAGEMENT CENTER opened in and towns. The population of the territort sersed at retail is approximately January 1995. The facility gives employees 1,500,000 the ability to control the delivery of .. .

W.e also supply electricity to other utih. . ties and municipal electric departments at electricity from our generating stations to holesale for resale. About 87 percent of our resenues are derised from retail our cus.ih homes. Members of the A cu-ic sales,11 percent from uholesale sales and 2 percent from other sources.

Emi Worment Center Team include (troin left) Ron h&, dexter, Wendy Rueger, Bob Sullivan. Dick Zbikowski. Frank Donlan, Frank Flemming. Rick Fike and Mike Sanford.

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r DEAR SHAREHOLDER: Aggressise cost er,ntrol, the use of new technologies, improve'ments in pnxluctiiity and changes in work practices all contributed to

. anothersuccessful year in 1994 for Boston Edison.We achieved earnings growth of 5.7 percent, and

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continued a fhe ye.ir trend ofincreasing your dividend,'this time by 3.4 percent to 51.82, up froin Z ,,- sl.76. Tips five-year pattern of, increase places Boston Edison in the industry's top cluartile for-dividend, gnnvth, and reflects continued financial strength, excellent operating performance and a N positive outlook for the future.

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1.( , Ai the" pace ofindustr) change increases, we faw an exciting future full of opportunity.We are strmng

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tolook less 1 ke a monopoly and more like a successful service and technoh>gy firm. Our future includes -

smaller, nwre ~ellicient staff operations, strong alliances with business partners and the use of new 4 technologies to lower costs, improve servia td customers and position 'us to compete successfully. <

COST CONTROL -We are controlhng our costs successfully. In May, we signed new siycar con-tracts w ith our two union locals providing certainty as to wage adjustments and health care benefits,

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and gaining more Dexibility in work practices As a result ofinvestments inimproved technologies we realiecd significant gains in reliability and iynxluativity, enabling us to reduce our work force by 371 positions,'or 8.4%, in 1994.We accomplished this through' a combination of attrition and by selec- _

tively eliminating positions and functions. Also, we consolidated the Marketing and Sales organizations, outsourced certain functions, and stream-W[

lined operatmas in line organir.ations.

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Other measures uill trim millions of dollars from Company expenses.Two lit

• Tests. Q Q y f x' nice centers will be closed in 1995 with ftmetions consolidated at remain-ste, i G 2 2 ing centers. Improvements in: materials management enabic us to reduce hhhhhh[3

. -imentory and close three warehouses. By holding less inientory, streamlining V. ON & N '

, major work processes, standardi7ing sizes and types of materials and emplov-

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'[ (( ing just-in: time inventor [technihues, we will'save $7 to $10 million annualiy.

N wsWA 1 t1 sum a E 1-And, we are working 'with vendors like General Eh ctric and Westinghouse to determine the price'and availability of rec]uired supplies ciuickly and to place k'% / .

onlers with minimal human intervention and paperwork.

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' Using new technologies, the bill collection. process has been improved,

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increasing cash flow by sonie $4 million. Our fleet of passenger vehicles has d '

-- . been reduced by 40 perceni, or 250 cars. It is noteworthy that these savings s / p are being'identifWd and realized by cross-functional teams trained in and .

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charged w'ith finding solutions.They are doing just that.

r*= An employce' team deseloped a streamlined two-step, one-day process for new customer instaUations. Combining new technologies with work practice changes, this new prowss both reduces costs and improves service. Other employees reduced system maintenance outage times and, in doing so, lowered labor costs, minimized customer inconvenience and impnned reliabihtv.~

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PLANNING - Our efibrts to achie e greater flexibility in resource planning produced positise resuhs, as well.' In an important decision from'the Massachusetts Department of Public utilities fMDPil), our plan to meet future demands Ihr electricity through a flexible resource acquisition strat-egy n as approved.The MDPU agreed that new supplies of electricity are not needed through the ycar 2000, and approved our request to issue an options REP (a flexihte contract giving us the option to .

buy power at a predetermined pricc), calling it,"an innovathe approach to resource planning"

_ In November, we eliminated a cumbenome first mortgage bond indenture, providing us with gre'ater - , ..  ;

financial flexibility. We are one of only a few electric utilities to have no first mortgage bonds.

7 OPERATIONS - - Our generating plants continued to perform well.The' EannenstrEn:shAnE j Pilgrim plant's 1994 " report card" from the Nuclear Regulatory Commission FROM OPESADONS sose 2 ,

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was its best ever, placing it in.the top quartile of plants nationwide. Once m r- m =*-- - +

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. again, Pilgrim carned incentise resenues by exceeding 1994 perfbrmance tar- sus pgg gets set hv the MDPU. Iuture perfbrmance is expected to show continuing 1 9 W & + srgi impnnement because of the climination of planned maintenang merhauls [$j yy* star between refueling.

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In 1994, the lbssibfuel .;eneration t system achieved the second highest unit

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asailability in the sptem's history, significantly improving the percentage of dh5L .n; ,w -

time gent rating units are asailable to produce pouer.

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Also, major emironmental modifications were completed at our power sta- m e  ; _

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tion in south Boston. As a result, the company continues to have the cleanest sid.

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generating plants in New England.We are in compliance with the Iederal and pg state Acid Rain regulations through the year 2000, while other utilities still must imest to reduce emissions from their plants.

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COMPETITION - success in a compeiiiive entininment is measured in wins and losses, and w c've been uinning. One of the reasons is the quality of the sales and marketing team, a blend of profes-sionals w ith estemis e experience in competithe situations and seasoned Boston Edison veterans.This year we gained more than 40 mcgawatts in new customer load, and had no significant customer losses.

' In the w holesale market, all existing customers are under contract through at least the year 2002, and ~

we added a new customer with significant growth opportunity, thelbwn of Braintree. In the retail

' market, we acquired new husiness from former steam customers and expanded oxisting customer _ -

relatiomhips through ned other-side-of-the meter services. - - -

• TECHNOLOGY -- with a Ibeus on meeting the c hanging needs and expectations of customers, we're looking for technological solutions that will enable us to reduce costs, impnne and expand sersice and add value to the customer relationships.

A new energy management center and the modeling of the future distribution business, both' described later in the report, are just two examples. Others can be Ibund throughout the Comparn.

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in information, in operati6ns,in sales, in all aspeh of ficld senices, tcchnologies are being identified and dephncd to 6nhance our relationship with our customers.

Our course over the past live years has been one hf steady imprmement.We have successfully exe- -

cuted our operating' plans and, in manycases, exceeded our goals. Our manhgement team is strong 1

, and creatise, we base achiewd financial strength and flexibility, and we have the strategies in place to uin in w hat we knmv w ill be a changing, more competitive emironment.We are confident that w hat-ner changes come our way, we will remain successfulJ

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• In chIsing, one change in 1994 that affecthi as both w~as the retirement of Bernard W. Reznicek. First as president and then as chairman and chief execudre aflicer, Bernie brought clarity to our manage .

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ment processes, and helped us to dell'ne excellence for our operations, to empow er employees to per-lbrm beyond normal boundaries and to enhance our reputation with regulators and the financial community. lie is _now dean of the business sch6ol at Creighton Unisersity in his native Omaha, M Nebraska, and senes on our Board of Directors.We wish him well. "

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Thomas J. May George W. Dasis Chairman and Presi2k nt and '

> Chief Execiatisc Ollicer Chief Operating Ollicer fr$

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l Questions are being raised about the changes in our industry and what impact they're having on lloston Edison. In this section, Company Chairman and CEO  :

Tom May offers his views oninaustry l change and what shareholders should expect in the future.

l What's driving the debate on how to bokl proposals, folkmed by a perimi of reflection, sug-restructure the electric utility industry? gesting a somewhat skmcr approach. In other cases, as here in Massachusetts, the approach has been very delib- l 11,s a combination of factors. b.rst, the strudure of s ertical- .

crate, scry methodical.The Massachusetts Department of in ly tegrated utilities responsible for all aspects of genera-

.. Public Utilities is asking the right questions and bringin*o i tion, transnussion and distribution no longer makes sense. j the key stakeholders to the table.This makes a lot of sense, The wrrent system of. reg'ulation was largely created in the and I support the department's approach.

1930,* when rapid expansion of the electric system was  ;

critical to the nation's economic gnmth.Tmlay, that's no our goal shouhl be to maximize the benefits of competi-  !

longer the case. in f.wt, new, morc ellicient generation tech. tion to all customers, while minimizing the potential l nologies and lower costs, coupled with legidation that harm to the sarious stakeholders.This suggests to me an l started remming barriers to market entry in the late evolutionary process. We need to sort out the complex 1970's,have already created a competitive commodity mar. regulatory and economic obligations created under one Let for electricity. In addition, transmission systems, as a regulatory scheme as we move to another. And I think matter of Federal policy, are mming towards a mmmon this will take a number of years. At the same time, I carrier system (like the U.S. highway system) with equal believe choice will begin with our largest customers, am ss by all. her both generation and transmission, there probably within the next WGEqEMgg/

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are many questions that still need to be answered to assure llseyears. / - /

that stalchokler groups are proteded, hut the direction has In the meantime, some of MM V -

k clearly been set.

the same technolog.ic, eco- / g-You can add customer expectations to the technology, nomic and customer factors economics and public policy drisers. Customers want dntmg industry restructur- Ny~ o w ,

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j choice and the benefits of competition. Ours is the last of ing are already creating the regulated industries to go through this process, competition. Sophisticated , 's Customers want, and expen to be able to make, thoices customers will look at all in the future about their electricity supplier and the ser- options to reduce costs in a sices it will olTer, highly competitive national e and global economy. So j j How long will this transition take? " P "Uc" of ho"' h'"E it A _.

takes to restructure the b q j . ; Q. .QM There,* a lot of. speculation and uncertaintv about this, Nearl3two down states and the Federal gmernment are industry, we base to be pre-pared to compete success-(&[sD <MD U@d.p ff( y %

tmlay addressing the complex issues surniunding industry fully today to hold onto and W WM restruduring. In some cases, there base been relatisel) expand our customer hase.

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4 What's your vision of a restructured industry? What role is Boston Edison playing

" ""U I think the excitement will be in the retail distribution business. Generation is a commodity, the compctition We have a vital role on behalf of all of our stakehoklers will be intense, and the margins will be small. Utilities - our sharehoklers, our customers, our employees and will continue to be players, in many cases through the communities we serse. If the interests of those stake-alliances, but the number of players will be large. hoklers are to be protected, the transition shouhl be Transmission uill simply become the interstate highway orderly to assure that no single stakehokler benefits at the system for inoving power expense of the others.We are fortunate to have already M MW8Mi8 from the generators to the operated under an incentive rate structure in generation, g retail distribution compa- and our managers are committed to freezing base rates f t l gg nies and to indisidual cus- through the year 2000. We also have a seat at the table in

'W % - W MM . tomers uho hase a choice eserv <

major forum looking at industry restructuring as it

,: , . .. . m m h k, M@h,g %g >F \g of supplier. There uill be muld affect Massachusetts. In fact, uc'se proposed a reg.

. M %% _ i m a ready access to the sutem, ulatory transition concept that wouhl separate generation Np%[ f A@bh ) rates will be published and pricing from transmission and distribution. It would pro-q; .

% W ,ty;ehyvh a generators, utilities and s ide for generation to be market priced, allow for recov-g .

T r customers will mme on cry of any generation assets currently recorded above and off relatisely casily. their market value through transmission and distribution

There will be trallic jams pricing, and establish incentises to improve utility efli.

and constraints, but those ciency on the distrihution system. The reactions weNe kA i o i M[ gf will get uorked out. had from a number of key policymakers hase been posi-W  : iM tive. Ours is just one approach, however, and it's impor-wt just as new tnhnologies, m s p P Y e tant that we be part of the debate on the full range of a g imprmed economics and W '

% proposals now under consideration.

g customer (hoice are trans-forming the industry, so too What should shareholders expect will they transform the retail distribution business.%.hile

.. the next few years?

most customers will continue buying electricity f. rom us, all customers w ill mntinue to has e electricity delisered by Sharehohlers shouhl expect us to work diligently at con-ut liut that's only the beginning of the relationship. We tinuing the steady pattern of financial progress we've will transform our existing distribution business into an achiesed over the past the ycars. And they shouhl expect integrated (lient services netuork. Automation and stor- us to mm e into a more competitise emironment by both age in hnologies uill allou us to bring new Inch of elli- influencing the outcome of the debate on how to restruc-cienn and hmer costs. Inibrmation technologies will ture the industry and by being aggressive in retaining and enable customers to make up-to the. minute buying deci- attracting customers. In addition, uc'll be looking for sions and allow us to monitor and control their use based new rnenue sources from expanded products and ser-on their choite of sersim and products. Meters will be sices. As vou'll see elsewhere in this report, we are con-replaced bs computeriecd dnices, and customers won't trolling costs, winning in competitise situations, seeking hase to wait until next month to know how much thm new business opportunities and enhancing customer rela-hase used and at u hat cost. Alliances with companies that tionships.We base a solid foundation for our participation ,

market and mme information are likelv to expand the in the debate on industn restructuring and for respond.

nature and scope of sers iu s u e can olTer. So the prospects ing to, and benefiting from, the competitise pressures for w hat this industrv u di look like in ten years are truh that are alreadv emerging.We will continue to pursue our exciting, once we work through the rules of transition. objectis e of outperfbrming the industry.

