ML20216E324

New England Electric Sys 1986 Annual Rept

ML20216E324
Person / Time
Site:	Seabrook
Issue date:	12/31/1986
From:	Huntington S NEW ENGLAND ELECTRIC SYSTEM
To:
Shared Package
ML20216D932	List: ML20216D924 ML20216E046 ML20216E098 ML20216E324 ML20216E368 ML20216E420 ML20216E457 ML20216E508 ML20216E535
References
NUDOCS 8706300680
Download: ML20216E324 (52)

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1 FinancialHighlights:

1986' 1985

.1984

(

i

' Earnings per average share

$ 3.20

$ 3.15

$ 3.02

~

Dividends declared per share -

$ 1.94

$ 1.83

$ 1725

- Annual dividend rate-year end

$ 2.00

$ 1.92

$.1.80. -

. Bcok value per share-year end '

' $20.24

$18.81

$17.44

Market price per share-year end

$28.00-

$25.00 '

$18.50

- Return on average common equity -

16.4% '

17.3 %

18.0%

New England Electric System (NEES) is a public utility holding company headquartered in Westborough, Massachusetts. Subsidiaries include L

three retail operating companies-Massachusetts Electric Company, which serves 850,000 customers in 146 Massachusetts communities;

' The Narragansett Electric Company, which serves 294,000 customers in

27 Rhode Island communities; and Granite State Electric Company,-

' which serves 31,000 customers in 21 New Hampshire communities.

Other subsidiaries include a wholesale generating company, New England

. Power Company, which operates 21 generating stations; an oil and gas

~

Contents exploration and fuels company, New England Energy Incorporated; three '

tenert Shareh Iders 2

l transmission sen/ ice companies: New England Electric Transmission The NEES Agenda:

Corporation, New England Hydro-Transmission Corporation, and New ourcommitment to Serve 4

England Hydro-Transmission Electric Company, Inc.; a conservation NEESPLAN /IProgress 14 financialReview 16 service company, NEES Energy, Inc.; and a service company, New FinancialStatements 21

England Power Service Company.

Notes to financialStatements 27 Report ofIndependent Certified Public Accountants 37 Supplementary Information 38 System Directors 40 System oflicers and Subsidiaries 40 ShareholderInformation back cover 1

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Dear Shareholder:

We are pleased to report another solid year for our investors and cus-tomers, with strong earnings and lower costs.

%j Our earnings per average share were $3.20, a 16.4 percent return on s,

average common equity. In November, the Board of Directors increased

.L the annual dividend rate from $1.92 to $2.00 per share, the eighth increase in six years.

The average cost per kilowatthour to ultimate customers decreased by 6.3 percent in 1986 because of lower fuel costs. This lower price level makes us the second lowest-cost provider among major electric utilities in New England. We continue to believe that emphasizing low costs to our customers is essential if we are to earn a good return for our share-holders in an increasingly competitive industry.

Thanks to a strong local economy, System kilowatthour sales to ulti-mate customers increased in 1986 by 5.2 percent. Sales have increased on average 4.7 percent per year for the last four years, well above our 2.3 percent 10-year average growth rate. As a result of this growth, we are accelerating our demand and supply programs developed under our long-range corporate plan, NEESPLAN 11, to meet our customers' future needs at the lowest cost.

In 1986, we broadened our planning focus to encompass both a com-mitment to meet our customers' needs and a dedication to serve the interests of our shareholders, our employees, and the communities, region, and nation in which we operate. As the result of an intensive, System-wide effort, we are pleased to announce "The NEES Agenda:

Our Commitment to Serve." The agenda has several basic elements.

We will strive to continue to provide you, our shareholders, with attractive returns.

We will s trive for total cus tomer sa tisfaction,' our primary goal.

We will endeavor to meet our customers' future electric energy needs at the lowest cost with our NEESPLAN ll demand-side and supply-side initiatives.

We recognize and will act upon the reality that skilled, motivated employees are essential to the fulfillment of our commitment to our shareholders and our customers.

We will conduct our business activities in a socially responsible man-ner that furthers the well-being of our communities, region, and nation.

The report that follows this letter addresses each of these elements.

Two major construction projects were completed during the year: the Millstone 3 nuclear unit and Phase 1 of the direct current transmission link between New England and Hydro-Quebec. Effective upon the com-mercial operation of Millstone 3 in April, our generating subsidiary was allowed by the Federal Energy Regulatory Commission (FERC) to include in rate base our full 12 percent investment in the unit.

2

K.p 3 m,

h

. JPhase 1 of the ' transmission tie with' Hydro-Quebec went into commer-

[

Iihl operation on October L Our transmission subsidiary built the major

]f Y;d

' part of the facilities on our side of the Canadian border. During the next

'[fj 11 years, approximately three'to four percent of the New England

? rgion's electric energy requirements will be imported over this tie. Our share of the benefits will be about 19 percent.We are in the process of,

.J,

" obtaining the regulatory approvals to construct Phase 2. Its completion f

a is now scheduled for late 1990.

Construction of the Seabrook I nuclear unit,in which we have a 10 percent interest, is complete. The Nuslear Regulatory Commission

._has authorized the _ owners of Unit 1 to load fuel and conduct certain preoperational tests. However, controversy concerning the safety'of the -

plant and emergency response plans for the area around the plant is significantly delaying, and could prevent,' commercial' operation. Please Lsee page 33 for further discussion of Seabrook 1.

In October, a FERC administrative law judge ruled th'at our generating subsidiary's investment in the cancelled Seabrook 2 nuclear unit was 1

prudent and that we may recover through rates our f ull investment in the

unit over 10 years. The decision will be reviewed by the f ull commission.

I' The Systern's' oil and gas exploration and fuels subsidiary announced in l 0ctober that it would not invest in new oil and gas prospects after Decem-ber 31,1986.The decision was prompted bv oil and gas market condi-tions and the outlook for the future and will not affect interests and com -

w i'

p mitments in properties owned prior to the end of the year.

~

h L

Based on our current outlook for oil and gas prices, we expect substan-

' tial losses from our oil and gas subsidiary's investment in properties e

acquired before January 1,1984. Under a pricing policy approved bv the Securities and Exchange Commission, the oil and gas subsidiary is entitled

(

3

.to pass these losses on to the System's generating subsidiary. The ability -

of the generating subsidiary to recover these losses from customers is at issue before the FERC. If the FERC were to disallow recovery of the losses, a substantial write-down against NEES earnings would be required.

' Please see page 27 for further discussion of our oil and gas subsidiary.

' Our 5,100 dedicated employees deserve full credit for our good results in 1986.Their efforts have served our customers and shareholders well.

We are pleased that they have earned financial bonuses through our

- NEES Goals Program for meeting 1986 earnings, customer cost, safety, and other operational goals and we look forward to their continued good j

servicein 1987.

ok

) k N-e JJoan T. Bok Samuel Huntington Chairman President and Chief Executive Officer February 26,1987.

3

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i The NEES Agenda: Our Commitment to Serve a

<r I

o i'

Custorners i-Our mission is to strive for total customer satisfaction. We do this by I

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M.

meeting customers' expectations of quality, price, and service. Fulfill-t

,y a

(,

ment of this mission is of special importance as our industry faces v

increasing competition, j

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l j

Customer satisfaction depends on the reliability of our service, the

.. Photo right: %):r industrial customers I

as cost of kilowatthours that we supply, and the quality of service that we

' include Digital Equipment l'orporation, a

$tasng manufacturer of networked computer Y'

stifents. Digital, which is our largev indus.

customers. We install new services, answer billing inquiries, read meters, trb/ cu:;tomer, has more than 60 accounts and repair distribution lines. 0ur objective with each customer is to be with thw England Electric System retail responsive, courteous, fair, and efficient. Our mission is to provide companies. Its corporate headquarters are in service that fulfills the customer's expectations and demonstrates that Mayrgis, Massachusetts.

,Q w: Among the Massachusetts we care about his or her needs. Simply stated, we will treat our customers retailsutnidiary's newest commercial as if they had a choice of suppliers, and we will demonstrate that they customhs is Sturbridge Me, Inc., a travel should choose us.

centerin the town of Sturbridge. Richard To accomplish th.is mission, we are taking several new steps. We are Brogharryr, Mn;achusetts Electric consumer servicN tepresenta tive (right), cfiscusses emphasizing customer satisfaction in all of our training programs and electric sebice with the trave / center'sfocusing our market research on issues associated with customer satis-owner, Weir Stewart,lt. (center), and George

%ction. We also recognize that true customer satisfaction depends on Mattson, developer of the project. Sturbridge the reliable and low-cost supply of electricity. Thus, we are improving the

' isle includes a country store, restaurant, reliability of our distribution network and continuing our strict attention and service station, as wellas other shops o Cost Control.

anda truck fueling depot.

We intend to provide high-quality service to all customers while main-y ~nm ~,. p p y 737 p

y 6g

-77*

taining our current position as one of the lowest-cost suppliers among w.

p ;,

major New England utilities.

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. a We will endeavor to meet our customers' future electric energy needs at the loviest cost with our NEESPLAN ll demand-side and suppfy-side initiatives i

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. NEESPLAN il Not only must we provide quality service to today's customers, we must also provide quality, low-cost service in the future, in 1985, we announced NEEOPLAN 11 to achieve that end.The objectives of NEESPLAN 11 are to:

l provide an adequate supply of electricity to our customers at the lowest possible cost,and encourage customers to use electricity efficiently.

The objectives are achieved through Balanced Planning-the consis-tent economic evaluation and implementation of an array of resources on both the demand side and supply side of the customer's meter.The goal is to implement a portfolio of programs to achieve a diverse and flexible l

planning solution under a range of economic conditions.

The benefits of the Balanced Planning approach were demonstrated in the past year. Spurred by a dramatic drop in oil prices, the demand for Photo left: Brian Dame, maintenance tech-f electricity increased well above our expectations. Licensing difficulties nician, inspects va/ves at the comerfordcon-ster terminalin Monroe, New Hampshire.

for Seabrook Unit 1, new reserve requirements for our existing gener.

At this facility, direct current electricity im-at.mg units, and regulatory proceedings on other new projects created ported from Canada is convertedinto afternat-uncertainties on the supply side as well. These factors have created the ing current for distribution within New England.

potential for a shortf all in our capabilities over the next five years.

Photo below: Japanese visitors from an Under N EESPLAN 11, we were prepared to respond to these changed electric utility, an electrica/ research institute, conditions with several new initiatives. First, we embarked on a major 8"d '^* l898"'S! 8 ""**"' 8'"dY "'

pilot photovoltaic project in Gardner, Massa-System-wide program of.mcentives for conservation and load manage-chusetts forits application to a similar ment.The new program, drawn from our recent demonstration projects, project in /apan.

is designed by 1991 to reduce our annual peak by 230 megawatts or

- about five percent of our load, and to save 335 million kilowatthours per k

• x year. Second, we increased our near-term goals for alternate energy sup-g.

plies. Third, we went forward with the life extension and availability

,3 improvement programs for our existing generating units. Fourth, we are e

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evaluating sites and preparing to initiate licensing for new generation.