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THE EMPLOYEE OF THE FUTURE udipo,sess multiple skills, be flexible and be expected to undertake more tasks. Speciali/cd jobs and narrowly defined job classifications are being replaced, and employees are being asked and Utilities used to have emponered to take more personal responsibility real-life situations. For example, the module pre-long lead times to plan for improsing customer sersice. For example, sents a supervisor with 50 homes without power for the future. Stability Company and union leadership worked together at the end of a shift. The supervisor answers a was the norm, and the with 70 substation operators and mechanics to series of questions and makes decisions.The mod-premium on speed was create one new job combining both sets of skilk. ute takes the " answer", es aluates it, and presents a small. But the rules are The new classification prmides employees with number of other scenarios that might have been changing, and speed and new flexibility to get the job done, benefits the considered. Such training broadens employees' flexibility are required Compant through more emcient use of emplovce thinking, enhances decision-making and increases attributes in a competi- resources, and benefits customers by quitker confidence.

tiee market. We are response at louer cost.

achieving flexibility and -S speed through our focus in this example, as in so many others, the key to

[i[A :D Y @[ ' Vi -VW on cross-functional suuess is Mutual Gains Bargaining, a technique C/M teams for meeting for understanding what's at stake before negoti- ffyh[ p/J7;k Yy customers' needs, the ating an agreement that most closely meets the jgW ^ I use of technologies and a needs of all imohed, it sounib simple enough,

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cost consciousness but the efTects base been scry dramatic.

shared by all employees. ' -

in May 1994, our labor unions signed six-year contrans.They include a number of productis its j ' '

and benefits imprm ements, along with fair u age . 8) '

increases, that would not base been possible -

without Mutual Gains Hargaining.The contracts e proside both flexibility and stability as a result of a shared sicu of emerging competition. From left: lohn Prior, Warren Farnsworth and Steve Prosper, a self directed work team given the In addition to ucll-trained and flexible employ. autonomy to act on behalf of the customer.

res, we will continue to focus on technology to help emplosces meet competitive (hallenges. In 1994, ne initiated an interactise telesision simu-lation module to help first hne supersisors face 7

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1 OUR APPROACH TO Resources Authoritt goes well beyond supphing SERVING acctricity. one aspect or the partnership CUSTOMERS is aangiog. imohea the inuanation or a iis k, submarine We are becoming a business partner, not just an cable and the construction of ha(kup generators electricity prmider to our commercial and to serse a new uaste treatment facility fo industrial customers. We are working to under. Greater Ikston. In addition, the Company and utand their businesses so that ne can be a more MWRA hase entered into a three-year operation cI[cctise partner in meeting their needs We are and maintenan(c training agreement u hi(h using technology to imprme service, lowcr costs alone is ulued at more than 52.5 million. Iluston Customers want quality and enhan(c our customers' internal operations. Inlison personnel are using their expertise to and value. Providing the in doing so, we will add ulue to the relationship, train MWRA personnel. Other aspects of the right mix of both will win which will help us retain and attract customers. relationship include energy cHiciency upgrades customer loyalty. That is The effects of changes in the industry are esi- and em ironmental te( hnologies. why we are working dent, and ur are responding ucll. In 1994 ue closely with our in another example of alliance building, the gained mer 40 meganatts of new load and had customers to understand,

(,ompany worked with city and state govern-no significant customer losses. not only their energy ments to put together a comprehensn, e proposal needs, but also the.ir in anticipation of a tougher, more competitise which led to the restart of a large paper compa-business needs.This way, future, we structured sales and marketing func- m in Ibston.The company will create 120 jobs we can offer operating tions to emure the mmt clicctise response to the and add 9 megawatts of load to our system. .. .

efficiencies, sarying needs of customers. We recruited sea.

The bottom line is that business customers want environmental solutions soned sales and marketing professionah from .

help in meeting their business needs. $.o, ne must and new technologies to competitise industries.The combining of highlt -

be more creatise, act more quit Lly, become a part suit individual situations, skilled long term lloston 1:dison employers and of.our customers, total business solutions, and stav in other words: A total sales professionah from competitise industrics ~

fwused on the basic s of customer scrsice. ener9Y solution based on has produced an exceptionallt strong team. We innovation and expertise.

are positioned io desclop relation hips more fully gpjl Mg g

and to better anticipate needs because ne under-m v .f WJ y%igs@

w w.  % wa stand our customers' husinesset We are able to $ ;i yp Ma:

offer total energy solutions to customers, going n ucll hesond the traditional utihty scope, to help them improse their own competitise positions.

We uill deselop alliances uith sendors, contrac-tors, manufacturers and other business partners to oller our customers a diserse portfolio of -

products and sersites Iur example, a mult" Part of the team responsible for planning, faceted cuort with the Massachusetts Water constructing and delivering service to the new MWRA wastewater treatment plant. Pictured from left: Jerry LaFond, Bill Polin, Rob Billet. Dan Charbonnet, Charlene Greene, Tim Crowell, and Tony Gervasi.

8

Pictured below is the MWRA wastewater treatment facility located on Deer Island.

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ustomers want the ability to make a choice. Tomorrow they willhave that choice in one form or another. For some of the largest customers, the choice will be over their energy provider, but for all customers they willbe able to exercise some choice over an array of products and services delivered over an integrated customer services network.

Faced with these choices, customers willmake electricity purchase decisions based on the value they're receiving.

L Carl Gustin. Senior Vice President Marketing and Corporate Relations F

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Pictured below is the interior of the new Energy Management Center which began operations in January 1995.

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of technology, strategic alliances with suppliers and customers, and innovative practices which create new business opportunities.

Ronald Ledgett. Senior Vice President Power Dehvery

AS THE UTILITY INDUSTRY CHANGES,excitingnew business opportunities will result. We are well positioned to grow with the changes and benefit from the results in our own senice territory, and possibly beyond.

As the industry changes, In the past two years, we realigned our tradition- and advanced control and telecommunications We Will play a Critical al electricity distribution functions to address the technology to monitor electrical system perfor-role in furthering the concerns of customers and communities more mance, and provide new services at customer interests of all our efTectively. Now, commitments to customers and facilities. A new substation in South Ikiston and stakeholders. We want to communities are made by emplovees who hase other system imprmements in 1995 uill retire take a leadership role in the resources, the authority and the accountabil- aging distribution circuits, resulting in reduced shaping the future of the ity to mAe commitments and carry them out. operating cost and imprmed customer senice.

electric utility industry. Whether a routine service call or a response to We will attempt to an emergency, customer concerns and commit-manimize the benefits of ments to customers are matters of greatest %d.$y@/

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1. h industry restructuring to

• all stakeholders. We importance to all empimees. '

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have a solid foundation for our participation in nologies that address customer concerns, reduce the key debates on operating costs, increase the utilintion of our industry change, awets, and create new sources of revenue. We will imest approximately s4 million mer the next two vcars to demonstrate technologies and sersice options for the distribution business of t omorrou. We intend to leverage lloston Boston Edison representatives leading the discussions on forming a Regional Transmission I dison's siS nificant imestment in right-of-uay Agreement and restructunng the New England and distribution circuits to profit from the bur- Power Pool. Pictured from left Joyce Wood, Phil Legrow, Ed O'Brien and Joel Kamya.

geomng "information highn ay.=

In January of this year, we inaugurated our new state-of the-art energy management control center, pictured on the emer.The $25 million center features interactise computer mapping, 11 - -

IT IS IMPORTANT TO UNDERSTAND thnosi orour we win simoitaneousiv pn> duct and to act based on reliable information, strive for cost savings Managers are analyzing their own business units and for smart in new w ays. Managers throughout the organifa- investments in new tion will now be responsible for revenues, technologies. The wires expenses and contribution for their indnidual into our customers' business units. homes and businesses will one day carry more liased on a competitive business analy sis, Using technology to access information is also than just electricity.They managers uill determine, for instance, if their important to our success. In 1994, we structured will also carry services decisions uill increase resenues, reduce costs or our information sy stems group to thcus informa- and information; another imprm e operations. In understanding the tion systems (IS) personnel on helping their link to the information implications of their decisions, managers will be internal customers, managers and employees, highway. The right armed w ith timely, action-oriented information. with any IS issue. The reorganization marks a technologies improve significant shift to a more flexible client-server reliability, add value for Our employees are challenged '

and time after

. (personal computer based) emironment, the customer and provide time find creatne approaches to streamline potential new revenue pn> cesses and impnne profitability. The supplv management system was also sources. It's an assessed to identify efliciency improvements and .

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improve ways of doing business.The results have

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been excellent: working with sendors and thinking about our business differently, we hase been able to improve operations, reduce inven-tory lesels, reduce paperwork and procedures, and climinate three w archouses. Creatise vendor partnerships with suppliers like General Electric and Westinghouse have led to an integrated Members of the cross-functional team working on system that determines availability and price of the two-year Distribution Circuit Business Pilot supplies and places timely orders with minimal Project From left: Ben Tucker, Mike Cooper.

Virginia Walker. Frank Gaffney. Frank Silvia. human intenention or paperwork.

Rob Becker and Annmarie Svingen.

W.e w d. i continue our commitment to new tech-nology, imprmed information and creatise thinking to help (ontrol costs, improve service and assure future success.

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Psetured below is a photovoltaic system that generates electricity using energy from the sun. This state-of the-art pilot project was co-funded by Boston Edison.

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s the details of regulatory change unfold, we are activelypreparing our managers for the business of the future through improved information and better application of technology.

Gone are the days when we could look at our business operations as a whole, total up the cost, add an appropriate profit, and charge customers the portion regulators

~'"' approved. Our future

'% willdepend on our ability to be the provider of choice for customers.

Charles Peters, Senior Vice President Finance

IP Pictured below is the New Boston power plant located in South Boston.

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A COMPETITIVE POWER GENERATION MARKET emphasirenafe, reliable and low cost power. Every employee knows that our reputation among regulators, State Clean Air Act requirements are expected to customers and the communities in which we be minimal.We also installed a new, state-of the-operate is also important. art environmental management system across

• P#"E The Pilgrim Nuclear Power Station's 1994

" report card" from the Nuclear Regulatory We base taken a leadership role in working with Commission u as its best es er, placing it in the top public and municipal utihties, non-utility gen-In every community quartile of plants nationnide. Also, at the Pilgrim erators, power marketers and regulators to build where we operate a plant, we are decreasing costs by imprming main- a consensus on uhat a " regional transmission" plant, we must remember tenance planning and reducing down time for agreement should look like, and how the inter-that we are neighbors maintenance work. Beginning in 1995, we will ests of our customers and shareholders can best and guests. Making low- refuel the plant every two years and eliminate be served.

cost power has to be planned maintenance outages between refueling.

l As more players try to fight for a piece of the gen-I balanced with many . . .

Th.is performance combined with a reduction m cration market, we'll continue to focus on man-other things, including .

the length of.each outage u di increase our aser-top-notch reliability, aging ourselves emciently and efTectively, remain age capacity factor to 8 W,, placing us in the top I safety and environmental an actise player in community atrairs and ensure group of plants nationwide and resulting in an practices. Additionally, our customers and shareholders are actisely rep-annual cost savings of 54.5 million.

our relationship with our resented at the table of regulatory change.

communities is a priority. On the fossil fuel generation system, we'se also gy , .

imprmed operations and reduced costs. We t

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streamlined work practices and consolidated .

maintenance actisities into one group resulting in reduced staffing lesels and cost sasings # _

totalhng s2 million. Our unit merhauls were Ig.

completed ahead of schedule and 9% under bud- h b

get. We've also negotiated five-year contracts ,

whidi cut natural gas transportation prices in Members of the Pilgrim Station outage review half, and uill continue to look for escry oppor-team preparing for this year's planned refueling tunity ti decrease the cost of our product and outage. From left Bruca VanFleet. Nancy Desmond, ensure our secess. Stuart Minahan Tom Trepanier, Mark Potkin and Steve Geary.

We completed mportant emironmental modili-cations at our r,lant in South lloston in 1994. As a result, future expenditures to meet lederal and 15

Man:gement's Discussion and Analysis Retail electric re+cnun increawd 5M milhon.The Ntarmber .

1993 and 1994 base rate increaws resultalin 528A million of the

'"""'"*'"""^"d PP'""i"'dh "' """'"" " aulue io the 2s Regulatory Proceedings increaw in retail sales. Iucl and purchasnl pmer rnenues increas"d 528.5 milhon primarily due to the rennery of certain new pur-ItetaH settlement agreements c hased pmer expenws. In an ordant e with the 1992 wttlement in 1992 our state regulators, the Massachuwtts lhpartment of agreement specific rnenues related to the purchasal pmer contract that expired in Octoiwr 1993 were not alIntal.

Puhhc thihties, apprmed a three. year settlement agreement eflec-Tlu dawaw in u holnale and other rnrnuc* is primarily due to tive Nosember 1992.This agreement prmided us with retail rate an estimated pr<nision for refunds to wluilesale customers due to increases, allownl for the rea>very of demand side management

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(1)%1) n nwrsation program onts, sja cified certain accounting adjustments and (larified the timing and remgnition of certain

. Operating espensen expemen. the agreement alw> set a limit on our rate of return on common equity of 11.75% for 1991 through 1995, excluding any Ltal fuel and puri hased [xmcr expenws decreased 527 milhon.

penalties or rew ards from perf ormance incentis n. I uel expense decreased partly due to lower fossil f uel prices and a The retail ratt irureasen consisted of a new annual performan(c IPh darraw in nudcar output. Ndad pmn nlwnw rWwin I"wcr costs amiciated with the long. term contrad that expired in adjustment charge effectise Nmember 1992 and tuo annual base rate increaws of $29 milhon effettise N<nember 1991 and Novemix r October 1993, partially othet by the msts of new contracts.The timing eHect of fuel and purt hawd power (mt collection aho con-1994.'lhe p rformant e adjustment ( harge uries annually basal upon tributal to the dawaw in fuel and lm hawul power expenses.1:uel the performanic of our higrim Nuclear Power Station.This charge is and pun hawal power expenws are substantially all rennerable further dewribed in our discussion of linancial(undition.

in adihtion to the retad rate increases, our resuhs of o[x rations throudi fud and purchasnl pmer roenues.

were afintnl by the rmacry of !)SM program (osts, an ounting "* "l*'dli""' d*I *di""d"" "*P'"* I"CT'd*d 8 7' P'i' adjustments an[I the timing ahl recognition of certain expenses as inady due to hipin unploya kne exp nsa hnsion ex[u nw inneawd m in@on due to a higher mntribution made to the p n.

further dncribnl in the follow mg Results of 0;wrations section.

sion plan for the year. In acairdance with the 1992 settlement agree-Our state regulators prnioush appr<ned a threegear settlement ment, we record pension expense in the amount of the contribution agreement eHectise N,ovember 1989.That agreement aho provided to the pla,.

us with retad rate increases and kpecified (criain accounting adjust-

. 1)cpreciation and amortization expense increawd irimarily due ments. f.he 1989 agreement primarily allected our results of opera-to a higher depreciable dant balance. In 1994 we fully ex sensed the tions through 1992.

remaining deferred costs of the cancelled Pdgrim 2 nuclear unit. In h,e do not currently plan to anale a base rate lihng upon the

, anordance with the 1992 setticment agreement we ihd not expense expiration of the 1992 wttlement agreement, therefore we anti (F any of these (osts in 1993.

pate that haw rates w dl rrmain in ellect at their current IneIA Amorti/ation of dclcrred nu(lear outage costs c onsists of, amounts relatnl to the 1991 and 1991 rduchng outages at Pdgrim Results of Operations Std'i"" I" 1993 "e defaral approxiinately s 14 indhon of refueling outage costs.We began to amorti/c thew msts in june 1991 oser the years as apprmed in the 1992 settlement agreement.

1994 scrsun 1991 The 52 million dnrease in demand side management programs 1.arnings per (ommon share were $2.4I in 1994 arul 52.28 in 1991. cxg.nw was due to the timing of reunery of program costs, thM The inircaw in earnings w as primarily the result of the expiration of expenw includn some program cmts reunered mer twehe months a hing term pun hawd pmer (cintract in (h tober 1991, a retail baw and other program onts rnmeral ma six years.The 1994 expenw rate increaw efin the Nmember 1991, a 2.0"6 increaw in retail (onsists of $22 mdhon of c osts primarily relateil to 1994 expendi.

LWh sain and an award rdatmg io an enunent dom.un caw. Thew tures and s11 milhon of o,sts upitaheed in 1992 through 1994.

positise (hangn were partialh offwt by higher operations and mairi- Municipal progra aml otlu r taxn increawd primari(5 as a j tenance, deprniation and amortuation and inmme tax expenws. tesult of higher lloston property taws ilue to a tax rate increaw and (apital addJ ins.

Operating retenue' Our cHectiw annualincome tax rate for 1994 was 11.4% ss.

Operating rnenun increasnl 4,i% mer 1991 as folkno: 21.4% for 1991. Both rain were reduced by adjustments to lcferred On thousamh> income taxes of 510 niilhon in 1994 and $20 milhon in 1991 made in 562,445 aconnlana w nh tlu- 2 wuknn nt agrunn nt. No further deferred Retail dectric rnenues income tax adjustments inay be made arn! we expect our ellecthe tax Demand ude inanagement rnenues 5,056 rate to he (low to the statutors rate m 199 2.

Wholesalc and other rnenun (2,919)

Nhot t ter m sales snenun 1,219 Other imome lm rease in operatme resenues $66,101 in Nmendwr 1994 a (ourt ruhng bn ame cilectiw prmishng us with an adhtional $5.7 nulhon gain on a 1989 cminent domain taking of our property.

Interest charges the lower generation, and lower costs associated with the long-term Interest charges in total did not change significantly. Interest charge, contract that expired in October 1993.The decreases in expense on long-term debt deucased due to the first mortgage bond and were partially offset by the timing efTect of fuel and purchased debenture redemptions in 1994 and the significant first mortgage power cost collection.

bond refinaruing in 1993 at lower interest rates.This decrease u as par. Other operations and maintenance expense increased 7.1% pri-tially ofTset by higher amortiution of redemption premiums. Other marily due to increases in employee benefits and nuclear production interest charges increased due to higher short-term interest rates par. expenses. Postretirement benefits expense increased by 57 million tially ofTset by a kmer aserage short term debt level. Allowana for primarily as a result of the adoption of a new accounting standard and borrowed funds used during (unstruction ( AFUDC), w hich represents pension expense increased by $5 million; both are provided for in our the financing costs ofconstruction, increased as a result of a higher 1992 settlement agreement and further explained in Note E to the AFUDC rate related to higher short-term interest rates. consolidated financial statements. A refueling outage at Pilgrim Station in 1993 resulted in higher nuclear pmduction expenses.

1993 sersus 1992 Depreciation and amortintion expense increased m. 1993 pri-Earnings per common share were 52.28 in 1993 and 52.10 in 1992. marily due to a higher annual decommissioning charge for Pilgrim The increase in earnings was primarily the result of a retail rate Station effectise November 1992 provided by the 1992 settlement increase effective Nmember 1992, the expiration of a long-term agreement.The charge is based on a 1991 estimate of decommis-purchased pnver contract in October 1993, no amortiution of sioning costs as further discussed in Note D to the consolidated deferred cancelled nuclear unit costs and lower interest expense. financial statements. In addition, the effect oflower depreciation These pmitive changes were partially ofTset by higher operations and rates implemented in anordance with the settlement agreement was maintenance, income tax and property tax expenses. offset by the effect of a higher depreciable plant balance.

In accordance with our 1992 settlement agreement we did not Operating revenues expense any of the $19 million of remaining deferred costs associat-Operating resenues increased 5.0% over 1992 as follows: ed with the cancelled Pilgrim 2 nuclear unit in 1993.

On dx,unandg Amortiation of deferred nuclear outage costs consists of Retail electric revenues 570,837 am unts related to the 1993 and 1991 refueling outages at Pilgrim Station as discussed in the results of operations for 1994 versus 1993.

Demand side management resenues 33,601 The increase in demand side management programs expense is Wholesale and other revenues (2,794) consistent with the increase in DSM resenues. DSM expense Short term sales resenues (31,144) includes some custs recmcred mer twelve months and other costs increase in operating resenues $70.500 recmcred mer six years.We began to recover presiously deferred DSM expenses in August 1992. In 1993 we expensed and collected Reuil electrie evens increased 571 million.Tbc November from customers approximately s 30 million of defer ed 1991,1992 1992 and 1991 rate increases resulted in 540.6 milhon of additional and 1993 program costs. Oser six years we are expensing and col.

revenues in 1993. Fuel and purchased pmer revenues increased lecting from our customers s 11 million of costs capitalized in 1992 529.5 milhon over 1992 primarily due to the timing clTect of fuel and s 37 million of costs capitalized in 1993.The 199 3 expense relat-and purchned power cost collection and lower resenues received ed to these capitalized costs w as 57 million.

from short term power sales as discussed below. Municipal property and other taxes increased in 1993 due to the We began recmcry of certain demand side management program absence of tax abatements. In 1992 property taxes were reduced by costs, lost base revenues and incentises in August 1992. Our 1993 510.4 million of tax abatements in accordance with our 1989 settle-resenues prosided 545.9 milhon related to 1991,1992 and 1993 ment agreement.

DSM programs. Our 1992 resenues of 512.3 milhon related primar- Our elTectise annualincome tax rate for 1993 was 23.4% vs.

ily to 1991 programs. 8.7% for 1992. Iloth rates were significantly reduced by adjustments The decrease in w holesale and other resenues reflects an esti- to deferred income taxes of $ 20 mdlion in 1993 and 52 3 million in mated prmision for refunds to customers of 58.6 million in 1993 as 1992 made in accordance with the 1992 and 1989 settlement agree-a result of orders from our state regulators on our generating urut ments.The 1992 rate was also reduced due to tax benefits of performance program. approximately 57 million resulting from mandated payments made Lower short. term pmer sales resenues were a result of changes in accordance with the 1989 agreement. Our adoption of a new in our generation asadabihty and the needs of short-term pmer pur- accounting standant for income taxes in 1993 did not significantly cheers. Resenues from short. term sales serse to reduce fuel and affect earnings.

purchased pmer bilhngs to retail customers and therefore have no effect on earnings. Interest charges and preferred and preprence disidends Total interest charges decreased 54 milhon in 1993. Interest on long.

Operanng espenses term debt decreased primarily due to the relinancing of substantially Ltal fuel and purchased pmer expenses decreased s 12 milhon. Fuel all our first mortgage bonds in 1993 at hmer interest rates, partially expeme decreased pr mardy due to a 21.5% decrease in fmsd gener- othet by higher amortiution of redemption premiums. Other inter-ation and an 8.5% decrease in nuclear generation, resuhing from est charges decreased due to a hmer short. term debt lesel and lower planned plant merhauls and a nuclear refuehng outage. Purchased short-term interest rates. AFUDC decreased as a result of a kmer power expense reflects both higher interchange punhases, caused by AFUDC rate related to hmer short. term interest rates.

11

Preferred and preference dividends decreased 5.1% due to the cantly from the 1995 amount in the four years thereafter 'e have ,

replacement of a preferred and a preference stm k issue with less long-term debt and preferred stock payment recluirements of costly issues of preferred stock. 5102.6 million in 1995,5103.6 million per year in 1996 through 1998 and 53.6 million in 1999.

External financings continue to be necessary to supplement our Financial Condition internally generated funds, primarily through the issuance of short-term c mmercial paper and bank borrowings.We currently have Our 1992 settlement agreement is providing us with increased rev-authority from our federal regulators to issue up to $ 350 million of enues from retail mstomers over the three-year period ending short-term debt.We have a 5200 million revolving credit agreement Odober 1995. Additionally, a significant long-term punbased pmver and arrangements with several banks to provide additional short-contract expired in October 1993 with no change in related rev-term credit on a committed as well as on an uncommitted and as enues.The settlement agreement also limits the annual rate of return available basis. At December 31,1994 we had $215 million of short-on ecluity during the three. year period to 11.75%, excluding any '

term debt outstanding, none of w hich was incurred under the penalties or rewards from performance incentivea.

rev Iving credit agreement. In 1994 our state regulators approved Our ability to achieve or exceed the i1.75% rate of return on

""' 0"*"d"E P anl to issue up to 5 500 m@on of securities through equity is primarily dependent upon our ability to control a,sts and 1996.The puceds will be used to refinance short and long-term to earn performance incentives from generation performance mech.

securities and for capital expenditures. Refer to Note 11 to the con-anisms.The most significant impact that incentives can have on our solidated Gnancial statements for specific information relating to our financial results is based on Pilgrim Station's annual capacity factor.

recent Anandng adivities.

An annual capacity fanor hetween 60% and 68% would provide us with approximately 547 million of revenues in the performance year ended Onober 1995. For each percentage point increase in capacity Outlook for the Future factor above 68%, annual revenues u ill increase by approximately

$690,000. For cat h percentage point denrase in capacity factor below 60% (to a minimum of 35%), annual revenues uill decrease fledricity sales by approximately $790,000. Pilgrim's capacity factor fiir the perfor- A significant portion of our electricity sales are made to commercial mance year enthng October 1995 is currently expected to le customers rather than industrial customers. As a result our sales have approximately 69%, a decrease from the 72% capacity factor been only moderately impacted by the unfavorable economic factors achieved in the pertiirmance year ended October 1994, primarily afTecting the manufanuring industry in Massachusetts, including due to the refuchng outage scheduled for 1995 We earned approxi- defense cutbacks and continued downsizing in the computer indus-mately $47 million in revenues related to Pilgrim's capacity factor in try. Increased sales to commercial customers more than ofEwt the the performance year ended October 31,1994. decrease in sales to industrial customers as economic factors provid.

Pdgrim Station automatically shut down in August 1994 as a ed growth in the commercial sector in 1994. Total retail sales result of a non nuclear problem with its electrical generator.The increased 2% in 1994.

plant returned to sersice three nmnths later following the comple- Implementation of DSM programs, which are designed to assist tion of necessary repairs as well as maintenance work originally customers in reducing electricity use, will result in lower growth in uheduled fier an October 1994 mid cycle outage.The power needs clearicity sales.We receive approval from our state regulators for usually met by the station were met by our other generating plants annual DSM spending levels and recovery amounts.Through 1994 or pun hased from other suppliers as necessary.We do not beliese we collected from mstomers certain DSM program costs primarily that the generator damage resulted from actions uiihin our control. in the year incurred and other DSM program costs over a six year however, our rennery of the incremental purchased power costs period.We are also provided with incentises and recovery oflost dunng the outage through fuel and purdased power rnenues is rnenues based on the anual reduaion in customer electricity usage subject to rnicw by our state regulators under our generating unit from these programs and a return on the costs that we recover over performance program. six years. Beginning in 1995 all costs are expected to be collected As diwussed in Regulatory Pnicec<hngs, we do not plan to make primarily in the year incurred.We will continue to recover the DSM a base rate fihng with our state regulators upon the expiration of the costs capitalized during 1992 through 1994 along with a return on 1992 wttlement agreement, therefore we anticipate that our base imestment on the unrecovered balance.

rates will remain in eflect at their current lesels.

Competition g The electric utility business is in a period of transition from a tradi-tional rate-regulated environment based on cost recovery to an envi-We meet our capital expen<hture cash requirements primarily with ronment with both competition and mmhfied regulation.The clTects internally generated funds.These funds provided for 98%,76% and of competition to date base been most evident in the wholesale elec-88% of our plant and nuclear fuel expemhtures in 1994,199 3 and tric market. In response to increased competition from other elec-1992, respectisely. Our current ntimate of plant expenihtures for tric utihties and non. utility generators to sell electricity for renale, 1995 is 5NO milhon.Thne expenihtures will be used primarily to we have secured long-term power supply agreements with our live maintain and impnne existing transnussion, thstribution and genera- uholesale customers.These agreements set our rates through the tion facihtiet We do not exped plant expenditures to vary signiG year 2002 and beyond.

18 1

, We are also beginning to fan some Ibrms of mmpetition in the We are also subject to our state regulators' integrated resource retail electric market.%is is happening as industrial and large com- management (IRM) process in uhich electric utihties forecast their mercial customers pursue their options to generate their own electric future energy needs and propose how they will meet those needs by p,wer, as customers look to obtain lower eledricity prins and to sub- balancing conservation programs with all other supplies of energy.We stitute natural gas or oil for cledridty for heating or coohng purposes submitted an IRM filing in 1994 and received a favorable ruling in and as large facilities factor the cost of electricity into their decisions January 1995. Our regulators found that we do not have a need for to relocate into or out of a given acrvice territory. In the future, the additional resources through 2001 and we are not required to issue a potential esists for eledric utihties and other energy suppliers to sell competitive request for proposal for new generating capacity at this eledrkity to retail customers of other electric utihties without regard time.We are required to update our IRM fihng in January 1996.

for existing servia territories. In addition, our state regulators are currently investigating two issues related to the onset of competition, Non-utility business inwntive regulation and industry restruduring.

In 1993 we created an unregulated subsidiary, Boston Energy We are responding to the current and anticipated retail competi-Tec hnology Group (HETG), following approval from our state regu-tive challenges in several ways.We <ki not plan on seeking any addi. I We h.we authority to imrst up to 545 milhon in this wholly-tional base rate increases until at least the year 2000 and are working

<m ned subsidiarv. IIETd engages in demand side management activi-to accomphsh this by controlhng costs and increasing operating efli' ties and businesses involving electric transportation and the related ciencies without sacrificing quahty of service or profitabihty. During ih h doll ned subsidiaries. In 1994 1994 we reduced our wurkforce by 8.4% we negotiated six year llETG acquired a substantial majority interest in two additional busi-suntracts with our two union locals w hich resulted in cost-sasing nesses. REZ-TEK International Corp. pnnluces systems that treat changes and limits wage growth and we implemented various other cooling water used in commercial and industrial air conditioning sys-cost control strategies. We also deseloped customer alliances and .

tems in an energ'y efh,cient and environmentally sound manner, and provided economic .cselopment rates to some customers. In addi.