I And finally, we are investigating other opportunities in the market,

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7 1.c g . Shareholders s Our duty to our owners is twofold. We must maintain our financial integrity and flexibility to respond to changing economic conditions and regulatory approaches, and we must continue to earn attractive returns. .We start from a strong position. Our historical dividend growth is among - ? the best in the industry, we have a consistent record of solid earnings, and the market price of our equity is well above its book value. Our task is to maintain this record as we meet future challenges. We will strive to accomplish this objective primarily through superior perfor-mance in our core utility business. Strict cost control, quality service, and diverse, flexible planning produce concrete results for both custom-ers and investors. Maintaining our position as a low-cost supplier among ' Photo nght: Providing information about. ~ the major utilities in the region leads to satisfied customers and attrac- - New EnglandElectric System is one of the services o/ our shareholder services depart. Commitments to more projects reduce risk to both customers and ' I . ment in Westborough, Massachusetts. Share-shareholders. Superior service to customers leads to superior results . holders Kathleen Bowman and W. Ronald ior inyestors. Marshalllearn more about the System from in the future, our efforts will be focused on both meeting the growth in a Ruth Benjamin, a shareholder services representative (left).. our own service area and evaluating other opportunities within the electric - ll Photo below: Judith Daggett and out other power business, such as our transmission project to bring low-Cost

. shareholder services representatives use an Canadian hydro power into New England. Our goal is to provide reliable,'

automated information system to research

and respond to shareholders' questions U

concerning theiraccounts.' uate opportunities to diversify into other nonutility businesses, we will [fM -$ 7 h'.;" $ # 9 d P D 1 9:D approach these opportunities cautiously and selectively. Undertakings, u g (' {j, if made, will be limited to businesses that are closely related to our core f business, in areas where we can compete effectively and provide 2 .t { J significant benefits to the System and its shareholders. Our strength M and expertise lie in providing quality service and reliable electricity at low. ~. .gg,J j __3 cost to customers. It is a business that has produced a solid record of M id. E attractive earnings for our investors. Our elforts will be focused on LM i lllIMI continuing that record. L L ge l-q-

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,,~,e M? 4}h n .j .~ - jf f b i )' We IECORnile and n; I 2.Ct U;iCn the j J l03hty that E WOd.P; llatE' L:T c3005 are estertial to th> f a" nEiit cf ect can'.:t rst to e.1 s'ertheidcis 3rd car cus' Etts

l } i ,. Employees ) Our employees are responsible for our good record of quality, low-cost service to customers and earnings growth for investors. They read the i meters, answer the calls, run the power plants, and maintain the lines efficiently and effectively. They also provide engineering, accounting, financial, legal, planning, shareholder, communications, human resources, and other services. Our past succ. esses are to their credit, i and our future is in their hands. Our work force is changing. Thirty-eight percent of our employees are Photo lef t: Maintenance training at our 50 years of age or older. One-third of our management and professional powerplants includes both practicalexperi-positions will be vacated within the next five years. We have a need and ence and elassroom /nstruction. While an opportunity to enhance our work force by attracting, training, and studying air contro/ systems at salem Harbor station's Unit 3 precipitator, Richard swiniuch retaining the best employees available, #" #'*# '" ' ^' ## We are meeting that need by taking appropriate steps. We have re-i discuss the function of a precipitator viewed our salary structure to assure that it includes competitive component. compensation and benefits with appropriate rewards for outstanding Photo below: Management training sessions . performance. We have embarked on a major training program to provide inv lve personnel from al/ departments and 1,000 supervisors and managers with the best managerial skills pos-Relyea, management training specialist (left); sible. We have begun an employee health and fitness program, and we Earl McLaren, supervisor of construction have strengthened our long-standing commitment to on-the-job safety. accounting in westborough, Massachusetts; Superior performance by our employees leads to superior perfor. Andrea Daley, supervisor of customer diversi nsinN rthampt n,Massachuseus; mance by the System. Our task is to provide our employees with the skills, and Francis N. Fountain, assistant district 1 motivation, and opportunity to perform their jobs creatively and effi-superintendent in Hopedale, Massachusetts. ciently. Their performance will lead to the quality service, satisfied cus-tomers, and solid returns to our shareholders that are the key objectives g ; k,,_s of the System. b r 11

F j s Cornmunities, Region,and Nation Our corporate responsibilities extend beyond providing reliable, ) low-cost service to customers, earning attractive returns for investors, Photo vight: System retail subsidiaries, state and providing meaningful careers to employees. Our activit.ies also affect governments, and other utilities havejoined 9 with community agencies to help people in ur Communities, region, and nation. We interact with them in three pri-1, needpay their winter energy bills through the M8IY W8YS-5 Good Neighbor Energy fund. /nstrumental First, our energy planning is affected by policies of local, state, and in developing this program for Rhode Island national governments. As a result, we have the responsibility to partici-were Robert McCabe, president of The pate in the development of sound energy policies. To carry out this Narragansett Electric Company (left), Edward Burke, chairman of the Rhode island responsibility, we seek an active leadership role within our industry and Public utilities Commission, and Major continued participation in policy development at all levels of government. Ralph Thomas of The Salvation Army, which Second, our daily operations are of regional and community concern. administers the fund. Our power plants and facilities have an immediate effect on their sur-I Photo below: At ceremonies in Boston's historic faneuil Hall, Massachusetts Electric Companyreceivedan award / rom the in an environmentally responsible manner. Our generating stations are Massachusetts Audubon Society. The award completely integrated into a New England-wide power pool, NEP00L i recognized our retail subsidiary's commitment As a result, our responsibility for providing reliable service goes beyoad i to energy conservation, load management 1 the bounds of our own franchise area and extends to New England as 9 programs, and cooperative advocacy with the \\ Massachusetts Audubon Society forpassage o/a state appliance ef/iciency standards bill. Finally, we have an effect on the general well-being of the areas that we Samue/ Huntington, NEES president and serve. Both the economic development and growth in our region depend chief executive o/ficer (right), accepted the award from the organization's president, As a business that is closely tied to its service area, we have a special j Gerard A. Bertrand. l responsibility to be a good corporate citizen in the communities in which we operate. We recognize this responsibility and will do our best to further the [ interests of our communities, region, and nation when making our basic ( d f" business decisions. f n M .3 ,;(l L e

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l 4 li i ~ l 6 t; i t is l 's.~Y w 2. $~ YKm ; d' f +\\i' t 4 7 [ [- h' W. ~ q , p. J ,l ' t? i, ll y t J, 'l i b' "f 'I j? i v 4 a. hk h f, f ' -l %. 3.,4 t 6.i j l; n. F-l ,,q l II h s. J f i 'N ~ y-:. og r l' ~ ~*Of j 7 gw . j ,W _s-x Salem Harbor Station NEESPl.AN il Progress t During 1986,we made good progress in customers in 20 Massachusetts communi-implementing our NEESPLAN ll programs. ties. The program was a success. Intensive This progress forms the foundation for the marketing and significant incentives pro-new initiatives described in the preceding duced an excellegt response from customers discussion of the NEES Agenda. Specific and resulted in their achieving substantial NEESPLAN 11 activities are summarized kilowatthour savings. below. A similar demonstration program, focused on load management, was undertaken in Conservation and Load Management.The first Rhode Island. Unlike the conservation pro-programs that we implemented under grams that save kilowatthours. load manage-NEESPLAN 11 were focused on conservation ment is designed primarily to shift consump-and load management. We wanted to test tion of kilowatthours to off-peak periods. Thus, l the market for new demand-side programs, the Rhode Island program focused on radio-develop the expertise and practical tools nec-controlled interruption of electrically pow-lI essary to implement conservation incentives, ered equipment, new pricing incentives in and evaluate the response by our customers. time-of-use rates, and special payments to Two demonstration projects were under-encourage the operation at the time of our j taken. The first-the Enterprise Zone peak of standby generation owned by hospi- ] program-focused on conservation. A broad tals, nursing homes, and others. range of incentives was designed for 35,000 Both of these programs provide the experi-14

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ence'with marketing, technology,and cus -

'3 and 19 percent of Hydro-Quebec Phase 1. + 3',w L tomer response that is essential to implement Completion of both projects is an important demand-side programs. We are now imple-step in meeting our capacity requirements - ^ menting the best' programs System-wide. ' and providing additional fuel diversity for our i customers. The electricity produced by Mill-4 Alternate Energy. in N EESPLAN 11, we revised stone 3 and the hydro power imported from upward our pricing policy for alternate energy James Bay, Canada, add important nonfossil. purchases.That change produced signifi-fuel energy to our supply mix. l Lcant increases in our purchases. When . We hope to increase this diversity with NEESPLAN 11 was issued,we had 165 ' Hydro-Quebec Phase 2 and the operation of " megawatts of alternate energy on the system. . the Seabrook nuclear unit. Hydro-Quebec Today, we have 218 megawatts in operation Phase 2 is now in the preconstruction licens-g ~ and an additional 208 megawatts under con-ing stage. Seabrook Unit l is the subject of. tract.- As a result of this success, we have contested 'operatinglicense proceedings. increased our alternate energy goals. (See Note F-2 of " Notes to Financial State-ments" on page 33.) We believe the prompt s Existing Facilities. N EESPLAN'll focuses not operation of bM projects is in the best only on new resources, but also on our exist-Interest of our customers and New England. ing facilities. Specifically, we evaluated pro-as a whole, grams to extend their lives and improve their, performance. Our economic analysis shows. Other Activities.The System has also been ac-that these programs are clearly justified tive in other businesses related to our utility - ~~ under our Balanced Plan. During 1986, we operations. N EES Energy, our energy conser-completed the first phase of the engineering .vation subsidiary, has continued to grow and analysis. In the years ahead, we will proceed produce significant energy savings for its with detailed inspections and improvements clients. Since its formation in 1984, N EES consistent with the maintenance schedules Energy has served 34 customers throughout for the units. New England. In 1986, its significant proj-During 1986, we also continued our efforts ects included a contract with the public to maintain fuel diversity and low fuel costs - schools of Providence, Rhode Island for the at our units. 0ur move to coal conversion, installation of efficiency improvements in completed in 1984, reduced our oil depen-25 schools. j dence. Our ability to use both coal and oil Fundamental decisions were also made ') permitted us to take advantage of the col-with respect to our oil and gas program devel-lapse in oil prices and obtain new, even lower oped by New England Energy Incorporated, prices for coal. Customers enjoyed significant Based on oil and gas market conditions and - savings in fuel costs. During the year, we com-the outlook for the future, we decided not pleted the work necessary to permit burning to acquire new oil and gas prospects after natural gas, in addition to oil, at our South December 31,1986. This decision does not Street Station in Providence, affect our participation in existing prospects and reserves. The issues associated with our { New Generation. Two new projects-the oil and gas program are discussed in Note Millstone 3 nuclear unit and Hydro-Quebec A-3 of " Notes to Financial Statements" on Phase 1 -entered service during 1986. We page 27. have entitlements to 12 percent of Millstone 15

. fjgj gj 9 y Earnings and Earnings per average share for 1986 increased to of earnings. In February 1986, the System com-dividends' $3.20 from $3.15 in 1985. The annual dividend pleted a two-for-one common share split for share-rate was raised eight cents per share in November holders of record on January 24,1986.The market 1986, a 4.2 percent increase, and is now $2,00 price of New England Electric System (NEES)com-per share on an annual basis. Dividends of $1.94 mon shares was $28 per share at year end, compared declared in 1986 represent a 61 percent payout with $25 per share at the end of 1985. ' l Operating revenue. The $12 million decrease in our operating revenue in this decrease was a 5.2 percent increase in kilowatt-l I 1986 was due to a reduction in fuel recovery reve-hour sales to our ultimate customers, f nues, reflecting lower f uel costs. Partially of fsetting I . Operating expenses Total operating expenses decreased by $12 million in amortization. These increases were partially offset l 1986. This decrease resulted from lower fuel costs, by a decrease in the Oil Conservation Adjustment which reflects the significant decline in worldwide amortization. (See Note A-6.) fuel prices, and a decrease in maintenance expense. Our largest generating unit, Brayton Point Unit 3, ) These decreases were partially of fset by an increase was out of service from late August 1986 through in other operation expense and a significant increase late January 1987 due to a major turbine failure. in depreciation and amortization expense. This unit was out of service for about six months in The increase in depreciation and amortization both 1983 and 1985 as the result of equipment fail-expense was due to the start of depreciation associ. ures. In each case, the incremental cost of replace-ated with the Millstone 3 nuclear unit,which com-ment power was included in New England Power menced operation in April 1986, property loss amor-- Company's (N EP) fuel adjustment clause billings. tization associated with the cancelled Seabrook 2 (See Note F-3.) nuclear unit, and increased oil and gas property ? Tax Reform Act The recently enacted Tax Reform Act has reduced the the remainder of the savings. The tax law changes {j of 1986 46 percent corporate federal income tax rate to an are not expected to have a significant impact on our average rate of 40 percent in 1987 and 34 percent earnings, but would decrease our cash flow, in addi- [ thereafter.We are proposing to use a portion of the re-tion to the reductions in tax rates mentioned above, sulting savings to fund a major load management and the Tax Reform Act repealed the investment tax conservatic., program, and to pass on to customers credit, with certain exceptions, beginning in 1986. t Earnings Per AverageShare Dividends Declared Per Share-Annual Rate $3.25 $2.o0 j f i sm f 2.75 I'l5 ~ 2.50 1.50 ?' 2.25 2.00 l.25 1.75 f 1.5o / 1.00 1.25. 1.oo ~ o.75 f 78 80 82 84 86 78 80 82 84 86 16 +- _:_____=_-_======== =