Coneco L,orporation pnniden engineering and' project management tion, we filed with aur state regulators for approsal oflower rates services to energy and water conse ration project developers and for a small numbei of large manufaduring customers on a limited contractors.These acquisitions were not material.

basis.These actions all signify our commitment to be a competitiselv -

We do not currently have a substantial m. vestment m. BETG and priced, reliable pnnider of energy. We are also actis ely participating

, . . do not anticipate it significantly impacting our results of operations an regulatory and legislattre discunions and pnKTedings concerning ,

In the next several vcars.

the future structure of.t he electric utility industry.We do not expect '

the economic development rates or the prop > sed lower manufactur-ing customer rates to have a signilirant impact on our financial con. Other Matters dition or resuhs of operations.

As a regulated company, we are subject to certain accounting U" d " " *'"'"I rules that are not apphcable to other businesses and industries.These accounting rules allow regulated companics, as appropriate, to We are subject to numerous federal, state and h> cal standards with record crrtain costs as regulatory awets instead of expenses when resp ct to w aste disposal, air and water quality and other environ-they are incurred.These regulatory assets are expected to be recm - mental considerations.These standards can require that we modify cred from matomers through future rates.The elletts of competition our existing facihties or incur increased operating costs.

or changes in regulation could ultimately cause us to no longer be We own or operate 48 properties where hazardous materials able to follow these accounting rules, in w hith case our regulatory were released in the past.We are required to clean up these proper-awets wouhl have to be fully exp nsed at that time. ties in acmrdance with a timetable developed by the Massachusetts Department ofI nvironmental Protection < Df P) and are continuing flewurre regulation to evaluate the costs associated with their cleanup.There are uncer-Our state regulators require utilities to purchase power from quali. tainties associated with these costs due to the complexities of fying non utihty generators at prices set through a bidding process. cleanup technology, regulatory requirements and the particular char-in 1991 our state regulators antered us to purchase 132 megawatts acteristics of the ddferent sites.We also continue to face possible lia-of pmer from an independent pmer pnnlut er, Altresco Iynn, l.P. bihty as a potentially resp,nsible party in the cleanup of ten multi-starting as early as 1995.We opp >se this onier since we do not party hazardous waste sites in Massachusetts and other states where beliese we need any new pmer for sneral years.We asked the we are alleged to hase generated, transported or disposed of han Massachuwits Supreme Judicial Court (SjC) to rescrse the order anlous waste at the sites. At the majority of these sites we are one of and in 1994 the SJC remanded the case to our state regulators for many potentially resp nsible parties and we currently expect to have further consideration. Our regulators then issued an onler requirmg only a small percentage of the potential liabihty.Through December us to negotiate a contract with Ahresco 1 ynn.We tiled an appeal of 11,1994, we base acnued approximately 57 million related to our this onler with the SjC in October 1994 and are currently awaiting cleanup liabihties. We are unable to fully determine a range of rea, a decision. In addition, we supported an appeal filed by other parties sonably pissible cleanup costs in excess of the accrued amount, of a state regulatory luly's conditional appnnal of construction of ahhough based on our awessments of the specific site circumstances, Altresm I ynn's generating station project. In January 1995 the SJC we do not expect any sut h additional cmts to have a material impact rnersed the regulator's appnnal on the basis that there w as no on our financial iondaion. Ihmever, additional provisions for showing of need for the project in Mawachuwtts prior to MM). (leanup costs couhl hase a rnaterial impact on our results of a

reporting period. alh>w the units to meet the provisions of the 1995 standards. .

Uncertainties continue to exist with resped to the disposal of Dependmg upon the outcome of certain DEP air quality modeling luth low-level radioactive waste (LLW) and spent nuclear fuel studies currently in progress, additional emission reductions may also re:ulting from the operation of Pilgrim Station. In July 1994 our be required by 1999.The extent of any additional reductions and the access to off-site Lt.W disposal facihties ended. Until access is cost of any further mochlications is uncertain at this time.

tttained to other disimsal facihties we are managing LLW through in recent years there have been increasing public mncerns on-site storage.The United States Department of Energy (DOE) is regarding cledromagnetic ficids (EMF) associated u ith clearic -

rerponsible for the ultimate disposal of spent nuclear fuel, however transmission and distribution facihties and appliances and wiring in there are uncertainties regardmg the DOE's schedule of acceptance buildings and homes. Such concerns have included the possibihty of of spent fuel for disposal. Itefer to Note D to the consohdated finan- adverse health efTects caused by EMF as well as perceived effects on cl.d statements for further dismssion regarding LLW and spent property values. Some scientific review s conducted to date have sug-nuclear fuel deposal. gested associations between EMF and potential health effects, while Under a 1991 c >nsent orth r with the DEP and other interested other studies have not substantiated such associations.We sup]mrt parties we made certain improvements in the emission mntrol sys- further research into the subjen and are participating in the funding tems at New Boston Station.ncsc iniprosements included the ofindustry-sponsored studies.We are aware that public concern replacement of four existing chimney stacb with two taller stat b in regarding EMF in mme cases has resulted in litigation, in opposition order to imprme tlw air quahty in the vicinity of the station, and the to existing or proposed facihties in proceedings before regulators or installation of low nitrogen oxides burners.The capital costs of these in requests for legislation or regulatory standards concerning EMF moeblications along with other associated improvements, which were leich. We bas e addressed issues relatise to EMF in various legal and substantially completed in 1994, were approximately 580 million. regulatory proceedmgs and in discussions with customers and other New 150ston Station has the abihty to burn natural gas, oil or concerned persons; however, to date we have not been significantly imth.15cginning in April 1995, as part of the DEP consent order, we affected by these desclopments.We continue to closely monitor all wdl be required to operate the station fueled exclusively by natural aspnts of the EMF inue.

gas, cucpt in certain emergency circumstances.We have made arrangements for a firm supply of natural gas to run the station at a Litigation minimum lesel.We are deseloping a least-cost plan for operation in 1991 we were named in a lawsuit alleging discriminatory employ.

beyond this minimum lesel invobing principally the utihration of ment practices under the Age Discrimination in Emphryment Act of interruptible gas supphes or short term capacity purchases- 1967 concerning 46 employees alrected by our 1988 reduction in The 1990 Clean Air Act Amendments will require a significant force. Irgal counsel continues to vigorously defend this case. Based reduction in nationwide emissions of sulfur dioxide from fossil fuel- on the information presently available we do not expect that this hti-fired generatmg unitt The reduction will be accomphshed by restrid- gation or certain other legal matters in w hich we are currently ing sulfur dmside emisunns through a market based system of nvohed will have a material impact on our financial condition.

allow ances. We currently have allow ances that are in excess of our llowever, an unfamrable decision ordered against us could base a needs and whith may be marketable. Any gain from the sale of these material impact on our results of a reporting perimL may be subjed to future regulatory treatment. Other prmisions of the 1990 Clean Air Act Amendments imohe limitations on emissions Executive Ofire Changes of nitrogen oxides from existing generating units. Combustion system h@ 1994 m bc Presidem, Thomas May, became Chairman mmblications made to New Itoston and Mptic Stations, including the and Chief Executive OHicer, former Executise Vice President installation of the low nitrogen oxides burners at New Boston, will George Davis became President and Chief Operating OfTicer and former Chairman and Chief Executive 00icer Bernard Remicek i retired. In January 1995 George Dasis announced his anticipated retirement elTectise September 1995.

l 20

CONSOLIDATED STATEMENTS OFINCOME years ended December 31, (in ilmusands except rarnings per share) 1994 1993 1992 Operating retenues $ 1,548,554 5 1,482,253 5 1,411,753 Operating expenses:

Fuel 156,951 170,799 200,774 PurchasedJ umer 356,874 370,049 352,030 Other operations and maintenance 441,423 406,271 379,350 Depreciation and amortization 149,122 137,722 129,045 Amortization of deferred cost of cancelled nuclear unit 19,791 0 24,381 Amortization of deferred nuclear outage costa 7,721 6,546 4,901 Demand side management programs 35,438 37,504 8,221 Taxes - property and other 100,132 93,102 80,426 Income taxes 54,279 34,941 11,25 Total operating expenses 1,321,731 1,256,934 1,190,853 Operating income 226,823 225,319 220,900 l Other income (expense), net 5,658 589 (2,074)

Operating and oth< r income 232,48I 225,908 218,826 1

Interest tharges:

lung term debt 102,570 104,375 106,850 Other 12,367 9,778 12,525 Albraance for lun nmed funds used during construction (7,478) (6,463) (7,847)

' Intal interest charges 107,459 107,690 111,528 Net imome 125,022 118,218 107,298 Preferred and preference disidends proiided 15,765 15,705 16,550 flalame aiailable for wmmon stock $ 109,257 5 102,513 s 90,748 Common shares outstandmg (wcighted ascrage) 45,338 44,959 43,144 o

Iarnings per sharc <ff wmmon semk $ 2.41 5 2.28 5 2.10 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS years ended December 31, (in thousand4 1994 1993 1992 Italance at bcginning of > car $ 218,292 5 192,948 5 174,477 Net ini ome 125,022 118,218 107,298 subtotal 343,314 311,166 281,775 Cash dn islends declarrd.

Preferred atock 15,765 15,705 14,923 Preference atm L 0 0 1,953 Conunon stm L 80,545 77,169 71,951 Subtotal  % ,310 92,874 88,827 llalance at end of scar $ 247,004 s 218.292 s 192,948 e

The acrumpanpng notes are an integral part of the consohdated financial statements.

21

a CONSOUDATED BALANCE SHEETS December 31, (in thousands) 1994 1993

- Assets Utility plant at original cost:

In service 5 4,074,810 $ 3,904,776 tris: anumulated depnciation 1,344,452 s 2,730,358 1,258,359 5 2,646,417 Nuclear fuel 291,836 273,867 Less: accumulated amortization 236,239 55,597 220,477 53,390 Construction work in progress 144,048 144,835 2,930,003 2,844,642 Investments in electric companics, at equity 24,678 24,292 l Nuclear decomminioning trust 82,831 66,060 j Current assets, Cash and cash equivalents 6,822 8,768 Accounts receivable 189,382 171,098 Accrued unbilled revenues 32,240 29,823 I url, materials and supplies, at average cost 71,560 79,381 Prepaid expenses and other 26,705 326,709 9,738 298,808 Deferred debits:

Regulatory assets 197,455 210,144 Intangible asset - pension 22,849 0 Other 32,085 252,389 33,342 243,486 Total assets 5 3,616,610 5 3,477,288 Capitalization and liabilities Common stot k equity 5 915,747 5 876,479 Cumulatisc preferred stak:

Non-mandatory redeemable series 123,000 123,000 Mandatory redermable series 94,000 96,000 14 ng-term debt 1,136,617 1,272,497 Current liabihtics:

1.nng term debt / preferred stot k due mthin one scar 5 102,250 s 2,000 Notes payable 214,786 204,151 Accounts payable 139,119 117,614 Interest aurued 24,464 25,467 Dividends payable 23,533 22,696 Pension bendits 31,908 22,005 Other 76,615 612,675 32,477 426,410 Deferred credits:

Power contracts 40,277 36,275 Animulated deferrni income taxes 515,454 484,785 Acnimulated deferred investment tax credits 67,048 71,140 Nuclear decommisnioning reserve 92,404 73,744 Other 19,388 734,571 16,958 682,902 Commitments and contingencies - -

Ltal capitalization and liabilities 5 3,616,610 5 3,477,288 The accompanying notes are an integral part of the conwdidatal financial statements.

22

CONShuDATED STATEMENTS OF CASH FLOWS years ended December 31, (in thousaruls) 1994 1993 1992 Cash fhmi from operating anisitice Net income $ 125,022 5 118,218 5 107,298 Adjustments to reconcile net income to net cash provided I,y operating actisities:

Depreciation 142,932 130,074 123,243 Amortiration of nudcar fuel I8,810 21,816 25,473 Amortiration of defer red iout of canc clied nuclear unit, net 19,067 0 22,340 Amortiution of deferred nudcar outage costs 7,721 6,546 4,901 Other amortiution i 3,%7 9,433 2,132 Deferred income taxes (4,184) 10,303 17,165 Investment tas credits (4,092) (4,073) (4,273) l Allowance for horrowed funds used during construction (7,478) (6,463) (7,847)

Net changes in: _ .-

Accounts recrisable and accrued unbilled restnues (20,701) 13,206 (18,188)

Fuel, materiah and supplies 3,093 9,722 (2,330)

Armunts payable 21,505 (18,465) 35,759 Rate and contract settlements 0 (175) (31,363)

Other current assets and liabihties 36,908 25,209 3,5"'5 Other, net 15,561 (19,548) /15,F44)

Net < ash prmiJed by operating a<tisitics 368,131 295,803 ~ }4,041 Imesting actisities:

Plant expemhtures (rxtludmg Al UDC) (198,760) (246,763) (213,827)

Nuclear fuel expenditures (21,934) (6,491) (17,198)

Capitalized demand side management a xpenditures (37,007) (37,156) (11,469)

Sale of plant am15, not 15,972 0 0 Nuclear deconunissioning trust imestments (16,771) (15,189) (7,210)

I ledric company imestments (186) 1,106 1,836 Nct < ash used by imesting actiritics (258,8M6) (304,493) (247,868) financing adisities:

Issuances:

Common stoik 10,634 10,855 70,412 Preferred stot L 0 40,000 40,000 I ong-term debt 15,000 815,000 60,000 Redemptions:

l'ri fi rred and pe rferent e stoi L (2,000) (40,000) (40,333) tung term ih ht retirements (50,000) (648,625) (123,600)

Net i hange in short term debt 10,635 (71,349) 65,200 Disidends paid (95,460) (92,370) (86,184)

Net rash prmided (used) byjinaming a<tiiitics (111,191) 13,511 (14,505)

Net increase (decrease) in < ash and cash equisalents (1,946) 4,821 (332)

Cash and cash c<1uis alents at the beginmng of the year 8,768 3,947 4,279 Cash and iash equnalents at the end of the year 5 6,822 5 8,768 s 3,947 Cash paul during the year for:

Interest, nct ol amounts t ajutahied 5 108,462 5 103,720 5 113,076 Income tases 5 46,074 5 30,305 5 10,095 The actumpanying notes are an mtigral part of the ionu.lidated financial statements.

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -

Note A.Significant Accounting Policies

1. Itasis of Consolidation and Acwunting ,

The consolidated finandal statements include the activities of our wholly-owned subsidiaries,llarbor Electric Energy Company and Iloston Energy Tnhnology Group. All significant intercompany transactions have been eliminated.