Allowance for As prrviously mentioned, Millstone 3 commenced (CWIP)in rate base. In 1986 and 1985, NEP includ- /. funds used during operation in April 1986. Its full inclusion in rate base ed an average of $185 million and $248 million, construction resulted in a significant reduction in AFDC in 1986. respectively, of CWIP in rate base. The inclusion of -(AFDC) This decrease was partially offset by AFDC on addi-CWIP in rate base increased N EP's cash flow, but did tional construction expenditures in 1986, principally not increase income because AFDC would have been associated with Seabrook 1. In accordance with Fed-recorded on any CWIP not included in rate base. (See eral Energy Regulatory Commission (FERC) rules, N EP Note A 5.) I includes a portion of construction work in progress Oiland gas Until late 1985, New England Energy incorporated resulted in an offsetting increase in other income. i operations (N eel) operated as a rate regulated company in Because the losses exceeded the accounting accordance with an intercompany pricing policy reserve, NEEl will begin passing losses on to NEP j (Pricing Policy) with N EP approved by the Securities in 1987. Based on our current outlook for oil and and Exchange Commissio'n (SEC). In October 1985, gas prices, substantial losses in future years are the SEC approved our proponi to modify the Pricing expected to be passed on to NEP. In an August 1986 Policy, whereby N eel's oil and gas exploration pro-rate filing with the FERC, NEP indicated its inten-gram would consist of two parts.The first part (old tion to begin passing N eel losses through its fuel program)is composed of prospects entered into adjustment clause to its customers in 1987. This j through December 31,1983 and continues to oper. pass-through is expected to be a contested issue in j ate in a rate regulated status. The second part (new the case. NEP does not have assurance that the. J program)is composed of prospects entered into FERC will allow recovery of these and future losses j since December 31,1983 and is considered to be from customers. In the event of disallowance of q non-rate regulated. Through the end of 1985, the old recovery, the NEES System would be required to program had generated customer savings totaling write down against earnings the value of oil and gas $10 million. However, due principally to the precipi-properties in accordance with SEC accounting rules. j tous declines in oil and gas prices, NEEl incurred Due to this uncertainty, our independent auditors operating losses on both its old and new programs have continued this year the qualification of their in 1986. opinion on our financial statements. Based on year Under the terms of the modified Pricing Policy, end prices,if a write-down had been required,it losses on N eel's old program are first applied would have amounted to approximately $235 million against an accounting reserve previously established after tax. This amount has increased since December on NEEl's books, which amounted to $24 million 1985 due to further declines in oil and gas prices. before tax ($13 million after tax) at December 31, Profits and losses from NEEl's new program are 1985. The operating losses incurred on the old retained by the System. During 1986 and 1985, program during 1986 exceeded the amount of the N eel incurred after tax net losses of $6.2 mi!! ion accounting reserve by $278,000. Charging these and $10.3 million, respectively, from its new losses to the accounting reserve during 1986 program. In October 1986, NEEl announced that it BookValue PerShare-Year End Market Price PerShare-Year End $28 $28 4 26 26 hj 24 24 B- [gd 22 22 E 20 2o g 18 y i a 18 82 ' 83 84 85 86 82 83 84 85 88 17 1

Q, will not acquire any new oil and gas prospects af ter by oil and gas market conditions and if,e outicok Decernber 31,1986.This decision was prompted - ' for the future. (See Note A 3.) e ' ' [Other income / - Other income increased by $24 million in 1986. FERC decision that allowed NEP to recover amounts (expense)-net This increase was primarily the result of NEEl's oil written off prior to the end of 1983 related to the ~ and gas operations, discussed above, partially offset cancelled Pilgrim 2 nuclear unit. (See Note C.) . by the inclusion in 1985 of the effect of a favorable Seabrook 1 Construction of Seabrook I was completed in 1986. plans. Problems related to emergency response plan- . nuclear unit However, receipt from the Nuclear Regulatory Com. ning are likely to result in significant further delays mission (NRC) of an operating license is necessary in the operation of Seabrook 1 and, therefore,in sig-in order to commence commercial operation of the nificant cost increases, and may prevent commercial unit. A license may not be issued unless the NRC operation. Current or potential financial difficulties finds that the emergency response plans are ade-of joint owners or other problems pertaining to regu. quate. Numerous parties, including many elected lation of nuclear power plants could also result in t-federal and state of ficials, are opposed to operation cancellation of the unit. (See Note F-2.) of the plant and approval of the emergency response '1986 capital Cash construction expenditures for N EP and the state regulatory approval is required for the issuance expenditures retail electric subsidiaries totaled $188 million, of long-term securities. In 1984, NEP requested , and financing These expenditures included approximately $33 mil-authority from state regulatory commissions for the _l ^ lion for Seabrook 1 and $15 millhn for Millstone 3. Issuance of long-term securities during 1985 and internally generated cash prosided substantially all 1986. A portion of the proceeds was to be used to of the funds necessary for these capital expenditures finance N EP's construction program, including in 1986 and 1985, compared with 70 percent in Seabrook 1. In a 1985 order responding to N EP's

1984, request, the Massachusetts Department of Public As a result of declines in interest rates, System sub-Utilities (MDPU) conditioned its approval upon j

sidiaries refinanced a significant amount of higher N EP providing " binding assurances" that the risk of

I cost long-term debt. During 1986, NEP sold approxi.

further investment in Seabrook would be borne by ^ mately $150 million principal amount of general and shareholders, not ratepayers. NEP declined to pro-refunding mortgage bonds.The proceeds were used vide these assurances. In subsequent proceedings, to retire $122 million principal amount of higher the MDPU did approve NEP's issuance of additional cost mortgage bonds, $18 million of higher cost pre-long term securities, provided that an amount equal ferred stock, and to pay related redemption premiums, to the proceeds would be used to retire higher cost NEP's rates are regulated by the FERC. However, securities. 6 Kilowatthour Sales Growth to System Maximum Demand Ultimate Customers (Megawatts) 6%. 4000 36 % f j 4 3400 3200 - 3 _fg d 2 ~ 2800 _ 1 { _g _g 2600 _ I 1 h 240o Il T 4 W 0.- w 2200 -. -1 2000 82 83 84-85 86 82 83 84 85 86 j 18. J

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During 1986, Massachusetts Electric and remaindir cama principally from internal funds. ] . Narragansett Electric issued $25 million and in October, New England Electric Transmission 3 $65 million principal amount of long-term debt, Corporation (NEET), our transmission service - respectively. The proceeds were used to redeem company, put into commercial operation its portion $22 million and $44 million, respectively, princi-of the interconnection between the Hydro-Quebec pal amount of higher cost long term debt, and to system and the New England region.This project was retire $10 million principal amount of maturing ' completed under budget and on schedule. Cash con-3W percent Narragansett Electric first mortgage struction expenditures amounted to $14 million in bonds,in addition,long term notes of $2 million - 1986. During 1986, NEET issued $66 million of 8.8 1 . ere retired at maturity by Granite State Electric percent long-term notes and N EES made equity con-J w and $14 million of long-term notes were retired by tributions of $7 million, which were used to repay. the parent company. borrowings under N EET's construction financing in 1986, oil and gas exploration and development arrangements. expenditures totaled $77 million, including capi. NEES raised $42 million of equity in 1986 talized interest costs of $33 million. Bank loans through the issuance of new common shares under financed $8 million and equity contributions by the System's Dividend Reinvestment and Common [ . NEES financed $8 million of the expenditures. The Share Purchase Plan and employee share plans. '1987 capital-Cash construction expenditures for N EP and the in 1987, expenditures for our oil and gas activities expenditures retail electric subsidiaries are estimated to be are estimated to be $60 million, including capital-and financing. 5205 million in 1987. Internally generated funds ized interest costs of $30 million. Internal funds are - are estimated to meet all of NEP's construction estimated to provide 85 percent of these needs in expenditures and 65 percent of the retail electric 1987. { subsidiaries' construction expenditures in 1987. During 1987, N EP plans to issue $30 million of These estimates are based on the continued inclu-pollution control bonds and to retire additional high-i sion of a portion of CWIPin rate base.(See Note er cost preferred stock. Granite State Electric plans to issue $5 million of long-term notes in early 1987.' F-4.) The other retail subsidiaries may issue one or more Two new subsidiaries have been formed to build, own, and operate facilities in connection with a series of bonds later in 1987. Bond ratings for the . second phase of the interconnection between the electric subsidiaries are single A or double A. Hydro-Quebec system and the New England region. No public offering of NEES common shares is Cash construction expenditures for these facilities currently planned for 1987 or the foreseeable f uture. are estimated to be $65 million in 1987. Lor g-term ' However, in 1987, the System expects to raise about borrowings are expected to finance 60 percent of $40 million of equity through the issuance of new these expenditures. The remainder will be provid-common shares under its Dividend Reinvestment ed by equity contributions from N EES (51 percent) and Common Share Purchase Plan and employee and non-affiliated utilities (49 percent), share plans. l O Construction Expenditures' n Externalfunds WiO"5) ~ ' n Hydroand D Internalfunds $250 -s Alternates a Nuclear [ 1 ' E Dil 200 'ff m Coal 150 g 100 _ 4 Q . g 50 - R k i 1 4 a N J d o_ 82 83 84 85 86 79 83 86 19

• Includes M P and the retail electric subsidiaries.

\\

i o . Rate activity in August 1986, NEP filed its W-8 rate case with were subject to refund in the amount of $7.6 million the FERC. In the filing, N EP had proposed to for every month between March 1,1986 and the - *V increase rates in two steps. The first step would have' actual in-service date of the unit. Since Millstone 3 1 increased rates by $43 million effective January 1, went into service on April 23,1986, refunds were 1987 to recover costs unrelated to the commercial made for the Millstone 3 portion of the increase col-operation of Seabrook 1. The second step would have lected prior to the in-service date. } increased rates by $5.3 million per month to recover The W 7 rate case settlement did not resolve costs associated with Seabrook l if and when it N EP's request to (a) amortize its investment in the became licensed and entered service, in early 1987, cancelled Seabrook 2 nuclear unit and (b) earn a. l' N EP revised the first step, which now represents a return on the unamortized portion of such invest- . requested increase of $11 million, to reflect the ment. The revenues associated with this amortization impact of the new tax law. This revised increase (approximately $20 million on an annual basis) are { will become effective on April 1,1987, subject to being collected subject to refund, in October 1986, refund pending the FERC's investigation. N EP also a FERC administrative law judge issued an initial .j requested the withdrawal of the second step because. decision that NEP's expenditures for Seabrook 2 NEP believes it is unlikely that Seabrook I will be in were prudent and that N EP could recover its entire service before the end of 1987. This case also investment in the unit over a 10-year period, af ter includes the previously mentioned issue of the reallocation of certain costs to Seabrook 1. This deci-pass-throughof NEEllosses. sion is being reviewed by the full commission. NEP's In February 1986, a partial settlement was reached request to earn a return on the unamortized portion in NEP's W 7 wholesale rate case filed in July 1985. of its Seabrook 2 investment is still under review by Under the partial settlement, which was approved by the FERC. (See Note C.) the FERC in April 1986, NEP was authorized to in NEP's W-6 rate case filed in July 1983, the only increase its rates by $40 million on an annual basis remaining issue concerns the inclusion of a portion d as of March 1,1986. The increase allowed the inclu-of CWIP in rate base, collected subject to refund sion in rate base of NEP's full investment in the Mill-from January 1984 through February 1986. (See stone 3 nuclear unit based on an in-service date of Note F-4.) March 1,1986. However, these settlement revenues inflation. Inflation continues to reduce the value of System been less significant in recent years due to the lower earnings and dividends. However, the impact has levels of inflation. y ( I Regulation-Percent of 1986 Electric Revenue $W 6E Cost Per KWH to Ultimate Customers % 1% { i ~ M3 ?& T lo.oc g y1 5 ActualDollars s M; '. }7 4 i. D 1986 Dollars a g gN%g 0 Federa! Energy g l{ 9.s A . Regulatory C /y + Ek}4kb] Commission ]T}h(R 9o j hh f D Massachusetts $[d)[5MM# tr RhodeIsland u llewHampshire h _[ 8.5 A 81 82 83 84 85 86 20 -- -- ----------------- ----J

' New England Electric System and Subsidiaries

• • . Selected Financial Data -

Year ended December 31 (millions of dollars, except per share data) 1986 1985 1984 1983 1982 . Op2 rating revenue: $ 940 $ 908 $ 882 $ 802 5 711 Electric sales (excluding f uel cost recovery) Fuelcost recovery 407 462 530 507 482 . Other utility revenue 29 25 26 23 20 Oilsales 10 16 13 13 13 l Gas sales 46 33 35 29 36 Total operating revenue $1,432 $1,444 $1,486 $1,374 $1,262 Total fuel cost' $ 421 5 475 $ 543 $ 522 $ 497 j Net income $ 172 5 164 $ 152 5 133 $ 108 I Average common shares 53,794,323 52,083,490 50,176,454 48,366,894 46,585,694 Pershare data: Wet income. $ 3.20 $ 3.15 $ 3.02 $ 2.74 $ 2.33 Dividends declared $ 1.94 5 1.83 $1.725 $1.625 $1.475 Total assets $3,810 $3,687 $3,441 $3,131 $2,804 Capitalization: Common share equity $1,101 5 993 $ 888 $ 792 $ 708 Cumulative preferred stock subject to mandatory redemption 25 43 43 45 46 1 Other cumulative preferred stock 162 162 162 162 162 Long-term debt 1,401 1,364 1,361 1,220 1,065 Totalcapitalization $2,689 $2,562 $2,454 $2,219 $1,981 Total electric sales (millions of kilowatthours) 19,574 18,338 18,256 17,025 16,388 Cost per KWH to ultimate customers (cents) 7.10 7.58 7.94 7.87 7.46-System maximum demand (megawatts) 3,520 3,555 3,379 3,234 3,171 Number of employees 5,131 5,004 4,989 5,058 5,126 Number of customers 1,175,307 1,147,399 1,122,930 1,102,470 1,086,094 ' Includes fuel component of purchased electric energy, fuel handling, and other related costs Consolidated Netincome Customers served Per Employee (Millions) 5180 240 16o 22o 120 _ 200 100 _ 180 a 82 83 84 85 86 74 77 80 83 86 21