We fbilow acmunting policies prescribed by our federal and state regulators. We are also subject to the acmunting and reporting requirements of the Suurities and Exchange Commission. The financial statements comply with generally accepted accounting principles. Certain prior period amounts on the financial statements were rnlassified to conform with current presentation.

2. Itesenues We remrd resenues for electricity used by our customers but not yet billed at the end of each accounting period.

L Torecasted Tueland Purchased Power states

- The rate charged to retail customers for fuel and purchased power allows for fuel and some purchased power costs to be billed to customers using a forecasted rate. %e difference between actual and estimated costs is recorded as an adjustment to fuel and purchased power expenses and is includ-ed in an ounts recessable until subsequent rates are adjusted. State regulators base the right to reduce our subsequent fuel and purchased power rates if they find that we base been unreasonable or imprudent in the operation of our generating units or in purchasing fuel.

4. Depreciation and Nuclear fuel Amortiration Our physical property was depreciated on a straight.line basis in 1994,1993 and 1992 at composite rates of 3.11%,3.09% and 3.36% per year, respntisely, based on estimated useful lives of the sarious dasses of property. The cost of decommissioning Pilgrim Station, our nuclear unit,is excluded from the depreciation rates. When property units are retired, their cost, net of salvage value,is charged to accumulated depreciation.

The cost of nuclear fuel is amortiicd based on the amount of energy Pilgrim Station produces. Nuclear fuel expense also includes an amount for the estimated msts of ultimately disjmsing of the spent nuclear fuel and for assessments for the decontamination and dnommissioning of United j States Department of I ncrgy nudear enric hment facihties. These costs are recovered from our customers through fuel rates.

L Amortiration of Deferred Nuclear Outage Costs We expense deferred nudear outage costs over fisc years as apprmed in 'he 1992 settlement agreement. The deferred mst balances in 1994 and 1991 consist of amounts related to the 1993 and 1991 refueling outages t l'ilgrim Station. j i

6. Amortiration of Discounts, Premiums and itedemption Premiums on Debt we expense ihscounts, premiums, redemption premiums and related costs associated with issuances or redemptions of long-term debt or the refi-nancing of existing debt mer the hfe of the debt or the replacement debt subject to regulatory approval.

7. Allowamefor Iunds Used During Construction (ATUDC)

Al UDC represents the estimated costs to finance plant expenditures. In accordance with regulatory accounting, AFUDC is included as a cost of utihty plant and a reduction ofinterest charges. Ahhough AI UDC is not a current source of cash income, the costs are recovered from customers mer the sersite hfe of the related plant in the form ofincreased revenues collected as a result of higher depreciation expense. Our AFUDC rates in 1994,1991 and 1992 wcre 4.4 5%, 3.62% and 4.48%, resperthely, and represented only the cost of short-term debt.

C. Cash and Cash [quisalents Cash and cash equhalents are mmprised of highly liquid securities with maturities of three months or less. Outstanding che ks are included in cash and accounts payable until they are presented for pay ment.

9. Alloname jor Doubtful Accounts Our acmunts recchable are substantially all reemerable. This rec <nery occurs both from customer payments and from the portion of customer c harges that prmides for the rennery of bad debt expense. Accordmgly, we do not maintain a significant allowance for doubtful accounts balance.

10. Itegulatory Assets Regulatory aucts represent costs incurred whis b will be collected from customers through future charges in acmrdance with agreements with our state regulators. These msts are to be expen ed when the correspondmg revenues are recched in order to appropriately match revenues and expenses. A portion of these msts is currently being recmcred from customers. No return on investment was carned on the regulatory assets.

Regulatory aucts mnsisted of the following:

December 31, 1994 1993 Redemption premiums s 52,859 5 59,116 Inmme taxes, net 44,745 26,916 Power contractx 40,277 36,275 Pemion and postretirement costs 22,761 24,416 Nudcar outage cmts 17,804 25,524 Cancelled nudcar unit 0 19,067 Other 19.009 18.830 5 197,455 5 210.144 24

Note B. Rstail Settisment Agreements In 1992 and 1989 our state regulators, the Massachusetts Department of Public Utilities, approved three-year settlement agreements relating to our rate caw proceedings. These agreements provided for retail rate increases, accounting adjustments and demand side management program expendi-tures; clarified the timing and recognition of certain expenses and set hmits on our rate of return on common equity. Refer to Management's Discussion and Analysis for further information related to these settlement agreements.

The settlement agreements did not affect our contract or w holesale pcmer rates charged to other utihties, which are regulated by our federal regulators, the Federal Energy Regulatory Commission.

N:te C, income Taxes in 1993 we prospectively adopted natement of Financial Accounting Standards No.109, Accounting for IncomeTaxes ($FA5109). This required us to change our methmlology of ac<ounting for income taxes from the deferred method to an asset and liability approach. The deferred method was based on the tax efTects of timing difTerences between income for financial reporting purposes and taxable income. The asset and liability approach requires the recognition of delirred tax assets and liabdities for the future tax eflects of temporary di1Terences between the carrying amounts and the tax basis of assets and liabilities. In accordance with SFAS 109 we recorded net regulatory assets of $44.7 million and 526.9 million and corre-sponding net increases in accumulated deferred inmme taxes as of December 31,1994 ar d December 31,1993, respectively. The regulatory assets represent the additional future revenues to be collected from customers for deferred income taxes.

Accumulated deferred income taxes consisted of the following:

December 31, (in thousands) 1994 1993 Deferred tax liabihties:

Plant -related $ 511,572 s 496,731 Other 105.786 95,161 617,358 591,892 L)eferred tax assets:

Plant related 13.216 9,999 Investment tax credits 41,273 45,914 Alternatise minimum tax 1,132 18,672 Other 44,083 32,522 101,904 107,107 Net accumulated dcIerred income taxes 5 515.454 5 484,785 No valuation allowances for deferred tax assets are deemed necessary.

Components ofinmme tax expense were as lidlows:

years ended December 31, (in thousands) 1994 1993 1992 Current income tax expense $ 62,819 s 28,711 s (385)

Deferred tax expense (4,468) 10,303 16,533 Investment tax credits (4,092) (4.073) (4,273) locome taxes c harped to operations 54,279 34,941 11,725 Taxes on other income:

Current 2,550 1,205 (2,348)

Deferred 284 0 782 2,8 14 1,205 (1,566) 70talincome tax expense $ 57.113 s 36,146 5 10,159 The ellettive income tax rates reflected in the consohdated financial statements and the reasons for their di!Terences from the statutory federal income tax rate were as follows:

1994 1993 1992 Statutory tax rate 35.0 % 35.0 % 34.0 %

State income ax, nes of federal income tax benefit 4.1 4.2 3.9 Imestment tu trechts (2.1) (2.6) (3.6)

Municipal property tax adjustment -

(0.6) (1.6)

Adjustment of deferred taxes on cancelled nuclear unit -

2.7 Reversal of deferred taxes 4ettlement agreement (5.5) (13.0) (19.6)

Federal tax twnefit of mandated payments from settlement agreements -

(6.2)

Other 0.4 (0.l) (0.9)

I tiectue tax rate 31.4 % 23.4 % 8.7%

25

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)

Note D, Nuclear Deconunissi:ning and Nucle:r Waste Disposal L Nuclear Decommissioning When higrim Station's operating lic ense expires in 2012 we will be required to decommission the plant. We are expensing an estimate of the decomminioning costs mer Pilgrim's expected senice hfe. The 1994 cxlwnse of approximately 515 million is in(luded in depreciation expense on the comolnlated inoime statement. He estimate uwd to determine our annual expeme is based on a 1991 study which documents a cost of approximately s 128 million to decommission the plant using the" green Gehl" meiluul, w hi(h provides for the plant site to be completely restored to its original state. The cost estimate, whic h imohes many uncertainties, was incorporated in our 1992 retail settlement agreement. We retrhe recovery of the annual expense from charges to our retail customers and fnim other utility companies and municipalities u ho purchase a contracted .

amount o[PRIgrim's electric generatton. Tiw funds we collect from decommissioning charges are deposited in an external trust and are restricted so that they may only be used for decommiwioning and related expenws. The net earnings on the trust funds, w hich are also restricted, increase the nudcar deconunissioning fund balanu and nuclear decommissioning rescrse, thus reducing the anmunt to be mllected from customers.

The 1991 decommiwinning 6tudy w as partially ujxlated for internal planning purposes to evaluate the potential impact of long-term spent fuel storage options resulting from delays in Unital states Department of Energy (DOI.) spent fuel renunal on the estimated decommissionmg cost.  ;

(see part 2 twkm for a discussion of spent fuel renuna4 The partial update indicates an estimated decommissioning cost of approximately $400 milhon in 1991 lollars bawd ujuin a revhed spent fuel renunal u hedule and utilieation of dry ajwn fuel storage technology. No further ujxlate is currently asailable, howeser we will continue to monitor DOL spent fuel renunal xbedules and desclopments m spent fuel storage technology along with their impact on the dnununiwinning estimate.

In 1994 the financial Anuunting standards Boani began to resicu the acmunting for decommissioning. If current industry accounting practices j are t hanged our annual decommiwioning expenw couhl increaw and trust fund earnings could be reported as immtment income. In adthtion, the total estimated liabihty for denimmissioning costs may tw ren.nled on the balante sheet, most hkely fully offwt by an a&lition to utihty plant costs.

We do not expect that tlwse potential ihanges wouhl base a material clTect on our results of operations.

L Spent Nu lear l~uel In 1994 we rnennl a hrenw amendment from the Nuclear Regulatory Commission to nunhfy our fuel storage facihty at Pilgrim Station to provide sunitient rmm for spent nuclear fuel generated through the end of Pilgrimi operating beenw in 2012. We hase mo.hned the facihty to pnnide qwnt fuel storage capacity through approximately 2001, howner any further mmhncations are subject to rnicu by our state regulators. In a&li.

tion we are arthcly exploring the fea ilnhty of other spent fuel storage facilities and technologies.

It is the ultimate resguins inhty of the DOE to permanently espose of spent nuclear fuel as required by the Nuclear Waste Policy Act of 1982.

We currently pay a fee of 51.00 per net megan atthour sohl from Pilgrim station generation under a nuclear fuel asposal contract uith the DOE.

The fee is collected from customers through fuel < hargn. The DOE is currently conducting scientinc studies evaluating a potential spent nuclear i fuel repmnory site at Yucca Mountain, Nevada. The potential site, howner, has encountered substantial public and political opposition and the DOE l

has pubhtly statnl that it may be unable to construct nut h a repo*itory in a timily manner, in June 1994 we and other internted parties Gled peti.

tiom in the ILS. Court of Appeak for the D C. Circuit wcking declaratory ruhngs that the DOE is obligatal to begin taking spent nuclear fuel for dnpmal in 1998. The Dol has sought to esmiss those petitions and a court ruhng is an aited. It is unknow n at this time whether and on w hat schalule the DOI will nentually mnstruct a siwnt fuel repository and uhat the cucct on us uill be of any delay s in suth construction.

L in-l.n cI ItaJiva< th e 1%te Our an eu to low Incl radioacthe w aste (1.1W) lh[xnal facibiics located in llarnwell, South Candina ended in July 1994. Until accns is attained to other dhpmal facihties we are managmg 11W generated at Pdgrim station through on-site storage. I.egislation has been enacted in Mawachuwtis ntabikhing a regtdatory prm ess for managing the state's 1IW including the possible siting, licensing and construction of a dispos,al fanhiy within the state, or, ahernathcly, an agreement u nh one or more other states. Ilowner,it appears unlikely that either option uill be asail.

able in the near future. Pen &ng the mnstruction of a dn[xnal facihty uithin the state or the adoption by the state of some other L1W management pnnvdure, we w di contmue to monitor the situation and imntigate other asailable options.

4. Other Nu lear linits We are an imntor in and customer of two other domestic nutlear units. Lioth of these units recche, through the rates charged to their customers, an amount to mver the ntimated ants to dnpne of their spent nu(lear luel and to da ommission the units at the end of their uwful lhes.

N:te E. Pensions, Other Postratirement and Postemployment Benefits L Pensions We hase a definnt benc6t funded retirement plan with certain contributory features that cmers substantially all employees. llenc6t* are I asal upon an employeci years of wrvic e and mm}wnsation during the last years of employment. Our funding pohcy is to contribute an amount each year that k not .len than the minimum rniuired conitibution uniler fnleral law or greater than the maximum tax deductible amount. Plan aswts are pri- i marily eqmtin, bond ,imuramr contracts and real ntate funds.

Net pensitin nWI Onishtnl oI Nic ft d!ow ing colnlN bnent%!

l l

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l

• years ended December 31, (in thousands) 1994 1993 1992 Current acrsico cost benefits earned 5 15,057 5 11,734 s 10,683 Interest w w projected benclit obligation 31,961 33,181 32,287 Actual rm 61(r-turn) on plan assets 214 (44,470) (23,281) ,,

Net am., u.ation and deferral (12,169) 8.528 (13,549)

Net pension cost (a) $ 17,063 5 8,973 5 6,140 (at in accordam e n nh an agreement with our state rigulaters wc dcferred the chlierente in net pension wits and the annual funding amounts. Net deferred costs amounted to 16 mdhon and s 14 mdhon at December 31,1994 and 1991, respectnely. Net pension costs recorded as ex[wnse were 525 million in 1994,55 mdhon in 1991 and 50 in 1992.

'*'e used the following assumptions for calculating pension cost:

1994 1993 1992 Discount rate 7 00 % 8.25o 8.25 %

e Expected long-term rate t' return on assets 10.00 % 10.00% 10.00 %

Cornpensation increase rate 4,50 % 4.50 % 4.50 %

The pension plani funded status was as follow s:

December 31, (in thousands) 1994 1993 Actuarial prescnt s alue of benclit obhpations:

An umulated benefit obbea tion,indudme scsted binefits of 5 305,632 and 5384,150 5 121,072 5 400,895 Plan assets at fair tatue > 289,164 5 394,231 Projected ohhgation L, scru c rendered to date (187,910) (509,661)

Projected benefit obhgation in excew of plan assets (78,746) (115,428) linrecognierd prior *crsice cost I1,328 8,139 l

Linremgnierd net loss 67,161 75,352 linrempnierd net obhgation 8,998 9,932 Minimum habdity adjustment (b) (22,849) 0 Net pension habihts 5 (11,408) 5 (22,005) e (b) statcment of I mantial Aununtmg standanb No. 87,I mploycri Auuunting for Pensions (sf As 87), requ res the recognition of an a(hhtional mimmum liabihty for the cu en of au umulated bcnchts os er the fair salue of ple. ewt* a vl accruul pension costs. In aicordance with sf As 87 we rewrded an adihtional mini.

mum habihn and sorresponihng intangible met of 52 3 m9 hon on our u nsohdated balance sheet at December 31,1994.

We used the following awumptions hir cahidating the plan's yearand funded status:

1994 1993 Diwount rate 8.25 % 7.00" .

Compensation mercase rate 1,90 % 4.50"o We aho prmide dcfined contribution 40l(k) plans for substantially all our employces. We match a percentage of employees' voluntary contri-

'alons to the plan *, w hich amounted to 58 mdhon in 1994, 57 million in 199 3 and 5 5 milhon in 1992.

2, Other 1%tretirement flenefits In adthtion to pension bendits, we aho currently provide health care and other benefits to our retired employees who meet a rtain age and years of scrsite chgibihty requirements. In 1993 we adopted Statement of Jinancial Acmunting Standards No.106,I mploycrs' Accounting for Postretocment llenclits Other lhan Pensions of As 106). This requires us to nord a liabihty during the working years of employecs for the expected costs of prmiding their pmtretirement benefits other than pensions (Pilol's). Prior to 199 3 our policy was to record the cost of P110Ps uhen paid. Our transition ohhgation upon adopting this standard was approximately 518 3 milhon, w hit h uc clected to recognire mer 20 years as permitted by si As 106.

Our 1942 settlement agreement pnnides us with a phase-in of a portion of the higher PilOP costs incurred under Si AS 106 and alkm s us to deler the a4htional msts in eurw of the phase in amounts to the estent that we fund m external trust. Our funding pohcy is to contribute 100%

of postrctirement ben Gt cmts to esternal trusts. Accordmgly, we recorded espenses of 517 million in 1994 and 515 milhon in 199 3, relketing the ai o iunt of current omt recoscry from (ustomers, and defiTred t}ic nct costs in exceu of amounts expemed for future recoscry. Net deferred costs amounted to 516 mdlion and 510 milhon at December 31,1994 and 194 3, respectiwly.

I 27

Net pstretirement lwncliti cust consisted of the following components:

years ended December 31, (in thousan&) 1994 1993 Currrnt sertice cmt - benehts carned $ 4,978 5 4,351 Interest cost on aummulated lwnefit obligation 11,632 14,286 Actual return on plan assets (187) 0 Amortization of transition ohhgation 9,151 9,151 Net amortization and deferral (2,581) 0 Nc postretirement benefits cust $ 24,993 5 27,788 We used the following assumptions for cahmlating pistretirement benefits cost:

1994 1993 Diuuunt rate 7.0% 8.0%

Expected long-term rate of return on assets 9.0% 9.0%

llealth care cmt trend rate 9.0% 12.5 %

The health care cost trend rate is assumed to decrease by one percent eac h year beginning in 1995 to 5% in 1998 and years thereafter. Changes in the health care cost trend rate will afIn1 our cost and obhgation amounts. A one percent increase in the assumed health care cost trend rate wouhlinarcase the total service and inteerst cost components by 20% and would increase the accumulated benellt obligation at December 31,1994 by 18%.

The p>stretirement Iwncfits program's funded status was as follow s:

Deccmber 31, On thousands) 1994 1993 Trust assets at fair value $ 33,100 s 18,016 Anumulated obhgation for servlic rendered to date from:

Retirees $ (91,960) 5 (75,216)

Adive employees eligible to retire (31,159) (64,880)

Artisc emphivers not eligible to retire (51,545) (176,664) (73.285) (213,381)

Accumulated twnctit obligation in excrss of trust assets (141,164) (195,365)

Linrecognised prior sersice cost (19,502) 0 linrecogniini net (gain)/ loss (1,849) 21,497 linrenignized transition obligation 164,715 173.868 Net pntretirement benefits baldhts 5 0 5 0 ihe weighted aserage distuunt rates we used to measure the accumulated bene 0t ohhgation were 8.25% in 1994 and 7.0% in 1993. The trust assets consist of equities,Imnds and money market funds.

3. Postemploycnent Ilenefts in 1994 we adoptcJ $.tatement of f inancial Accounting Standants No.112, Employers' Accounting for Postemployment Benefits (SFAS 112). This rnguirni us to record a liability for the estimated costs of providing putemployment lwnefits. Postemphiyment benents prmided to former or inactise employres their beneficiaries and emered dependents consist primarily of thsability.related Iwnefits, including workers' cumpensation. We previoudy remgnired the costs of these benefits primarily as claims were paid. The adoption of SFAS 112 did not have a material efTnt on our results of ojwrations, l

Noto F, Eminent Domain Taking In Nmember 1994 a Norfolk Superior Court ruhng against the Massachusetts Metropohtan District Commission (MDC) became efTective, pnnid-ing us uith an achhtional s 5.7 milhon gain on an eminent domain land taking case. We had filed suit against the MDC in 1992 related to the emi-nent domain taking of certain of our property in 1989 l

Note G. Cancelled Nuclear Unit in May 1982 we began to expense the inst of our cannlied Pdgrim 2 nuclear umt over approximately cleven and one-half years in anurdance with an onter rnrised from state regulators. We did not expense any of these costs in 1993. The remaining balance of s19 million was fully expensed in 19W as allowed by our state regulators in our 1992 settlement agrectnent.

28

e Wete H. Capital Stock and Indebted:ess Capital 5tmk December 31, (doll:rs in thousands, except per share amounts) 1994 1993 1992 Common stenk cajuity:

Common sim k, par salue 51 per share,100,(XX),000 shares authorized; 4 5,5 3 5,477, 4 5,129,227 and 44,763,055 shares issued and outstanding: $ 4 5,535 s 45,129 5 44,763 Premium on wmmon sta k 622,803 612,653 602,196 Retained carnings 247,004 218,292 192,948 Surplus imented in plant 405 405 405 Total common stock equity $ 915,747 s 876,479 s 840,312 Cumulative preferred stock:

Par value s 100 per share,2,890,000 shares authori7ed; issued and outstanding:

Non. mandatory redeemable series:

Current Shares Redemption Series Outstanding Pria/ Share 4.25% 180,(XX) 5103.625 $ 18,000 s 18,(XX) s 18,(XX) 4.78 % 250,000 $ 102.800 25,0(X) 25,000 25,000 7.75% 400,(XX) 40,000 40,000 0 8.25% 400,000 -

40,(X)0 40,000 40,000 8.88 % 0 . 0 0 40,000 ,

I lotal non-mandatory redeemahic serics $ 123,000 $ 12 3,000 s 123,000 Mandatory redermahic scrics:

Current Shares Series Outstanding 7.27% 460,000 $ 46,(XX) s 48,000 5 48,(XX)

H,00% 500,000 50,000 50,000 50,000 Total mandatory redermable series  % ,000 98,(XX) 98,000 I cas: due within one year 2,000 2,000 0 Total mandatory redermable scrics, net $ 94,000 5 96,000 s 98,(XX) l Dhidends Dedared per Share Common stoc k $ l.775 s 1.715 s 1.655 Preferred sto(k:

4.2 5% wrics 5 4.250 $ 4.253 5 4.250 4.78% series 4.780 4.785 4.780 7.27% series 7.270 7.270 7.270 7.75% series 7.750 5.707 0 8.00% series 8.000 8.000 8.000 8.25% series 8.250 8.250 5.278 8.88% wries 0 2.220 8.880 l Preference stan k:

I s 1.46 series 5 0 s O s 0.365 1

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_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _. ._ .__-_______-_____a

O Indebtednen a 1)rromber it ,

Clollars in thousands) 1994 1991 lampterm sicht:

first mortgage innuls:

Series S, uriable ratr, tlue 2002 $ 0 5 2 5,(KX) herire ll,10.2 50%, duc 2014 0 15,(M K)

'Ibtal lirst inortgage lunuls () 40,(X K)

Sewage faulity reirnue bonile 16,100 16,300 Inn: dur within one year 6(M) 0 inc funda hel1 by trustcc 4,0H1 1,803 Net long term newage facihty ersonuc lumd, 11,617 32,497 1kbenturen:

8.875%, duc 1995 IOO,(XX) lOOpX) 5.125%, due 1996 t rx),(Xx) IOO,0(K) 5,7(K)%, duc 1997 100pK) 100,tMX) 5.950%, duc 1998 LOO,(KK) 1(K),000 6.h00"b, slue 20lNJ 65,000 65p)0 6.050%, duc 2(KM) IOO,(XX) 1(K),0(K) 6.H(KPb, due 2(M)! 150,(KK) 150,(HX) 9.875%, ilue 1020 100px) l(K)MX) 9.175%, duc 2021 I I S,(KK) 12 5,0(X) 8.2 50%, due 2022 60,(XX) 60,0N) 7.MNr% duc 2011 200JXK) 200AX) blal debenturen 1,190MX) 1,200,(KX)

Inn: due within one year 100,000 0 Net long term alth, utures 1,090p K) 1,200,(KX)

Maw,u hmrtts indust rial linam e Agent') hond=:

5.750"b, duc 2014 15,(XN) 0

'lotal lone term <lcht 5 1.136,617 5 1,272,497 Short term alrht:

Notn payable; llank loans 5 80,786 5 106,501 Conunctrial paper i14 # M) 97,650 lotal noten pauble 5 214,786 5 204,151 I, Comnmn 5 tmh Sinse 1)ctrinber iI,1991, ne h unt the folloning sharra of tonunon xtot L:

Number 'ihtal Prrmium on (in thomanilo alsharen Par Value Common sim k j ltalante t antmber it,1991 42,047 5 42,047 5 516,567 i finidend trimestrnent plan 416 416 9,658 Neu hine (() 2,1(K) 2,100 55,971 Italanu l)ctrinber 11,1992 44,761 44,765 602,196 lbsidend trimentment plan 166 166 10,457 Italanir I)et embt r 11,1991 45,129 45,129 612,655 j lbidend reimestment plan (b) 406 406 10,150 llalant c I)ct ember 11,1994 45,515 5 45,535 5 622,801 ,

1 (a) We ilWtl ller hrt pon M1b t4 tht 19N tufnind at Nttst k hM84Ihr lu f ttlut t 4btW Q, [ln tit ivt (l ) At l>ru entwr 11, l'N4,ihr rom.mang audun unt munmin ,1wn-i rncrmi f.,r future b.uanir unitet the 1)ni.lcml Itrime.unent an.1 Cennnu.n % L Pun hanc Plan erre 2,40x,00 6hain, i j

M

$ 2. Cumularise Non-ManJatory itedermable Preferred Stock in May 1993 we issued 400,000 shares of 7.75"o cumulatiw non mandatory redeemable preferred stm k at par. The stos k is redeemable at s100 per share plus awrued dis idends beginning in May 1998. These shares uere sok! in the form of 1.6 million depositary shares, each representing a one. fourth interest in a share of the preferred sim k. We used the pnued, of this issue to fully retire the 8.88% series cumulative non-mandatory redeemable pn ferred stoc k.

L Cumulatise Mandatory stedermable Preferred Stock The 460 000 shares of our 7.27% sinking fund series cumulative preferred stock are currently redeemable at our option at 5103.88. The redemp-tion price det hnes annually each May to par ulue in May 2002. The stoc k is subject to a mandatory sinking fund requirement of 20JXX) shares each May at par plus au rued dindendt We also hase the non-cumulative option eac h May to redeem athhtional shares, not to exceed 20,000, through the sinking fund at 5100 pi r share plus accrued dnidends.

We are not able to redeem any part of our 500,000 shares ed 8% series cumulatne preferred stm k prior to December 2001. The entire series is subjed to mandatory redemption in December 2001 at s 100 per share, plus accrued disidends.

4, Inngderm Debt The aggregate prinopal amounts of our delwntures and seuage facihty rewnue bonds (incluihng sinking fund requirements) due are 5100.6 million in 1995, s101.6 million per year in 1996 through 1998 and 51.6 milhon in 1999 In I4 bruary 199 3 we issucil 565 million of 6.80a'o debentures due in 2(x)0. We ustti the proceeds of this issue to reduce simrt. term debt.

These debentures are not redeemable prior to maturity.

In Marc h 1991 we iwurd 5650 nullion of debentures and used the pnueds to retire ten series of first mortgage bonds and reduce short-term debt. The debentures were iwurd in fiw wparate wrics with interest rates ranging fnim 5.125% to 7.8% and maturing between 1996 and 202 3.

The 51/8% debentures due 1996,5.70% duc 1997, 5.95% duc 1998 and 6.80% due 2W)3 are not redecinable prior to maturity. The 7.80%

debentures duc 202 3 are first redeemable in March 2001 at a redt mption price of 103.73% The redemption price decreases annually each March to par value in Man h 2011. There is no sinking fund requirement for any series of these debentures.

In August 1993 we iwurd s100 milbon of 6.05% debentures due in 20(xh We used the proceeds from this sale to reduce short term debt.

Thew debentures are not redermable prior to maturity and haw no sinking fund requirements.

In Man h 1994 the Mawac huwtts industrial linance Agency, on our behalf, issued 515 milhon of 5.75% tax-exempt unsecured bonds due in 2014. The bonds are redeemahic beginning in February 2004 at a redemption price of 102% The redemption price decreaws to 10l% in f ebruary 2005 and to par in iebruary 2006. The pnweeds from this muance together uith sullicient other funds were used to fully redeem the Series 11 first mortgage bonik We redeemt d at par the 5 2 5 milhon sariable rate Series s first mortgage bonds in 1994. These bonds paid interest at 9.2% for the period January 15,199) through January 14,1994. The rate uas adjusted to 8.2% beginning January 15,1994 based upon the tengear constant maturity Treasury rate as pubhshed bs the Irderal Rescrw Iloard.

As a n suh of the redemptmn of all outstanihng first mortgage bonds, the Indenture of Trust and Iirst Mortgage that had mortgaged substan-tially all our property smcc 1940 was terminated in Nowmber 1994.

Seu age fat ihty rewnue bonds were iwued by llarbor I.lectric i nergy Company (111 i C), a w holly -owned subsidiary The bonds are tax.

exempt, subject to annual mandatory sinking fund redemption requirements and mature in the years 1995 2015. The weighted awrage interest rate of the bonds is 7. 3%. A portion of the pnieceds from the lunds is in rewrw with the trustee. If HI EC should haw insullicient funds to pay cer-tain costs on a timely basis or be unable to meet certain net worth requirements, we wouhl be required to make additional capital contributions or ,

loans to the subsiihary up to a maximum of 57 milhon. )

5. Short- Term Debt We haw arrangements uith wrtain banks to pnnide short term creibt on both a committed and an uncommitted and as available basis. We cur-rently haw authority to inue up to 5 350 milhon of short term debt.

i We hase a 5200 nulhon resobing creibt agreement uith a group of bankt This agreement is intended to provide a standby source of short-l term borrow ings, linder the terms of this agreement we are required to maintain a common equity ratio of not less than 30% at all times.