1 New England Electric System and Subsidiaries - Statementsof Consolidatedincome O'LYear ended December 31 (thousands of dollars) 1986 1985 1984 Operating revenue (Note A) $1,431,943 $1,444,279 $1,485,727 Operating expenses: Fuel for generation 304,344 375,997 433,861 Purchased c!cctric energy: Fossil andinterchange - 117,793 111,896 114,287 Nuclear entitlements 88,855 87,535 85,896 Other operation' 214,540 196,295 182,818 Maintenance 88,564 99,401 76,296 Depreciation and amortization (Notes A and C) 203,502 166,867 150,726 Taxes,other than federalincome 95,975 94,711 93,573 Federalincome taxes (Note B) 117,629 110,078 122,917 Total operating expenses 1,231,202 1,242,780 1,260,374 Operating income 200,741 201,499 225,353 Otherincome (Note A): Allowance for equity funds used during construction 30,985 38,404 23,815 Equity in income of nuclear power companies 7,799 7,615 6,435 Other income /(expense)-net (Notes A-3 and C) 28,567 4,351 (1,107) Federal taxes on other income-credit (Note B) 9,465 11,671 8,845-Operating and other income 277,557 263,540 263,341 Interest: Interest on long-term debt 93,028 94,148 94,051 + Otherinterest 9,131 4,170 14,098 Allowance for borrowed funds used during construction, net of deferred federalincome taxes of $9,717, $12,408, and $10,462 (Note A) (11,587) (14,731) (12,402) Totalinter.e.st 90,572 83,587 95,747 income af ter interest 186,985 179,953 167,594 Prefened dividends of subsidia..es 14,989 15,875 15,993 Net income $ 171,996 $ 164,078 $ 151,601 Average common shares 53,794,323 52,083,490 50,176,454 Pershare data: Net income 3.20 3.15 3.02 Dividends declared ( 1.94 1.83 1.725 I The accompanying notes are an integral part of these financial statements. 22 ) LL

y,

New England Electric System and Subsidiaries 1

[,JConsolidated Balance Sheets" . " At Decernber31(thousandsof dollars) ^ 1986 1985 - Assets Utility plant, at origina/ cost (Note A) $3,117,148 $2,503,276 . Construction work in progress (Note F) 514,987 909.792-3,632,135 3,413,068 I Less accumulated provisions for depreciation and amortization 917,743 847,586 Net utility plant 2,714,392 2,565,482 - Provedoilandgas properties, at fullcost (Note A) 965,805 852,334 Unproved properties 23,368 59,507 l 989,173 911,841 Less accumulated provision for amortization 326,907-239,644 Net oil and gas properties 662,266 672,197 Investments (Note A): Nuclear power companies, at equity _44,979 -45,162 Other subsidiaries, at equity 27,240 15,383 Other investments, at cost 7,459 7,310 - Totalinvestments ~ 79,678 67,855 . Current assets: Cash, including temporary cash investme'nts of $3,413 in 1985 '1,691 6,344 139,562 178,591 Accounts receivable, less reserves (Note F) - Fuel, materials, and supplies, at average cost (Note F) - 77,806 65,046 Other current assets 6,084 3,188 Total current assets 225,143 253,169 Unamortized property losses (Notes C and F) 87,207. 109.127 Deferred charges and other assets 41,731 ~ 19,057 - $3,810,417 $3,686,887 Capitalization Capitalization (see accompanying statements): and liabilities Common share equity $1,100,694 $ 992,924 Cumulative preferred stock subject to mandatory redemption 25,000 42,500 Other cumulative preferred stock 162,528 162,528 Long-term debt 1,401,177 1,363,983 Total capitalization '2,689,399 2,561,935 Current liabilities: Long-term debt due within one year 10,000. 14,155 Short term debt (Note D) 45,050 80,907 Accounts payable (Note F) 115,593 146,075 Accrued taxcs 20,410-14,911 Accrued interest-21,273 22,906 Dividends declared 28,442 26,580 Other current liabilities 26,070 22,308 Total current liabihties 266,838 327,842 Deferred federal and state income taxes (Note B) 654,576 584,720 . Unamortized investment tax credits (Note B) 152,131 146,422 Other reserves and deferred credits (Notes A and C) 47,473 65,968 Commitments and contingencies (Notes A, C, and F) $3,810,417 $3,686,887 b I . The accompanying notes are an integral part of these financial statements. 4 23 l

New England Electric System and Subsidiaries.- Consolidated Statements of Capitalization -- i'I At December 31 (thousands of dollars) Common share equity (Note E)' 1986 1985 ' Common shares, par value $1 per share - Authori2cd-75,000,000 shares Outstanding-54,393,371 and 52,779,994 shares $, 54,393 $ 52,780. Paid in capital 478,007 437,756 Retained earnings '. 568,294 502,388 Totalcommon share equity $1,100,694 $992.924 > Cumulative preferred stock of subsidiaries 1986 1985 Shares outstanding Company - Par value 1986 1985 ' Cumulative preferred stock subject to mandatory redemption (Note H) New England Power Company - c 11.04% Series 5 25 700,000 $ 17,500 13.48% Series 100 250,000 250,000 ' $ 25,000 25,000 250,000 950,000 25,000 42,500 Other cumulative preferred stock Massachusetts Electric Company 4.44% Series 100 75,000-75,000 7,500 7,500 4 76% Series 100 .75,000-75,000 7,500 7,500 7.80% Series 100 150,000 150,000 15,000 15,000 7.84% Series 100 200,000 200,000 20,000 20,000 s TheTiarragansett Electric Company 4 W% Series 50 180,000 180,000 9,000 9,000 4.64% Series - 50 150,000 150,000 7,500 7,500 ' 8.00% Series 50 200,000 200,000 10,000 10,000 fiew England Power Company 6.00% 100 80,140 80,140-8,014 8,014 ~- 4.56% Series 100 100,000 100,000 10,000 10,000 4.60% Series 100 80,140 80,140 8,014 8,014 4.64% Series 100 100,000 100,000 10,000 10,000 6.08% Ser:es 100 100,000 100,000 10,000 10,000 7.24% Series 100 150,000 150,000 15,000 15,000 '8.40% Series ' 100 150,000 150,000 15,000-15,000 8.68% Series 100 100,000 100,000 10,000 10,000 1,890,280 1,890,280 162,528 162,528

Total cumulative preferred stock of subsidiaries (annualdividend requirement of $13,942 for 1986 and $15,874 for 1985) 2,140,280 2,840.280

$187,528 $205,028 24L i n. .m

~~ 1 Long term debt (Nota G) - 1986 1985 Company. Rate -

Maturity 1 Notes.

. Granite State Electric Company - 9%% 1986. 2,400 ' Granite State Electric Company 12.55% 2000. $. 4,000 4,000. New England Electric System. 85/s% 1987 13,500 New England Energy Incorporated (Note G) - variable 1994. 402,000 394,000 Massachusetts Electric Company 8%% 1992-185 - First mortgage bonds ' Massachusetts Series F. 5,% 1991 17,490 17,490 Electric Series G ~ 4%% 1992 60,000 l 60,000 Company Series H. 4%% 1993 10,000 10,000 Series I !. 5%% 1996; 10,000 10,000 ' L-Series J .7%% 1998 .15,000. 15,000 l Series K 75/s% 1999. -15,000 -15,000 Series M .7%% 2002 20,000 20,000-Series 0 12%%. 2012 2,879 25,000 Series P - 9%% 2016 25,000 The. Series E 3%% 1986 9,750. Narragansett Series F ' 45/s% 1994 4,600 ' 4,600 Electric. Series G 6%% 1998 7,500 7,500 Company SeriesI 7%% 2002' 7,500 7,500" Series J 9 2004~ 9,700 9,700 Series M 13 % 2010 20,000 Series N : 17%% 2012' '4,000 Series 0 12%% 2014 20,000 Series 0 9%% 2014~ 25,000 Series P. 10%% - 2016

40,000 New England Series G.

4%% 1987-10,000 10,000 Power Series H. 4 1988' 10,000. 10,000 Company Series 1 4%% 1991 20,000 20,000 Series J 4%% 1992 12,000 12,000 Series K 4%% 1993 10,000 10,000 Series L 6%% 1996 10,000 10,000 Series M 6%%- 1997 15,000 15,000 Series N 7%% 1998 20,000 20,000 Series 0 7%% 1998 20,000 20,000 Series P 8%% 1999 15,000 15,000 Series R 75/s% 2002 25,000 25,000 Series S 8%% 2003 40,000 40,000 i Series T 8%% 2003

• 40,000 40,000 Series U

- 10%% 2005 72,800 Generaland New England - Series H 8 % 1988 4,150 4,150 ' refunding Power Series N 8%% 1993 40,000 mortgage bonds Company Series A 85/s% 2007 50,000 50,000 Series B 9W% 2008 50,000 50,000 Series E 16 ' % ~ 2011 39,716 Series F 165/s%. 2012 3,491 12,781 1 Series D 9%% 2013 90,000 90,000 Series G 9%% 2013 16,150 16,150 Series f 10% % 2013 16,600 16,600 Series J 105/s % 2013 79,250 79,250 Series K variable 2015 38,500 38,500 Series L 7.80% 2016 29,850 Series M 9%% 2016 80,000 Less funds held by trustee, Series K (1,670) Unamortized discounts and premiums (9,483) (6,764) Totallong-term debt 1,411,177 1,378,138 'Long-term debt due within one year-(10,000) (14,155) Long-term debt $1,401,177 $1,363,983 t' . The accompanying notes are an integral part of these financial statements. 25

r d

I New England Electric System and Subsidiaries Statements of Changes in Consolidated Financial Position ,e. Year ended Decernber 31 (thousands of dollars) 1986 1985 1984 Sources of Net income $ 171,996 $ 164,078 5 151,601 internally Depreciation and amortization 203,502 166,867 150,726 gtnerated funds Investment tax credits-net 6,553 8,485 13,479 Deferred federal and state income taxes 60,139 88,955 65,167 Allowance for funds used during construction, net of deferred federalincome taxes of ' $9,717, $12,408, and $10,462 (42,572) (53,135) (36,217) 399,618 375,250 344,756 I Dividends on NEES common shares (104,442) (95,412) (86,635). I Net funds from internalsources 295,176 279,838 258,121 Sources of NEES common shares 42,086 35,888 31,245 externally Long-term debt-issues 249,520 59,125. 193,678 generated funds Long term debt-retirements (213,762) (78,408) (18,855) Premium on reacquisition of long-term debt (21,087) (7,695) (3,075) Preferred stock-retirements (17,500) (1,250) (1,250) Changes in short-term debt (35,857) 60,354 (57,397) Net funds from external sources 3,400 68,014 144,346 Sourcesof funds $ 298,576 $ 347,852 $ 402,467 Applications Construction expenditures, excluding allowance 1 of funds for funds used during construction $ 188,014 5 200,659 $ 229,949 Oil and gas exploration and development 77,332 122,118 164,801 investments 11,823 3,627 3,371 Changes in working capital (excluding short-term debt) and other items 21,407 21,448 4,346 Applicationsof funds $ 298,576 $ 347,852 $ 402,467 Detailof changes Cash, including temporary cash investments $ (4,653) $ (26,056) $ 29,491 in working capital Accounts receivable (39,029) 42,169 (24,393) - (excluding short-fuel, materials, and supplies 12,760 (12,838) (6,321) term debt) and Othercurrent assets - 2,896 1,258 181 other items - Accounts payable 30,482 (19,094) 22,878 Current liabilities-other (9,490) 30,316 9,385 Other items 28,441 5,693 (26,875) $ 21,407 $ 21,448 5 4.346 New England Electric System and Subsidiaries Statements of Consolidated Retained Earnings Year ended December 31 (thousands of dollars) 1986 1985 1984 Retained earnings at beginning of year $ 502,388 $ 433,722 $ 368,756 Net income 171,996 164,078 151,601 Cash dividends on common shares (104,442) (95,412) (86,635) Premium on reacquisition of preferred stock (Note H) (1,648) Retained earnings at end of year $ 568,294 $ 502,388 5 433,722 The accompanying notes are an integral part of these financial statements. 26 w.

e - r u p New England Electric System and Subsidiaries - Notesto financialStatements Note A Significant accounting . policies 1, Basis of l he consolidated imancial statements include the the Hydro-Quebec electric system and New England. consolidation accounts of New England Electric System (NEES) NEET has entered into agreements providing for the and all subsidiaries except NEES Energy, Inc. and financial support of the facilities by participating New England Electric Transmission Corporation New England utilities, including New England Power (N EET), which are recorded at equity. N EES Energy Company (N EP). In addition, four regional nuclear is a company involved in energy conservation generating companies in which N EP has a minority services whose operations are dif ferent from the ownership interest and a shipping joint venture are consolidated group. NEET is a transmission service also valued at equity. All significant intercompany company that owns and operates a transmission tie transactions between consolidated subsidiaries have line used to transmit hydroelectric power between been eliminated.

2. System of The accounts of NEES and its utility subsidiaries are of Accounts prescribed by regulatory bodies having accounts maintained in accordance with the Uniform System jurisdiction.

3.0il and gas New England Energy incorporated (NEEl) is engaged exploration program consists of two parts.The first operations in various activities relating to fuel supply for the part (old program) is composed of prospects entered System companies as authorized by the Securities into through December 31,1983. The second part and Exchange Commission (SEC). These activities (new program)is composed of prospects entered presently include (a) participation (principally through into since December 31,1983. a partnership with a non affiliated oil company, On account of the Pricing Policy, NEEl's old Samedan Oil Corporation (Samedan), a subsidiary of program is considered to be rate regulated. As such, Noble Af filiates) in domestic oil and gas exploration, it has not been subject to certain SEC accounting development, and production,(b) sale of fuel oil rules, applicable to non-rate regulated companies, purchased in the open market to NEP, and (c) own-which limit the costs of oil and gas property that ing and operating, through a joint venture, a coal-could be capitalized. The Pricing Policy has allowed fired, coal-carrying ship, chartered to NEP. NEEl to capitalize all costs incurred in connection On October 30,1986, N eel announced that it will with its old program fuel exploration activities, not acquire new oil and gas prospects af ter Decem-including interest paid to banks and a limited return ber 31,1986. The decision was prompted by oil and paid to NEES on its investment in NEEl.The SEC gas market conditions and the outlook for the future. rules applicable to non-rate regulated companies The decision will not affect N eel's interests and do not permit certain costs to be capitalized. In addi-commitments in oil and gas properties presently tion, the SEC's full cost " ceiling test" calculation owned by its partnership with Samedan. Samedan is requires non rate regulated companies to write down contir,aing to explore, develop, and manage these capitalized costs to a level which approximates the propert.es on behalf of the partnership. present value of their proved oil and gas reserves. NEEl follows the full cost method of accounting The old program will continue to operate in a rate for its oil and gas operations, under which capitalized regulated status until the modified Pricing Policy is costs relating to wells and leases determined to be terminated. If the modified Pricing Policy had been j either commercial or non-commercial are amortized terminated and the old program had become non-using the unit of production method. rate regulated at December 31,1986, N eel would NEEl operates under an intercompany pricing pol-have been required to write down its assets in the old icy (Pricing Policy) approved by the SEC Until late program to meet the SEC's full cost ceiling test. This 1985, the Pricing Policy provided that any excess (or write down would have been approximately $235 deficiency)in the proceeds from the sale of NEEl million after tax based on oil and gas prices and production (all of which to date has been sold to non-NEEl's proved reserves at the end of 1986. This af filiated third parties) over costs was passed on to amount has increased significantly since December ) (or recovered from) NEP. Under the Pricing Policy, 31,1985 due to lower oil and gas prices. At Decem- '{ NEEl passed approximately $10 million of savings ber 31,1986, approximately 90 percent of NEEl's on to NEP and ultimately to retail customers. proved reserves were natural gas and the remainder In October 1985, the SEC spproved the System's was crude oil and condensate. Consistent with the ] proposal for the modification and phasing out of the modifications approved by the SEC, the termination Pricing Policy and the eventual conversion of NEEl of the modified Pricing Policy will not occur until the d to a non-rate regulated company. As a result of old program properties are substantially produced the modified Pricing Policy, N E El's oil and gas out, NEEl terminates the modified Pricing Policy 27

Tj ] ' under circumstances described below, or an disallowance of recovery, the N EES System would bel accounting reserve (crossover reserve) becomes suf-required to write down against earnings the value of ) v* ficient to offset any required write-down. At that - . oil and gas properties in accordance with the SEC's time, the old program will become non-rate regulated. ceiling test, and NEEl might terminate the modified for SEC accounting purposes. It is not currently Pricing Policy. From then on, profits and losses from i r + expected that the crossover reserve will ever be suffi-the old program would be retained by N EES. Any. . cient to offset any required write-down; future developments adversely affecting the likeli-Under the terms of the modified Pricing Policy, hood of recovery by NEPof NEEl losws, including an NEEl will make a per barrel compensating payment unfavorable FERC ruling in a currently pending case ' to NEP from any operating profits realized from the (not involving N EP) with similar issues, might also ' sale of production from the prospects included in the . cause such a write-down by the N EES System. old program. Any remaining operating profits would Under the modified Pricing Policy, NEES does not go to the cro,sover reserve. Through December 31, expect to earn a return on its investment of approxi-r 1985,Se old praram gemied customer savings. mately $40 million in N eel's old program. It has not Hover, due to precipitous declines in oil and gas recogn'ized any return on its investment in N eel over marvet prices, the old program generated operating the last four years. losses for the first time during 1986. As a result of the As a result of the SEC's approval in October 1985, losses during 1986, the crossover reserve, which was profits and losses from N eel's new program will be - $13 million after tax at December 31,1985, was ex. retained by NEES. Therefore, the new program is hausted. Charging the losses to the crossover reserve considered to be non-rate regulated and is subject resulted in an of fsetting increase in other income. to the SEC accounting rules described above. Since + Because the losses in 1986 exceeded the cross. the beginning of 1984, N EES, in anticipation of the over reserve, N eel will pass the excess, which - SEC's approval, had been recognizing in its income amounted to $278,000, on to N EP in 1987. Based statement the estimated effect of applying these on our current outlook for' oil and gas prices, the old accounting rules to NEEl's new program. In 1984, program is expected to generate substantial losses in 1985, and 1986, the System recorded after tax net future years, which will be passed on to NEP. In an losses from the new program of $4.5 million, $10.3 - August 1986 rate filing with the Federal Energy Reg-million, and $6.2 million, respectively. Since Janu. ulatory Commission (FERC), NEP indicated its inten-ary 1,1984, NEEl's total expenditures on the new ' tion to begin passing NEEl losses through its fuel program have amounted to $45 million. Although adjustment clause in 1987. This is expected to be a NEEl will continue to incur costs in connection with contested issue. In seeking to recover such losses activities related to existing properties,it will not ' . from customers, N EP has relied on the modified acquire new oil and gas prospects after December j Pri-ing Policy approved by the SEC and the fact that 31,1986. the old program has been conducted in the interest N eel's costs incurred and capitalized in connec-of ratepayers. However, N EP does not have assurance tion with its oil and gas exploration and development that the FERC will allow recovery. In the event of activities are as follows: Year ended December 31 (thousands of dollars) 1986 1985 1984 Leases- $ 19,224 $ 24,181 $ 46,297 Exploration 46,446 46,550 71,966 Development 11,641 '55,797 50,857 Other 21 (4,410) (4,319) Total $ 77,332 $122,118 $164,801 included in the ab ve amounts for 1986,1985, and also include $33,083,000, $38,128,000, and 1984, respectively, are lease costs of $2,414,000, $38,916,000, respectively, of costs of capital for $7,456,000, and $9,461,000, exploration costs the years 1986,1985, and 1984. ' of $5,852,000, $10,557,000,and $6,223,000, The following table presents costs by category and development costs of $1,700,000, $390,000,and the years in which they were incurred. These costs $-0, and other cot ts of $949,000, $-0, and $-0, are included in the " Consolidated Balance Sheets" which relate to the new program.The above totals under the caption " Unproved properties." (thousands of dollan) 1986 1985 1984 Prior years Total Acquisition costs $ 1,431 $ 4,111 $ 5,116 $ 10,406 $ 21,064 Exploration costs 667 64 28 759 Development costs 1,491 54 1,545 i Total $ 3,589 $ 4,229 $ 5,144 $ 10,406 $ 23,368 r 28 ] j s

+ y, ' included in the above emounts for 1986,1985, proved oil and gas propertits by December 31,1988. and 1984, respectively, are acquisition costs of The acquisition costs relate to leases on which ' $1,394,000, $3,404,000, and $4,101,000, explo-drilling had not yet begun as of December 31,1986. ration costs of $413,000, $65,000, and 5-0, and - The exploration and development costs relate to j development costs of $830,000, $-0, and $-0, wells which may be either currently drilling, or com-which relate to the new program. NEEl estimates pleted, but which have not yet been determined to be that the majority of these costs will be included in either commercial or non-commercial.

4. Revenue The utility subsidiaries record revenue as billed NEEl recognizes revenue from sales to third parties ori a cycle billing basis. No revenue is recorded for when received from its partners.

electricity that has been delivered but not billed. 5, Utility plant ' The utility subsidiaries capitalize, as part of con-rate base and in the provision for depreciation. (See f struction costs, an item called allowance for funds Note F-1.) The composite rates approximate the pre. J used during construction (AFDC), which represents tax costs of funds (11,4 percent in 1986 and 11.9 { the composite interest and equity costs of capital percent in 1985 and 1984). Consistent with past i funds used to finance that portion of construction regulatory approvals, tax benefits on the borrowed costs not eligible for inclusion in rate base, in 1986, funds component of AFDC are deferred and amor-an average of $185 million of construction work in tized over the estimated lives of the property giving - progress (CWIP) was included in rate base. AFDC is rise to the tax benefits. recognized as a cost of " Utility plant." Accordingly, in the " Statements of Consolidated income," the AFDC is capitalized in the same manner as construc. borrowed funds component of AFDC is presented net - tion labor and material costs, with offsetting credits of related deferred federalincome taxes as detailed to "Other income" and " Interest." This method is in below. An additional effect of this presentation is the accordance with an established regulatory approved allocation of a credit of equal amount, resulting from rate-making practice under which a utility is permit-the deductibility of capitalized interest expense, to ted a return on, and the recovery of, prudently incurred "Other income: Federal taxes on other income-capital costs through their ultimate inclusion in the . credit." Year ended December 31 (thousands of dollars) 1986 1985 1984 Allowance for borrowed funds used during construction $ 21,304 $ 27,139 $ 22,864 Related deferred federal income taxes (Note B) (9.717) (12,408) (10,462) Allowance for borrowed funds used during construction-net 11,587 14,731 12,402 Allowance for equity funds used during construction 30,985 38,404 23,815 Total allowance for funds used during construction-net $ 42,572 $ 53,135 5 36,217 In April 1986, the Millstone 3 nuclear generating plants and properties are charged to maintenance unit, of which NEP is a joint owner, went into com-expense accounts as incurred. Plant retired or other-l mercial operation. N EP was able immediately to wise disposed of, together with costs of removal less include its full investment in the facility in rate base, salvage, is charged to " Accumulated provisions for which resulted in a reduction in AFDC during 1986. depreciation and amortization." Costs of current repairs and minor replacements of

6. Depreciation The depreciation and amortization expense included composed of the following:

and amortization in the " Statements of Consolidated Income"is Year ended December 31 (thousands of dollars) 1986 1985 1984 Depreciation $ 90,549 $ 77,450 $ 74,485 Amortization: Oil and gas properties 87,263 60,770 55,093 Property losses 22,944 13,213 11,473 Oil Conservation Adjustment 2,746 15,434 9,675 Total depreciation and amortization expense $203,502 $166,867 $150,726 29 u

l Depreciation is provided innually on a straight.line provisions for depreciation as a percentaEe 0! basis in amounts at inst sufficient to amortize the weighted average deprzclable property by plant C_. undepreciated cost of depreciable utility properties category are as follows: ' over their estimated remaining service lives. The Year ended December 31 1986 1985 1984 Hydro production - 1.5% 1.5% 1.5% Thermal production 4.6% 4.4% 4.3% Nuclear production 2.5% Other 3.2% 3.2% . 3.2% Overall weighted average 3.3% 3.4% 3.4% Oil and gas property amortization is based on a (OCA) was designed to allow the accelerated recovery percentage calculated by dividing each year's of expenditures for coal conversion facilities at the production by total estimated proved and probable . Salem Harbor Station, both during and af ter the con-reserves (unit of production method). In addition, version period, out of savings from burning coal. amortizationincludesawrite-off of approximately Total expenditures through December 31,1986 were $10.1 million in 1986, $16.3 million in 1985, $103,862,000. At December 31,1986,accumu-and $8.2 million in 1984 pursuant to SEC rules lated provisions for OCA amortization amounted applicable to non-rate regulated oil and gas com-to $35,961,000. The difference, amounting to panies.(See Note A-3.) $67,901,000, remains to be recovered. During The amortization of property losses relates to 1986, savings from burning coal decreased signifi-cancelled nuclear power plants. (See Note C.) cantly due to the decline in oil prices, in the event The Oil Conservation Adjustment (OCA) amor-that these circumstances continue and prevent the tization represents the net amount recovered from accelerated recovery of coal conversion costs, the customers for the amortization of certain coal con-OCA provisions allow NEP to revert to traditional version facilities. This current charge to customers means of cost recovery. -

7. Nuclear fuel The Nuclear Waste Policy Act of 1982 establishes clause.

disposal and that the federal government is responsible for the Also, N EP is recovering through depreciation nuclear plant disposal of spent nuclear fuel. Under the provisions expense its share of estimated decommissioning decommissioning of this act,the federal government requires NEP to costs for Millstone 3, amour' ting to $16 million in pay a fee based on its share of the generatioa from 1985 dollars. This estimate is based on a settlement the Millstone 3 nuclear generating unit. NEP is agreement negotiated by the lead owners in a FERC recovering this fee through its fuel adjustment rate proceeding.