I Commitment fees must be paid on the unuwd portion of the total agreement amount.

Information erganhng our short-term borrow ings, turnpriwd of bank loans and commercial paper is as follow s: )

(in thousands of dollaro 1994 1993 1992 l

Maumum short term borrow mgs 5 268,100 s 320,000 5 314,998 Weighted awrage amount outstamhng 5 214,640 5 220,149 5 233,286 Weighted awrage interest rate *, culuthng commitment fees 4. 5% 3.4% 4.1%

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31

Note 1. Fair Clue of Securities

• The following methmis and awumptions w ere used to estimate the fair value of em h class of wcurities for which it is practicable to estimate the value:

Nuclear Jewmmissioning trust 1he mst of $82.8 million approximates fair value based on quoted market prices of accuritics held.

Cash and cash equivalents I

The (arrying amount of 56.8 milhon approximates fair value due to the short-term nature of these accurities.

Mandatory redermable umulative preferred stock, sewagefacility revenue bonds and unsecurcJ debt 1he fair values of these semritten are based up,n the quoted market prices of similar inues, Carrying amounts and fair values as of December 31, 1994 are as follow s:

Carrying Iair (in thousando Amount Value Mandatory redeemahic cumulative preferred stock 5 96,000 $ 93,780 Sewage facihty rnenue Ix>nds 36,300 37,037 Unsecured debt 1,205,000 1,111,317 Note J. New Accounting Pronouncement Statement of Financial Accounting Standards No.115, Acmunting for Certain Investments in Debt and Equity securitics, became clTectise in 1994.

This statement did not base a material rifect on our consohdated financial statements.

Note K. Commitments and Contingencies

1. Capital Commitments At December 31,1994, we had estimated contractual obligations for plant and equipment of approximately $50 mdlion.

1

2. Irase Commitments l We hne leases for certain facihtics and equipment. Our estimated minimum rental commitments under both noncancellable leases and transmission agreements for the ynra after 1994 are as follow s:

(in thousands) 1995 5 26,540 1996 24,305 1997 21,396 1998 19,438 1999 17,794 i Years thereafter 127,646 I Total 5 237,119 l

l l

We will capitahic a portion of these lease rentals as part of plant expenditures in the future. Our total expense for loth lease rentals and trans-minion agreements was 527 nulhon in 1994 and 5 to milhon in 1993 and 1992, net of capitaliicd expenses of 54 mihion in 1994 and $ $ million in 199I and 1992.

3. Ilydro-Quebec ,

We hair an approximately 11% equity ow nership interest in two mmpanics whit h own and operate transminion facihties to import electricity l I

from the Ilydro Quebec system in Canada, w hich is imluded in our consolidated fmancial statements. As an equity participant we are required to guaranter, in addition to our ou n share, the total obhgations of those participants w ho do not meet certain credit criteria and are compensated acconhngly. At December 31,1994, our portion of these guarantees was apprmimately $21 milhon.  ;

i

4. knkee Atomic Ilestric Cornpany We her a 9.5% stm L imntment of apprmimately 52.5 milhon inYanker Atomic Electric Company (Yankee Atomic). In 1992 the Ibard of l Directors of Yanker Atomic decided to permmwntly dismntinue [xmer operation of theYankee Atomic nuclear generating station and decommission the fanhty. We relied onYankee Atomic for ten than one penent of our system capacity under a long term pun hased power contract.

In 1991 Yankee Atomic rnrised appnnal from federal regulators to continue to milect its inientment and decomminioning costs through July 2000, the jwriod of the plant's ogwratmg hirnse. The estimate of our share of Yankee Atomic's investment and msts of demmminioning is approxi-mately $ 19 mdhon as of December 31,1994. Ihn estimate is reconled on our mnsohdated balance sheet as a power contract halnhty and an ofTset.

ting regulatory awrt as we contmur to odleti these costs from our customers in accordance with our 1992 settlement agreement.

32

6. Nudear insurame The federal Price- Andermn Act currently prmides approximately 50.9 bdlion of financial protection for public hability daims and legal costs ansing from o single nudcar.related acddent. The first $ 200 milhon of nuclear hahihty is covered by commercial insurance. Additional nudear liability insurance up to approximate:y 58.3 bilhon is provided by a retrospective annessment of up to $75.5 milhon per incident levied on each of the 110 units licensed to operate in the Umted States, with a maximum assessment of s 10 million per reactor per accident in any year, The additional nudear liability insurance amount may change an existing units give up their licenses. In addition to the nuclear habihty retrospective assessments, if the sum of all pubbc liabihty daims and legal costs arising from any nuclear accident exceeds the maximum amount of financial protection, each licenser can be assessed an aihhtional five percent of the maximum retrospective assessment.

We have purchased muurance from Nudear Electric Insurance 1.imited (NEIL) to cover some of the costs to purchase replacement power during a prolonged accidental outage at Pilgrim station and the cost of repair, replacement, decontamination or decommissioning of our utility property resulting from covered incidents at Pilgrim Station. Our maximum potential total assessment for losses which occur during current p(dicy years is approximately 514.8 milhon under both the replacement power and exceu property damage, decontamination and decommissioning policies. All companies insured with NIIL are subject to retroactive assessments iflosses are in excess of the total funds available to NEIL While assessments may also be madc for losses in certain prior policy years, we are not aware of any losses in those years which we believe are likely to result in an anessment.

6. Litigation in 1991 we were named m a lawsuit alleging discriminatory employment practices under the Age Discrimination in Empk>yment Act of 1967 con.

cernmg 46 employees alTected by our 1988 reduction in force. Irgal counsel cuntinues to vigorously defend this case. Itised on the information presently available we do not expect that this htigation or certain other legal matters in which we are currently invohed will hase a material impact on our financial condition. Iloweser, an unfavorable decision ordered against us could haie a material impact on our results of a reporting period.

7. liarardous ttaste We own or operate 48 properties uhere hazardous materials were rdcased in the past. We are required to clean up these properties in accordance I with a timetable developed by the Massachusetts Department of Environmental Protection and are continuing to evaluate the costs associated with l their cleanup. There are uncertainties associated uith these costs due o the complexities of deanup technology, regulatory requirements and the particular characteristics of the chfTerent sites. We also cont;nue to face possible liabihty as a potentially responsible party in the deanup of ten multi party haardous uaste sites in Massachusetts and other states uhere we are alleged to have generated, transported or disposed of hazardous waste at the sites. At the majority of these sites we are one of many potentially responsible parties and we currently expect to have only a small percentage of the potentialliabihty. Through December 11,1994, we have accrued approximately $7 million related to our deanup liabilities. We are unable to fully deter mine a range of reasonably possible cleanup costs in excess of the accrued amount, although based on our assessments of the specific site circumstances, we do not expect any such additional costs to have a material impact on our financial condition. Ilowever, additional provisions for deanup (usts could have a materialimpact on our results of a reporting period.

1 i

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, l l

Note L Long Term Power Contracts .

L long-Term Cemtransfor the Punhase of Eleariaity We purt hase electric p<mer und<r nescral long term cuntracts for whi(h we pay a share of the generating unit's capital and fhed operating costs through the contract expiration date. The total tust of thew cuntrans in included in punha rd power expense in our tunsolidaird income state-inents. Information relating to thew contracts as of December 31,1994 is as follows:

proportionate share (in thousands) 1994 1994 Interest Debt Contract Units of Minimum Portion of Outstanding Espiration Capacity Purchawd(a) Debt Minimum Through Cont.

C,rneraung Unit Date  % MW Se rtice Drht Sersice Exp. Date Canal Unit 1 2001 25.0 140 5 796 5 321 5 1,928 Mann. liay Transportation Authority 2005 100.0 34 (b) (h) (b)

ConnecticutYankee Atomic 2007 9.5 55 2,607 1,695 14,678 Ocean State Power Unit i 2010 23.5 67.5 5,072 3,653 21,563 Ocean State Power Unit 2 2011 23.5 67.5 4,266 3,223 18,316 Northrant I:ncrgy Annociates (c) (c) 219 (c) (c) (c)

!!Energia 2013 73.0 64 (d) (d) (d)

MaisPower (c) 2013 44.3 117 12,642 8,088 86,538 Ltal 764 5 25,381 5 16.950 5143,023 (a) 1hc Northr4<t I:ncrgy Aswwiates auntrad represente 6.44. : f our total system grrwration capability. The remaining uints listed alxnc reprr*ctit 15.W. in total.

tb) We are required so juy the greates of 622 00 per Ldouatt-ye.ar or 90% of the Nrw I ngland hmrr Pool aa[ubihty responsihihty ad uwtment i tharge up to 163.00 per Lihmate year timei the quahfied raiucity (currently raird at 14MW) plu inc reinental nperating, maintenaiu e and fuel coats. W total chargra for this contrad m 1994 were approximairly $2 nulhon.

(c) We pun h4=e appnainutely 75 5% of the energy output of this unit under two contractn. Our contract reptr cnts 135MW and expirciin the year 2015. W other tuntract is for 84MW and empiren in 2010. We pay for thin energy based on a pri< r per LWh actually recciird. We do not pay a pniportionate share of the unit's rapital and fhed o;wranng cmts. & total < hargen for thric contracts in 1994 worr appnaimately 5119 nullion.

(d) We pay for thin energy based on a prier per kWh actually retrised. W total chargrs under ihm contract for 1994 were approunutdy 511 million.

(c) & Ma% hewer inntralt Elart?d in january l994. PaymentA are b. pied on a stipulated prke lWT MW rating of the Unit suhlrtt to the unit maintaining a twelvr numth astrage asadahihty of at lect 90% Pay monts are adjusted proportionairly if the iwehr month average i. Iwlow 'ith if the twthe month average is lens than 10% no pay ment in required.1htal chargen for tlus contrad in 1994 were approximately 547 mdhon.

Our total fixed and sariable costs for these contracts in 1994,1993 and 1992 were approximately $286 million,5225 million and $217 million, renpretinly. Our minimum fned pay ments under thew tuntracts for the years after 1994 are aa follows:

(in thousands) 1995 5 105,574 1996 108,187 1997 105,622 1998 109,837 1999 108,196 Years thereafter 1,318,008 lotal 51.855,424 lotal ptrnent salue 5 92N,594 2, long&rm Power Sales In adthlion to our power tale 6 to lhe w holesale customers, we nell a percentage of Pdgrim Station's output to other utilition under long tortn (un-tracts, Infortnation relating to thew (ontradh is am follow m:

Contract I xpiration Units of Capacity Sold Contract Customer Date  % MW Commonwralth Ilectrk Company 2012 11.0 73.7 Montaup i lectric Company 2012 11.0 73.7

%inus municipahtion 2000 (a) 3.7 25.0 lotal 25.7 172.4 (a) 56ubpd to trrtam adptstmente.

Umler thrke contrartt, the utdatirn pay their proportiorul sharr of the (Osts of operating Pilgrim htation and .: whd transmission facilition.

These rosts include operation and maintenance rx;wnwn, insurance, local tawa, depreciation, decomminioning and a return on rapital.

34

ileport of 1:depe:d:nt Acc=ntants 1b she Sam kholders and Ihreacrs of kron Edswn Cornpany We hace au.hted the accompanyieg u.w hdated balance sheets of Ibston Edison Company and subsidiaries (the Company) as of December 31, 1994 and 199 3 and the related consob 'ated statements of income, retained earnings and cash flows for each of the three years in the period ended Dec ember 31,1994. These fir.an(ial .tatements are the responsibihty of the Company's management. Our responsibility is to express an opinion on these finarmial staternents lased ( n our audits.

We conduded our audit in arc srdance with generally accepted auditing standards. Those standards rajuire that we plan and perform the audit to obtain reasonable anurance ahot t w hether the financial statements are free of material misstatement. An audit includes examining, on a test basis, cudenc e supporting the amounts and diulosures in the financial statements. An audit also includes assessing the accuunting principles used and significant estimates made by management, as well as esaluating the cnerall financial statement presentation. We believe that our audits provide a reasonable basn for our opinion.

In our opinion, the consolidated financial statements referred to alwar present fairly, in all material respeds, the financial position of the Company as of1)ccember 11,1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period emled I)cc ember 31,1944, in conformity with generally accepted accounting principles.

0 g

( L' ,

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,-, . u...a~ ,,

january 26,1995 35

4 Selected Consolidated Quarterly Financial Data (Unaudited) *

(in thousands, except earnings per share) 11alann Earnings Available Per Average Operating Operating Net for Common Common Revenues Income income Stock Share '

15'94 First quarter $ 377,449 5 45,795 s 19,812 5 15,850 $ 0.35 Secund quarter 368,655 50,395 23,982 20,031 0.44 Third quarter 449,094 96,599 70,182 66,256 1.46 Fourth quarter 353,356 34,034 11,046 7,120 0.16

-1993 1:irst quarter $ 354,752 $ 41,722 5 15,452 s 11,377 s 0.25 Second quarter 346,074 49,282 22,829 19,125 0.43 ,

Third quarter 436,024 96,319 70,015 66,053 1.47 lisurthquarter 345,403 37,996 9,922 5,938 0.13 Selected Quarterly Stock Data liillowing are the re[mrted high and low sales prices of our common stock on the NewYork Stock Exchange as reported daily in the Wall Streer Journal for each of the quarters in 1994 and 1993 and the dividends declared per share during each of those quarters:

1994 1991 ,

liigh low Dividends liigh Low Dividends ,

1-irst quarter $ 29 7/8 5 26 5 0.440 5 30 t/2 $ 26 3/8 5 0.425 Sexund quarter 29 1/8 25 1/4 0.440 30 7/8 27 7/8 0.425 Third quarter 27 5/8 22 3/4 0.440 32 5/8 29 3/4 0.425 Fourth quarter 24 1/4 211/2 0.455 32 1/4 27 7/8 0.440 i i

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i 36

. Selected Consolidated Operating Statistics (Unaudited) 1994 1993 1992 1991 1990 Cajnity MW; New !Laton Station 760 760 760 760 760 Pilgrim Station 669 670 670 670 670 Mystic Station 1,006 1,006 1,005 1,015 1,014 W.F.Wyman Unit 4 36 36 36 36 36 Jet turbines 287 283 281 281 281 Total 2,758 2,755 2,752 2,762 2,761 Contract purchases 1,035 938 1,157 1,293 924 Contract sales (373) (283) (303) (293) (173)

Net capability at year-end 3,420 3,410 3,606 3,762 3,512 Net capability at peak - MW 3,484 3,663 3,587 3,695 3,505 Cqebihty responsibihty to NEPOOL at peak - MW 3,306 3,190 3,396 3,381 3,393 Elison territory:

llourly peak - MW 2,798 2,662 2,545 2,652 2,548 Load factor 58.9 % 60.5 % 62.5 % 60.0 % 62.2 %

Generating station economy (llTU/ net kWh) 10,408 10,345 10.234 10,331 10,403 Average crat of fuel (Company) -

3 per million itTU:

Fossil 2.321 2.504 2.467 2.402 2.555 I Nuclear 0.501 0.507 0.522 0.562 0.591 Com[wmite 1.613 1.620 1.669 1.805 1.915 Capability (net kW):

hasil 84 % 84 % 81 % 81 % 81 % i Nuclear 16 % 16 % 19% 19% 19 %

Generation (system kWh escluding interchange):

I luwil 75 % 68 % 69% 70 % 72 %

Nuclear 25 % 32 % 31 % 30 % 28 %

i Utdity plant (5 in 000*n):

Expc. litures 198,760 246,763 213,827 202,589 240,902 Retireme no 45,673 34,147 34,036 30,333 27,180 Awumulated depreciation 1,344,452 1,258,359 1,177,294 1,097,991 1,015,371 Depreciable plant 3,994,212 3,841,752 3,567,160 3,488,269 3,277,616 Number of utihty employees at year.cnd 4,026 4,397 4,540 4,637 4,738 l Certain reclamfications were made to the data reported in prior years to conform with the method of presentation used in 1994.

37

4.

Selected Consolidated Sales Statistics (U2ardited) 1994 1993 1992 1991 1990 Uectric energy (kWh in thousands):

k> urns (system output): l Generated 9,428,911 9,787,092 11,679,824 10,602,110 12,744,238  !

Pun hased 5,920,065 5,326,224 5,449,225 4,651,101 3,305,491 New England Iower Pool 1,515,115 1,575,310 932,121 1,274,522 1,065,731 Total 16,884,111 16,688,626 18,061,170 16,527,731 17,115.460 Disposition:

Commercial 7,478,611 7,263,358 7,178,281 7,143,484 7,178,134 Residential 1,514,172 3,477,870 1,411,252 3,186,681 3,427,410 Industrial 1,519,185 1,580,969 1,671,564 1,685,184 1,743,848 130,721 145,242 292,510 279,540 275,213 Other (a) listal retad salen 12,681,109 12,467,439 12,555,607 12,494,889 12,624,605 Wholesale and contract sales (a) 2,167,589 2,272,669 2,517,247 1,660,082 1,674,114 New England l'ower Pool 725,439 877,978 1,898,059 1,252,797 1,885,165 lotal system 15,776,137 15,618,086 16,970,913 15,407,768 16,183,884 Miurilaneous usage 1,108,194 1,070,540 1,090,257 1,119,965 931,576 lbtal 16,884,IIi 16,688,626 I8,061,170 16,527,733 17,1I5,460 .

Kilowatthours - annual grow th:

Commercial 1.0% 1.2% 0.5% (0.5)% 1.2%

Residential I.6 1.9 0.8 (1.2) 0.4 l Industrial (2.6) (5.4) (0.8) (3.4) (5.5)

Other (10.0) (50.3) 4.6 1.6 3.9 Total retail sales (a) 1.7 (0.7) 0.5 (1.0) 0.1 Wholesale and contract sales 4.2 (9.7) 51.6 (0.8) 47.0 New l ngland Power l'uol (17.4) ( 5 3.7) 51.5 ( 3 3.5) (9.8) listal system 1.0% (8.0f a 10.1% (4.8)% 2.2%

l.lectric operating revenues by alass:

Commercial 50 % 49% 48% 48% 49%

Reaklential 28 % 28 % 27% 27% 28 %

Industrial 9% 10 % 10% 10 % 11 %

Wholesale and contract i1% 12 % 13% 13% 9%

Other 2% 1% 2% 2% 3%

ilectric sales statistics:

Residential averages:

Annual LWh une 6,197 6,143 6,081 6,060 6,144 Revenue per kWh 12.0W i1.62c 10.80c 10.66c 10.18c

- Annual bill $ 749.47 5 709.89 5 657.4 5 641.62 s 620.54 Customers:

Average number 655,707 651,141 646,215 642,967 642,041 (a) 1 fintive Irbruary 1991 a former retail ru=tomer became a wholesale cu tomer as allourd under Mawa husetts state law. Imludmg the etTert of this customer's thange in status, total retail ules marramed 2 0% in 1994 and 1.2". in 199 3.

Cettain retlawilkations and rcrak ulations were made to the data reported in prior years to conform with the meth<xl of presentation used in 1994 30

Selected Consolidated Financial Statistics (Unaudited) 1994 1993 1992 1991 1990 Operating revenues (000) $ 1,548,554 5 1,482,253 s 1,411,753 5 1,354,501 s 1,314,440 1341ance for common (0(K); $ 109,257 $ 102,513 5 90,748 5 77,059 5 77,788 Per common share:

Earnings 5 2.41 5 2.28 5 2.10 5 1.96 $ 2.01(*)

Dhidends declared 5 1.775 5 1.715 5 1.655 5 1.595 5 1.535 Dividenda paid $ l.76 5 1.70 $ 1.64 5 1.58 s 1.52 Ilook salue 5 20.11 $ 19.42 5 18.77 5 7.92 5 17.22 Operating cash flow M $ 8.12 $ 6.58 $ 6.80 $ 5.50 5 5.68 Payout ratio 73% 75% 78 % 81 % 76 %

Return on ascrage common equity 12.1 % 11.9 % 11.5 % 11.3 % 11.8 %

Year-end disidend yield 7.6% 5.9% 6.2% 6.6% 7.9% j Fixed ( harge coserage (Si C) 2.45 2.22 1.89 1.83 2.02 Cagutalintion:

7btal debt 56 % 57 % 56 % 58 % 59 %

)

Preferred an(t preference equity 9% 9% 9% 10 % 10 %

Common equity 35 % 34 % 35 % 32 % 31 %

1.ong term debt (000) $ 1,136,617 5 1,272,497 5 1,091,073 5 1,136,765 5 1,074,025 Mandatory redermable preferred /

preference stock (000) $  %,000 s 98,000 5 98,000 $ 100,000 5 100,000

'lotal assets (000) $ 3,616,610 5 3,477,288 5 3,294,234 s 3,119,285 $ 3,012,589 Internal generation after duidends (000) $ 216,105 5 193,484 5 204,248 5 193,019 5 187,954 l'lant and nuelcar fuel expenihtur es (000) $ 220,694 5 253,254 5 231,025 5 214,213 5 255,784 Internal generation 98 % 76% 88 % 90 % 73%

Common shares outstanihng:

Weighted aserage 45,337,661 44,959,050 43,143,953 39,347,824 38,778,901 Year-end 45,535,477 45,129,227 44,763,055 42,047,356 38,998,531 Stmk price - liigh 29 7/8 32 5/8 28 1/4 24 7/8 20 1/4

- Low 211/2 26 3/8 22 1/8 18 1/4 16 1/2

- Year-end 24 29 3/4 27 1/2 24 3/4 20 Year.cnd market value (000) $ 1,092,851 5 1,342,595 5 1,230,984 5 1,040,672 5 779,971 Trading volume (sharen) 25,095,100 18,729,400 26,460,900 17,464,300 19,652,300 Market /luiok ratio (year-end) 1.19 1.53 1.47 1.38 1.16 Prit e/carnings ratio (year-end) 10.0 13.0 13.1 12.6 10.0 (4) Int ludes 50 41 gier turnmon share from an at countmg ihange.

(h) I teludes elleet of rate and contrait settlementi.

Certain reclamlications and recakmlations were made to the data reported in prior years to conform with the method of presentation used in 1994.

N

OFFICERS DIRECTORS Thomas J. May, Chairman of the Board and Chief Executive Omcer a,d William F. Connell, Chairman and Chief Executive Officer, Connell Limited Partnership (metals recycling and pro.

George W. Davis, President and Chief Operating Omccr cessing and industrial production)

E. Thomas ik>ulette, Senior Vice President - Nuclear d,f Gary L. Count yman, Chairman of the Board and Chief Cameron 11. Daley, Seniorvice President - Power Supply Executive Omcer, Liberty Mutuallnsurance Company ac George W. Davis, President and Chief Operating Of0cer, L. Ctrl Gustin, Senior Vice President - Marketing & Corporate B ston Edison Company Relations a,c,f Thomr, G. Dignan, je , Partner, Ropes & Gray (law Grm)

John J. liiggins, Jr., Senior Vice President - lluman Resources b,d Charles K. GitTord, President, Bank of Boston Corporation Ronald A. Ledgett, SeniorVice President - Power Delivery (bank holding company) andThe First National Bank of Charles L. Peters, Jr., Senior Vice President - Finance U"'I "

b,c,f Nelson S. Gifford, FormerVice Chairman, Avery Dennison Alison Alden,\, ice President - Sales & Service Corporation (pressure-sensitive adhesives and materials, Marc S. Algwrt,Vice President andTreasurer omce products, prcxluct identification and control systems and specialty chemicals)

Richard S.11ahn,Vice President -Technology Research &

Development a,e Kenneth I. Guscott, General Partner, Long Bay Management Company (real estate development)

Douglas S. lloran,Vice President and General Counsel a,b,c Matina S. llorner, Executive Vice President, Teachers joel Y. Kamya,Vice President . Production Operations Insurana and Annuity Association and College Retirement I 'I" ""

Leon J. Olivier,Vice President Nuclear 0,.crations and Station Director a,c Thomas J. May, Chairman of the Board and Chief Executive

" " " "I'"I '

Arthur P. Phillips, Jr.,Vice President - Corporate information Services h,c,d Sherry 11. Penney, Chancellor, University of Massachusetts at Boston Rolwrt A. Ruscitto,Vice President Electric Customer Service e,f Bernard W. Reznicek, Furmer Chairman of the Board and Robert J.Weafer, Jr.,Vice President, Controller and Chief Chief Executive Oflicer, ik>ston Edison Company and At countmg Omccr Dean, College of Business Administration, Creighton

" #" 7 Tiwodora S. Convisser, Clcrk of the Corporation e,f flerbert Roth, Jr., Former Chairman of the Board and Chief Donakt Anastasia, AssistantTreasurer Executive Omcer, LF E Corporation (trame and industrial James J. Judge, Assistant Treasurer and Director - process control systems)

Corporate Planning e,f Stephen J. Sweeney, Former Chairman of the Board and Wayne R. I rigard, Assistant Clerk of the Corporation Chief Executive Omcer, Boston Edison Company b,d Paul E.Tsongas, Partner, Foley Hoag & Eliot (l.iw firm) a Member of Executive Committee b Member of Audit, Finance and Risk Management Committee e Member of Pricing Committee d Member of Executive Personnel Committee e Member of Nuclear Oversight Committee f Member of Capital Investment Committee C3

SMDEND REINVESTMENT Pl.AN Our Disidend Reimestment and Common Stm k Purt base Plan (the plan) is asailable to our mmmon and preferred sim khoklers. Under the plan, common and preferred utm kholders may base their dnidends reimested in our common stm k at current market prices. All participants may imest optional rash contriloutiom, up to a maximum of 5 5,(kk) gwr quarter, w hit h w di1.c imested at the current market price. Participants do not pay

[ fees or mmmiuiom.

All recordholdern of shares of common and preferred stm k are chgible to participate directly in the plan. Ilent ficial on ners of our stot k w hose hilarr$ are regist0 red in nalnes ottler tflan tbeir on n (e.g., a broker or bank nominef) must arrange {Jrtich{atkon witb tbe Tecordboh!cr. If for any reaion a beneficial on ner is unable to arrange par ticipation nith dicir broker or bank nominee, they must hetome a recordholder by having the sharen transferred to their on n name.

All correspondence concerning i hanges in plan ownership should be directed to the plan agent:

The first National llank ofItoston Dhidend Itcinsentment Unit Mail Stop: 45-01-06 It O,llos 168I Iluston, Massat husetts 02105-1681 ,

IMPORTANT STOCKHOLDER INFORMATION Annual Meeting SIC lorm 10-K Our Annual Mertmg of Stot kholders u ill be held on May 12,1993, at Stm kholders may obtain a copy of our annual report to the 11 m a.m. If you w hh to ru tise a copy of Tom May's remarks, Secmities and 1% hange Commiuion on lurm 10-K, by making a please write to our imestor Relations Department at the General w ritten request to our imestor Relations Department.

Ollites address lhted below.

Quarterly Itcport to Shareholders Company Contact Beneficial ou ners of our stm k u hose shares are registered in names Theodora Comisser other than their ou n te.g , a broker or bank nomince) may obtain Clotk of the Corporation (Opies of our Quarterly Reports to Shareholders on an ongoing basis bv making a w ritten request to our lmestor Relations Department to insestor Relations Contat t C placal on their mailing list. Note that the Annual Report uill Phd I endio continue to be mailed to beneficial ow ners directly by their bank or Diremor, im estor Rtlatiom broker.

General Of& es Inquiries Concerning Stot k NKi lloy hton ittert, ibton, Mawai husetts 021W Mx))

S If you hase questiom mncerning your disidend pay ments, tlisidend (617) 4 2 4 .wxi ilirect depmit, disidend reirnestment plan status, transfer procedures or other stoik account matters, please contact our SimkTransfer Stot L 1istings Agent at the following addren:

New L L and Ibton stot k cu hanges lhe lirst Nationalllank of Roston '

Sto(L Ny mhol Shareholder Sers ices, Dis ision ps; Mail Stop: 45-02-09 P. O. Ilox 644 Disidend Pay ment Date* 11oston, Massac husetts 02102-0644 Common and Preferred if you are submitting documents requesting a transfer, aillress 1st of itbruary, Mas, August, Nmember change or auount consohdation, please use this same address with Ias Status of IW4 Dhidenils Mail Stop: 4 5-01-05. If you wouhl hke to contact the bank by telephone i all 617-575-1100 or toll frec l-800-716-1001.

(.,cncralls, uniru sou are subject to a er tain esemptiom, all dnidenik on our common or prt ferred sim k are to be wnwicred it&o tasable.

Sto(L;Iransfer Agent, Registrar of Stot k and Disidend Reinscatment Plan Agent The iir st National Bank of limton i-41

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& Boston Edison investorRelations P3SS 800 Boylston Street Boston, Massachusetts 02199-8003 l

O e""tec e eevcieo n ne, Designed by Hyperactive tric.

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