8. Retirement plans The plans are noncontributory and provide retirement in pension cost in 1985 from 1984 is principally due benefits for substantially all employees. Current to actuarial gains on plan investments. In addition, service costs are funded annually; prior service costs the costs of certain supplemental plans decreased are being funded over a 20-year period; actuarial in both 1986 and 1985.

gains and losses are being amortized over a 10 year The comparison, as shown below,of the market period. Total pension cost, including the amortization value of pension fund assets with the actuarial of priorservicecnstsandof actuarialgainsand present value hecumulated plan benefits is pro-losses, was $3,641,000 in 1986, $6,312,000 in vided as a measure of the financial condition of the 1985, and $10,087,000 in 1984. plansif theyhad beenterminatedasof April 1,1986 The decrease in pension cost in 1986 is principally and 1985. The comparison shows that the plans' net due to actuarial gains on plan investments, partially assets exceed the actuarial present value of all plan offset by the cost of plan improvements. The decrease benefits earned to date. l At April 1(thousands of dollars) 1986 1985 Actuarial present value of accumulated plan benefits: Vested $287,940 $210,663 Non-vested 5,696 3.086 Total $293,636 $213.749 Net assets available for plan benefits $377,097 $331,422 The above calculation of the actuarial present value federalinsurer of pension benefits); the above calcu-of accumulated plan benefits used a discount rate of lation does not reflect any future salary increases. 7.1 percent in 1986 and 8.9 percent in 1985, which However, System plan benefits are based on represents a weighted average of the interest rates average salary levels during the final years of employ-used by the Pension Benefit Guaranty Corporation (a ment. Therefore, future salary increases will increase 30 p

@yd. c '. ;hlad benefits.Tffe.tetuarialliability,shonn below,-

qi 1

Tii 'C method and tssumptions, including an assumption was calculated using the plans' actuarill funding for future sality increases. g,9z At April 1 (thoumds of dollars) 1986 1985 7 G Net assets available for plan benefits $377,097 $331,422 d Actuarialliability 357,108 319,086 Excess of net assets over actuarialliability 5 19,989 $ 12,336 VW> P fji Certain health care and hfe insurance benefits are these benefits, which amounted to $5,672,000 in i provided to substantially all retired employees. Such 1986, $ 5,241,000 in 1985, and $4,624,000 in benefits are not funded by the System. The cost of 1984,is charged to expense when paid ' Note B - Total federal income taxes in the " Statements of Consolidated Income" are as follows: s ' Federalincome Year ended December 31 (thousands of dollars) 1986 1985 1984 ' taxes - Income taxes charged to operations. . $117,629 $110,078 $122,917 oq Income taxes credited to "Other income" (9,465) (11,671) (8.845) Income. taxes netted against AFDC-borrowed i f,:y funds (Note A-5) 9,717-12,408 10,462 ~ . Total federalincome taxes $117,881 $110,815 $124,534 ' i " Total federal income taxes, as shown above, consist of the following components: - Year ended December 31 (thousands of dollars) 1986 1985 1984' Currentincome taxes $ 48,429 5 11,103 $ 40,257 Deferred income taxes 62,899 91,227 70,798 y . Investment tax credits-net 6,553 8,485 13.479 [ ,M Totalfederalincome taxes $117,881 ' $110,81b $124,534 Y3 Investment tax credits of subsidiaries are deferred credits-net principally reflects reductions in current

n~

and amortized over the estimated lives of the federal income taxes attributable to investment tax ,g property giving rise to the credits. Investment tax credits which have been deferred. [' . Certain subsidiaries, with regulatory approval, have components of the deferred federal income taxes of adopted comprehensive interperiod tax allocation ~ these subsidiaries: . (norma lization). The following table details the Year ended December 31 (thousands of dollars) 1986 1985 1984 b Allowance for borrowed funds used during construction (Note A 5) $ 9,717 $ 12,408 $ 10,462 Excess tax depreciation and amortization 30,814 22,905 23,367 Oil and gas costs capitalized for book purposes and deducted for tax purposes 58,938 49,026 64,565 NEEl reserve (Note A 3) (2,477) Unamortized property losses (Note C) 783 24,352 Loss on reacquired debt 10,611 3,856 1,708 Other (720) 2,575-505 Reversalof prioryeartax deferrals (47,244) (21,418) (29,809) Deferred federat income taxes $ 62,899 $ 91,227 5 70,798 Thetaxeffectof thecumulativeamountof timing thereafter. If the above calculations had been made differences at December 31,1986, for which using these new tax rates, the System would have deferred federal income taxes have not been pro-estimated excess reserves for deferred federal vided, is approximately $92 million, calculated at income taxes of approximately $85 million, which the 46 percent corporate federal income tax rate in includes approximately $55 million related to NEEl. etfect in 1986, it is expected that through the regulatory process, The recently enacted Tax Reform Act of 1986 has any such deficiencies or excesses in the reserves for reduced the corporate federal income tax rate to an deferred federal income taxes will be recovered from average rate of 40 percent in 1987 and 34 percent or passed on to ratepayers. 31

's. Total federal income taxes differ from the amants income before taxes. Thz reasons for the differences computed by applying the statutory tax rate to are as follows: Year ended December 31 (thousands of dollars) 1986 1985 1984 Computed tax at staiutory rate of 46 percent $140,238 $133,753 $134,379 increases /(reductions) in tax resulting from: Allowance for equity funds used during construc'. ion (14,253) (17,666) (10,955) Book versus tax depreciation not normalized 1,880 6,629 6,810 Amortization of investment tax credits (6,617) (6,302) (4,732) Allother differences (3,367) (5,599) (968) Total federalincome taxes $117,881 $110,815 $124,534 Effective federalincome tax rate 38.7% 38.1 % 42.6% + Federal income tax returns for N EES and its sub-by the Internal Revenue Service through 1981. sidiaries have been examined and reported on Note C included in the " Consolidated Balance Sheets" decision, and ruled that NEP could recover its entire Property icsses under " Unamortized property losses" are the - investment in higrim 2. As a result, NEP's net uwtizedportionsof thecostsof threecancelled income in 1985 was increased by approximately $5 ricar generating projects, million. The FERC decision was upheld in 1986 by i On December 31,1980, a non-affiliated company the U. S. Court of Appeals for the first Circuit in an announced cancellation of plans to build two nuclear appeal by the Rhode Island Attorney General. generating units in Montague, Massachusetts. As NEP is a joint owner of the cancelled Seabrook 2 a part owner, NEP had expended approximately nuclear generating unit. At December 31,1985, $5 million ($3 million after tax) on the Montague NEP transferred approximately $83 million ($48 units. Commencing March 1,1982, NEP began to million after tax) of costs related to Seabrook 2 to amortize and recover through rates these costs over a unamortized property losses, in N EP's W-7 rate five-ycar period. case, the FERC permitted the amortization and On September 23,1981, a non-affiliated company recovery through rates of Seabrook 2 costs com-announced cancellation of plans to build the Pil-mencing on March 1,1986, subject to refund pend-grim 2 nuclear generating unit in Plymouth, Massa-ing investigation. On October 30,1986, a FERC j chusetts As a part-owner, NEP had expended administrative law judge issued an initial decision in approximately $50 million ($29 mil!bn after tax) on the W-7 case concerning the amortization of NEP's the unit. Commencing March 1,1982, NEP began to Seabrook 2 investment. The judge ruled that N EP's j amortize and recover through rates these costs over investment was prudent and that NEP could recover I an eight year period, subject to refund pending the its entire investment in the unit, after reallocation of l outcome of proceedings before the FERC. In May certain costs to Seabrook 1, over a 10 year period. 1984, a FERC administrative law judge ruled that This decision is now being reviewed by the full com-j NEP could not recover approximately $8 million of mission. NEP's request to earn a return on the its expenditures for Pilgrim 2 which were in dispute. unamortized portion of its Seabrook 2 investment is i Prior to the end of 1983, N EP wrote off the disputed still under review by th'e FERC. (See Notes F 1 and portion to "Other income /(expense)- net." However, F-2.) At December 31,1986, NEP had reserves for on April 11,1985, the FERC issued an opinion and Seabrook amounting to approximately $21 million, order reversing the administrative law judge's included in "Other reserves and deferred credits." Note D NEES and its subsidiaries have lines of credit with pollution control revenue bonds issued on behalf of Short-term banks totaling $210 million,of which $16 million NEP were outstanding. At December 31,1985, borrowing had been borrowed at December 31,1986. There $5,593,000 of the proceeds from such bonds were are no formal compensating balance arrangements. held by trustees in construction funds. Since these Fees are paid in lieu of compensating balances on funds could only be disbursed when quahfied con. most lines of credit and operating balances provide struction costs were incurred by NEP, this amount compensation for other lines of credit, was ofIset against total short-term debt outstanding At December 31,1986 and 1985, $28,750,000 at December 31,1985. There were no proceeds held j and $29,850,000, respectively, of ewt-term by trustees at December 31,1986. 3 I Note E On November 26,1985, the Board of Directors by $26,390,000. All per share data and number of ,l Share capital of declared a two-for one split of outstanding NEES shares for all periods included in the financialstate-l New England common shares, effected in the form of a common ments and notes have been adjusted to reflect the Electric System share dividend, Jo shareholders of word on Jan-

split, j

uary 24,1$& Theparvalueof thecommonshares NEES issued and sold additional common shares, l was nct chav(d as a result of the split and, accord- $1 par value, pursuant to a Dividend Reinvestment ( ingly, common shares were increased and paid-in and Common Share Purchase Plan and employee capital was decreased at December 31,1985 share plans, as follows: 32 I

'f i 1986' 1985-1984 Paid-in Paid-in Paid in (thousands of dollars) - Par capital Par capital Par capital ' Dividend Reinvestment and Common Share Purchase Plan < $1,198 $29,561 $1,383 $25,245. $1,418 - $22,464 , Employee share plans : H Premium on reacquired -. 415 10,912 461 8,799 420 6,943 preferred stock (222) ~ (16) (16) $1,613 $40,251 $1,844 $34,028 $1,838, ' $29,391 Note F - (1) in December 1986, the Financial Accounting Seabrook 2 property loss, the amount of the discount . Commitments L Standards Board (FASB) issued new rules for regu. that would be charged against income at January 1,

and, lated enterprises governing the accounting for prop-1988 for NEP's Pilgrim 2 and Seabrook 2 property

- contingencies erty losses and for newly completed plants. These losses is estimated to be $14 million after tax ($1 mil; rules will apply to the System beginning in 1988. NEP lion for Pilgrim 2 and $13 million for Seabrook 2), has been allowed in the past to amortize and recover in addition,the amount of recoveryof NEP's through rates over time costs incurred in connection investment in the Seabrook 1 nuclear unit, whether with its property losses. However, it has not been it operates or is cancelled, and the prudence of such allowed by the FERC to include anyof these amounts - ' investment would be at issue in a FERC rate proceed-in rate base and has, therefore, not earned a return ing. Under the new FASB rules, any disallowance of I on the unamortized balance of such costs during the ' the recovery of such investment would require an i recovery period. In connection with a request by NEP immediate charge to income equal to the amount of . in its W 7 rate case that the FERC allow NEP to eam" any such disallowance, a return on the unamortized property loss associated The new FASB rules also state that AFDC should with Seabrook 2, the FERC is currently reviewing its be capitalized only if its subsequent inclusion in - policy. If NEP is not allowed to earn a return, the new' . allowable costs for rate making purposes is probable, rules would require NEP to record the unamortized Under proposals still under consideration by the balance at a' discounted value. This change, when FASB,if the recovery of a portion of the costs related ef fective, will require a current charge to income to a completed plant is deferred to future periods, equal to the effect of such discounting. Although this deferring the recognition of such costs in income results N 9et income being reduced in the current would be permitted only if certain strict criteria. ' period,there is a corresponding increase in net.. are met relating to the timing and assurance of - . income during the subsequent recovery period.11 recovery. ' the FERC does not allow NEP to earn a return on its (2) NEP is a participant, with a joint ownership have heightened the widespread public concern over j share of approximately 10 percent,in Seabrook 1,an the safety of nuclear generating stations and the l 1150 MW nuclear generating unit in Seabrook, New effectiveness of emerggncy response plans.The Hampshire. Through December 31,1986, NEP's safety of Seabrook and the effectiveness of Seabrook expenditures, including AFDC, for Seabrook 1 and emergency response plans have become the subjects common facilities were $441 million, excluding of intensified public controversy in Massachusetts nuclear fuel. During 1987, NEP expects to incur an and New Hampshire. Numerous parties, including estimated $45 million of additionalcosts, including many elected federal and state officials,are opposed j ' $27 million of AFDC. to operation of the plant and approval of emergency j Although construction of Seabrook 1 is complete, response plans. While the ultimate impact of this receipt from the Nuclear Regulatory Commission public concem is uncertain, it is likely to result in (N RC) of an operating license is necessary in order significant further delays in the licensing process tocommence commercialoperation of the unit. A for Seabrook 1 and, therefore, in significant cost license may not be issued unless a finding is made increases, and may prevent commercial operation, by the NRC that there is reasonable assurance that Under current rules, the Governors of New Hamp-adequate protective measures can and will be taken shire and Massachusetts are normally responsible j in the event of a radiological emergency. The NRC for preparation of such plans and their submission l will base its conclusion in part on the findings of the to the FEMA for review. The New Hampshire emer-Federal Emergency Management Agency (FEMA) as gency response plans were formally submitted to the ~ to whether off site ernergency response plans, FEM A for review in December 1985. Some modifica-including evacuation plans, are adequate and capa-tions to the plans have been submitted. in February ble of being implemented to protect the public 1986, a drill was held to test the New Hampshire j within the emergency planning zone required by the plans. Seven New Hampshire municipalities refused } NRC, currently a 10-mile radius around the plant, to participate in the drill. A report issued by the FEMA l The accident at the Soviet Union's Chernobyl in April 1986 indicated that the state failed to demon-nuclear power plant in April 1986 and developments strate that it had adequate compensatory plans involving operating nuclear facilities in this country for these municipalities and that certain portions 33

4 of the drill mry have to be performed again. Brcause a prima facie showing for a waiver of the 10-mile NRC regulations currently require that a successful requirement. If it concludes that such a showing has .e drill be held within one year prior to the issuance of been made, the licensing board would certify the an operating license, it is likely that the entire drill issue to the full commission. will have to be repeated. Hearings before an NRC The NRC staff has filed a response stating that the licensing board on the New Hampshire plan will not issue should not be certified to the commission be held before the end of May 1987. absent a determination that there is substantial evi-In January 1987, the New Hampshire Supreme dence that a waiver is warranted. The staff estimated Court ruled that New Hampshire town meetings do that it would not be ready until the latter part of not have power of approval over emergency response 1987 to fully respond to the technical merits of the plans prepared by state civil defense officials. How-waiver petition. ever, legislation has been filed in New Hampshire Project management's petition to reduce the size which would give the towns such power of approval. of the emergency planning zone is actively opposed in January 1987, a New Hampshire Superior Court by the Governor and Attorney General of Massachu-issued an order upholding the right of a town to setts, eight members of the Massachusetts congres-require the removal from public property of poles sional delegation, and all four members of the New carrying Seabrook emergency warning sirens. This Hampshire congressional delegation. Legislation has-decision is being appealed. been filed in Congress which would require the N RC On September 20,1986,the Govemor of Massa-to retain the 10-mile zone for all nuclear generating chusetts stated that he will not submit emergency stations.The AttomeyGeneralof Mainehasasked plans for Massachusetts because he believes,in light the NRC to expand the emergency planning zone to of the accident at the Chernobyl power plant, that no at least 12 miles, thereby encompassing southern plans could provide adequate protection.The Gover-

Maine, nor's decision, which has been supported by eight in December 1986, the NRC issued a report of its membersof the Massachusettscongressionaldele-investigation of certain charges aired in a congres-gation, has heightened the difficulty of obtaining an sional subcommittee hearing regarding drug and operating license and has increased the possibility alcohol abuse and improper work practices during that the unit will not be allowed to operate.

construction of the plant.The NRC concluded that None of the six Massachusetts towns in the emer-none of the allegations raised any safety concems gency response planning zone is participating in the because they either were unsubstantiated or had planning process at present. Legislation has been been remedied by project management. filed in Massachusetts which would prevent the Gov. There is a potential for litigation involving manage-ernor from submitting emergency response plans to ment of construction of the Seabrook project.One the FEMA without approval of a majority of voters in potential defendant is Yankee Atomic Electric Com-the affected towns. Legislation has also been filed in pany, which has provided services to the project. Massachusetts which would expand the emergency Yankee is the owner of a 175 MW nuclear unit. NEP planning zone in Massachusetts to 40 miles. Several owns 30 percent of the common stock of Yankee and l municipalities outside of the 10-mile zone have is entitled to purchase 30 percent of its power. asked to be included in the planning process. In November 1986, a Vermont Superior Court Seabrook project management has stated that it upheld the validity of power sales agreements is developing its own emergency response plan for between Massachusetts Municipal Wholesale Elec-Massachusetts without the cooperation of state and tric Company (MMWEC) and six Vermont utilities, local officials,which it might submit to the NRC in which hold an approximately 0.9 percent entitle-a July 1986 decision involving Long Island Lighting ment to Seabrook power under these agreements. Company's Shoreham plant, the NPC stated that its The agreements were challenged by the Vermont licensing board must consider whether a plan pre-Public Service Department and two Vermont utilities pared by a utility would provide protective measures on the grounds that they were unauthorized.The that are generally comparable to what might be Superior Court decision is being appealed to the accomplished with the officials' cooperation, and Vermont Supreme Court. l that the board should assume that such officials A Massachusetts Superior Court issued a decision would in fact use their best efforts in responding to in February 1987 holdingthat town meeting votes ' an accident and would use the utility's plan. Legisla-cannot negate a municipal light board's authority to tion has been filed in both houses of Congress which enter into power sales agreements with M MWEC. would give state officials control over the emergency On November 25,1986, EUA Power Corporation, planning process and would effectively give the gov-a newly created subsidiary of Eastern Utilities Asso- l ernor of any af fected state the power to prevent the ciates, purchased joint ownership shares totaling j issuanceof anoperatinglicense. approximately 12 percent from five participants in In December 1986, Seabrook project manage. Maine, Massachusetts, and Vermont. EUA Power is a ment formally requested the NRC to reduce the single purpose corporation whose sole asset is its emergency planning zone to an area within a one-Seabrook shares. l mile radius of the plant. The NRC licensing board Problems related to emergency response planning, ) charged with reviewing Seabrook emergency re-current or potential financial difficulties of joint own-sponse plans has directed the parties in that proceed-ers, or other problems pertaining to regulation of ing to address whether project management has made nuclear power plants render eventual operation of j f 34 4 ~

y %( m c . Seabrook 1 uncertain. NEP continurs to believe that ' _ substantial adverse etfeet (reduction of more than ~ prompt operation of Seabrook 1 is in the best interest 10 percent) on eith:r NEP or NEES common share 9f; of its customers and N2w England. equity. Disallowance by the FERC of a greater amount ~ Whether Seabrook 1 operates or is cancelled, could have a substantial adverse etfect on the finan. recoverythroughratesof NEP'sinvestmentinthe - cialcondition of NEPand NEES.Whilethe FERCin - unit would be subject to FERC approval. The pru- ' the past has permitted the recoveryof prudently - 'denceof suchinvestment,includingthetermsof the _ incurred investments in cancelled plants, it has not j joint ownership agreement, would be at issue in any - permitted utilities to earn a return on such invest. l proceeding before the FERC. As part of its W-8 rate : ments during the recovery period. The FERC is cur. case filed with the FERC on August 29,1986, NEP. rently re-examining this policy. However,if Seabrook 1 sought to recover costs associated with Seabrook 1, were cancelled and NEP were not permitted to earn based on an in service date of May 1,1987. However, - a return on its investment during the recovery period, on January 30,1987, N EP asked to withdraw this under new accounting rules described in Note F-1, portion of the rate filing because it believes it is NEP would be required to record its investment in - i unlikely that the unit will be in service before the end Seabrook 1 at a discounted value. These new account- ~ of 1987.The prudence of NEP's investment in the ing rules will not apply to the System until 1988. If cancelled Seabrook 2 nuclear unit was decided this write-down is required, it could have a substan-

favorably in an initial decision by a FERC administra-

' tialadverse effect,when recorded,on NEPand NEES tive law judge in October 1986.The decision is being common share equity. However, earnings would be reviewed by tne full commission. (See Note C.) N EP higher during the subsequent recovery period. continues to believe that its expenditures on these The continuing public controversy concerning units were prudent and that the FERC will continue nuclear power could also af fect the five operating its policy of permitting the recovery over time of pru-nuclear units in which NEP has an ownership inter. dently incurred costs through rates. The amount of - est. Proposals to force the premature shutdown of any disallowance by the FERC of recovery of such nuclear units have become an issue in Maine, Mas-investments is uncertain. Although NEP,therefore, sachusetts, and Vermont. NEP has an ownership i cannot predict the outcome of rate proceedings interest in a nuclear plant in each of these states. involving NEP's Seabrook investments, it does not While the ultimate effect of this controversy cannot believe that the amount of any disallowance of recov-be predicted, it is possible that it will result in the cry of the expenditures incurred to date would have a - ' premature shutdown'of one or more of the units. (3) NEP experienced an extended outage from $25 million of replacement power costs covered by : August 1983 through February 1984 at the System's insurance. This amount was collected in 1986. In : largest generating unit, Brayton Point Unit 3, due August 1986, NEP filed a complaint in Massachu-l to a major turbine failure in connection with the setts Superior Court against Stone & Webster Engi-outage, NEP included approximately $20 million neering Corporation (S&W). In the proceeding, NEP of incremental replacement power costs in its fuel seeks to recover damages from S& Won the grounds, adjustrnent clause billings; At the request of the among others, that it is responsible for the silo fail-I Massachusetts and Rhode Island regulators and ure. In November 1986, NEP executed an agreement Attomeys General, the FERC initiated an investiga, with the Rhode Island Attorney General establishing f tion of this outage and,in November 1985,an a method of allocating any recovery from S&W administrative law judge ruled that N EP's recovery of between ratepayers ang! NEP. In the agreement, the these costs was proper. This decision is now being. Rhode Island Attorney General agreed not to initiate reviewed by the full commission. any regulatory proceeding concerning the 1985-Brayton Point Unit 3 also had an outage from late ' 1986 outage until NEP's dispute with S&W is August 1985 to February 1986 as a result of the resolved. structural failure of one of its five coal silos. NEP had From late August 1986 through late January insurance coverage for $25 million of replacement 1987, Brayton Point Unit 3 was out of service due to power costs beyond an initial 30-day deductible a major turbine failure. Incremental replacement period. Incremental replacement power costs ex-power costs were not insured and are estimated to be ceeded the $25 million level of coverage by approxi-approximately $10 million. T hese costs have been mately $17 million and, as in the case of the prior included in fuel adjustment clause billings. NEP has outage, NEP included this excess in fuel adjustment agreed to keep the Rhode ! stand Public Utilities clause billings. At December 31,1985, N EP had Commission informed of the results of NEP's investi-recorded a receivable for reimbursement of the gationof the causeof theoutage. (4) NEP filed its W 6 rate case in 1983. The only of Seabrook 1, the FERC issues an order requiring amount subject to refund in this rate case is the reve-NEP to make refunds as a result of the FERC chang-nue collected from January 1984 through February ing or eliminating its CWIP in rate base rules. These 1986 associated with the inclusion of CWIP in rate rules could change as a result of petitions filed with base related to Seabrook 1. These revenues amount-the U. S. Court of Appeals to review tl e potential ed to $21 million on an annual basis. This amount anticompetitive effects of such rules. Exclusion of would be refunded only if, prior to the in-service date CWIP from rate base, whether retroactive or not, f i 35 c i

[7, ). wou'Id reduce N EP's aft:r-tax cash flow, but would - r:cordid on the amount of CWIP not included in not reduce net income because AFDC would be rate base. g .r B ' (5) The utility subsidiaries' construction expendi-to be $60 million. (See Note A 3.) At December 31, ( tures, excluding AFDC,are estimated to be 5270 1986 substantial commitments had been made

million in 1987. The oil and gas subsidiary's expen-

. relative to these construction and exploration and ditures including costs of capital, for its exploration development programs. - and development programs in 1987 are estimated (6) linder NEP's current arrangements for fuel supply, services. The agreement can be terminated on - certain of its fuel contracts are assigned to a non-three months' notice. Fuel inventory held by the affiliate which purchases fuel under these contracts non affiliate for NEP amounted to $17,179,000 at and in the open market, holds the fuel in inventory, December 31,1986. This amount is included in the as owner, and sells the fuel to NEP at the time of " Consolidated Balance Sheets" in " Fuel, materials, burn at prices reflecting its cost of the fuel, in addition,. and supplies" and in " Accounts payable." NEP pays monthly charges to cover the non-affiliate's p' (7) In addition to the matters discussed above, the costs to these subsidiaries and their customers. utility subsidiaries, in common with other companies, The utility subsidiaries have been contacted by y are subject generally to other safety and environmental federal and state environmental agencies regarding regulatory requirements, which may result in the modi-potential statutory joint and several liability for clean-fication or delay in, or cancellation of construction up of nine sites at which such subsidiaries either or operation of, their existing or planned facilities. have or are alleged to have disposed of material - Anyof these requirements could result in increased designated as hazardous waste. (8) For a discussion relating to the uncertainty con-in oil and gas properties, see Note A-3. cerning the recovery by the System of its investments - Note G The indentures relating to mortgage bondsof utility a total of $500 million in four different portions. l Long term debt - subsidiaries require sinking fund installments total-The first portion is secured by a pledge of NEEl's ing $6,995,000 in 1987,57,145,000 in 1988, rights with respect to NEP under the Pricing Policy $7,395,000 in 1989, $7,395,000 in 1990, and on behalf of old program prospects (see Note A-3). 57,220,000 in 1991.The issuers of the mortgage - The second portion is secured by a mortgage on bonds may elect to satisfy these installments in cash, selected old program oil and gas properties. The in bonds, or by evidencing to the trustees additional third portion, which applies to the new program, is ,j tially all the properties of the utility subsidiaries are . between NEES and NEEl.The fourth portion is ' l property in amounts as provided therein. Substan-' supported by a Capital Maintenance Agreement I subject to the lien of the indentures under which secured by'a mortgage on selected oil and gas prop-the first mortgage bonds and general and refunding erties in the new program. All four portions operate l mortgage bonds have been issued, as revolving credit loans through December 31, The aggregate cash payments to retire maturing 1989, at which time they convert to five-year term mortgage bonds and for cash sinking fund require-loans with equal quarterly amortization. The total mentsonlong-termnotesof NEES'utilitysubsi-amount of borrowings that may be outstanding under diaries for the years ended December 31,1987 the second and fourth portions of the agreement at through 1991 are as follows: $ 10,000,000 in 1987, any one time is a function of the value assigned to $14,150,000 in 1988, and $37,890,000 in 1991. the currently mortgaged oil and gas properties. N eel There are no requirements for 1989 and 1990. Hold-is also required to maintain a minimum net worth of ers of pollution control revenue bonds secured by $40 million, including subordinated notes payable NEP's Series K general and refunding mortgage to NEES. At December 31,1986, interest rates on bonds can require NEP to repurchase the bonds in borrowings of $402 million ($387 million under the i 1988 and annually thereaf ter. In such event, NEP first portion, $4 million under the second portion, would expect to remarket such bonds at prevailing $11 million under the third portion, and $ under interest rates, the fourth portion) ranged from 6.4 percent to The annual interest requirement on the outstand-8.8 percent. Based on the oil and gas properties +l ing long-term debt of NEES' utility subsidiaries at mortgaged at December 31,1986, NEEl had addi-December 31,1986 is $84,272,000. tional borrowing capacity of $31 million under this NEEl has revolving credit and term loan agreements agreement. with three banks providing for borrowings of up to

Note H -

N EP has $25 million of 13.48% cumulative preferred commencing on September 1,1987. During 1986, Redeemable stock outstanding, which is subject to a mandatory all of NEP's 11.04% Series of cumulative preferred j preferred stock annual sinking fund requirement for the retirement - stock was redeemed. This redemption resulted in of 12,500 shares per year at $100.75 per share a charge of $1,648,000 to retained earnings. 36 i e

.1 Report of Independent Certified Public Accountants i 1 To the Board of Directors and Shareholders of New England Electric System: We have examined the consolidated balance sheets and the consolidated statements of capitalization of New England Electric System and subsidiaries as of December 31,1986 and 1985 and the related consolidated statements of income, retained earnings, and changes in financial position for each of the three years in the period ended December 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As more fully described in Note A 3 of " Notes to Financial Statements,"a subsidiary has a substantial investment in oil and gas properties. With the precipitous declines in oil and gas market prices in early 1986, there is uncertainty whether these invested amounts will ultimately be recovered. In our opinion, subject to the effects on the 1986 and 1985 consolidated financial statements of such adjustments,if any, as might have been required had the outcome of the uncertainty referred to in the preceding paragraph been known, the consolidated financial statements referred to above present fairly the consolidated financial position of New England Electric System and subsidiaries as of December 31,1986 and 1985, and the consolidated results of their opei'ations and changes in their consolidated financial position for each of the three years in the period ended December 31,1986, in conformity with generally accepted accounting principles applied on a consistent basis, d Boston, Massachusetts February 27,1987 1 s 37

t =,- . ". ; New England Electric System and Subsidiaries Supplementary information on Business Segments - 1 g / ' "(unaudited) The consolidated group operates in two principal domestic industry segments. . (thousands of dollars) Electric Oiland gas Consolidated. ) ' Year ended ~ . Operating revenue $1,375,821 5 56,122 $1,431,943 I December 31,1986 Depreciation and amortization 116,239 87,263 203,502 -f Other operating expenses 903,286 6,785' 910,071 Federalincome taxes 126,370 (8,741) 117,629 Operating income /(loss) : 229,926 (29,185) '200,741 LInterest expense .12',808 12,808 79,720 1,135 80,855 income from equity investments Other income /(expense)--net 15,152 24,150 39,302 Net income /(loss) $ 178,166 $ (6,170) $ 171,996 Totalassets $3,147,659 $ 662,758 $3,810,417 investments at equity 72,219 72,219 Capital expenditures 5 188,014 $ 77,332 $ 265,346 Year ended Operating revenue $1,394,936 $ 49,343 $1,444,279 December 31,1985 Depreciation and amortization 106,097 60,770 166,867 Other operating expenses -. 958,458 .7,377 965,835' Federalincome taxes 124,691 (14,613) 110,078 Operating income /(loss) 205,690 (4,191) 201,499 Interest expense 68,907 2,272 71,179 income from equity investments 10,056 10,056 Other income /(expense)-net 29,109 (5,407) 23,702' Net income /(loss) $ 175,948 $ (11,870) $ 164,078 Total assets $3,012,147 $ 674,740 $3,686,887 investments at equity 60,545 60,545 Capital expenditures $ 200,659 $ 122,118 $ 322,777 ' ^ - Year ended Operating revenue $1,437,738 $ ' 47,989 $1,485,727 December 31,1984 Depreciation and amortization 95,633 55,093 150,726 Other operating expenses 983,100 '3,631 986,731 Federalincomeiaxes 129,224 (6,307) 122,917 Operating income /(loss) 229,781 (4,428) 225,353 Interest expense 85,285 i 85,285 income from equity investments 6,099 6,099 Other income /(expense)-net 5,458 (24) 5,434 Net income /(loss) $ 156,053 $ (4,452) $ 151,601 Total assets 52,829,066 $ 611,961 $3,441,027 investments at equity 5 57,213 57,213 Capital expenditures $ 229,949 $.164,801 5 394,750 See Note A 3 of " Notes to Financial Statements" for a The net loss for 1985 of $11,9 million includes (a) a more complete discussion of oil and gas operations, $1,6 million after tax addition to an accounting l In 1985, the SEC granted approval to divide N eel's reserve (crossover reserve) and (b) a $10.3 million oil and gas exploration and development activities into af ter tax net loss from operations on the non-rate two programs: a rate regulated program and a non rate regulated program, regulated program, The net loss for 1984 of $4.5 million reflects the The net loss for 1986 of $6.2 million reflects the after tax net loss from operations on the non-rate after tax net loss from operations on the non-rate regu-regulated program. lated program. .I i i I 38

p liew England Electric System and Subsidiaries L ) Supplementary Information on Oil and Gas Activities (unaudited) I-r ~ The estimates of NEEl's proved reserves and proved proved reserves for 1984,1985, and 1986 are as. developed reserves of oil and gas, all located within follows: the United States, and changes to the estimated Crude oiland condensate Naturalgas (thousandsof Bbt) (thousandsof MCF) Proved reserves as of December 31,1983 3,300 70,019 l Revisionsof previousestimates (142) 22,284 l l . Extensions, discoveries, and other additions 1,732 64,435 Production (528) (9,375) Proved reserves as of December 31,1984 4,362 147,363 j Revisionsof previousestimates (48) 4,531' I Extensions, discoveries, and other additions 323 22,920 ) Production (685) (9,848) - J Proved reserves as of December 31,1995 3,952 164,966 Revisionsof previousestimates (449) (4,352) Extensions, discoveries, and other additions 223 17,847 Production (589) (19,893) I Proved reservesasof December 31,1986 3,137 158,568 1 . Year end average Proved selling price developed reserves - Crude oil and Crude oiland condensate Naturai gas condensate Natural gas . thousands ( (per Bbl) (per MCF) (thousands of Bbl) of MCF) l - December 31,1983 $28.00 $3.84 3,298 67,274-December 31,1984 $28.52 $3.73 3,122 94,897 l l l December 31,1985 $26.19 $2.97 - ' 2,980 157,443-l December 31,1986 $12.95 $1.68 2,121 '141,257-Proved reserves are estimated quantities of crude oil, at December 31,1986,1985, and 1984 are approxi-condensate, and natural gas which geological and mately 200,400 Bbis,140,000 Bbis, and 35,000 engineering data demonstrate with reasonable cer-Bbis, respectively, of crude oil and condensate and tainty to be recoverable in future years from known oil 4,070,000 MCF,1,302,000 MCF, and 60,000 MCF, j and gas reservoirs under existing economic and oper-respectively, of natural gas which relate to the new ating conditions. Proved developed reserves are those

program, f

proved reserves reasonably expected to be recovered The estimates of NEEl's proved and proved devel-l through existing wells with existing equipment and oped reserves were prepared by independent petro-lL operating methods. Included in the proved reserves at leum engineering consultants, Keplinger and December 31,1986,1985, and 1984 are approxi-Associates, Inc. of Dallas, Texas and Thomas C. Frick, mately 210,000 Bbis,140,000 Bbis, and 35,000 Petroleum Consultant,of Dallas, Texas.The reserves Bbis, respectively, of crude oil and condensate and are estimates only and should not be construed as 5,028,000 MCF,1,302,000 MCF, and 60,000 MCF, exact quantities. Future conditions may affect the respectively, of natural gas which relate to the new recovery of estimated reserves, program. Included in the proved developed reserves 39 l

3 + 4p u, System Directors System Officers 3 1 As of December 31,1986

Felix A. Mirando,Jr.

. As of December 31,1986' - Privateinvestor W. Douglas Bell ' New Yot*, New Yo/*

Joan T. Bok former Chairman and -

' Compensation Committee ' Chairman - 6

Chief Executive 0fficer h

. State Mutua/ Life Assurance Guy W. Nichols. Samuel Huntington fA Co.of America ~ former Chairman and. President and Worcester, Massachusetts - Chief Executive Officer - Chief Executive Officer O becutive Committee New EnglandElectric System . y Westborough, Massachusetts ' John F. Kasl w

Joan T. Bok Audit Committee Executive Vice President L

Chzirman andChief Operating oflicer 1 NewEnglandElectric System - John D. Ritchie a W:stborough, Massachusetts : .- J.D.R. Consultancy, Inc. Robert O. Bigelow I Compensation Committee - Management consultants , Vice President ' Executive committee. Stone Ridge, New York Customer Service Committee . James'H.' Hunter Executive Committee freden. E.Greenman j c formerPresident

Vice President, General y

James Hunter Machine Co.,Inc. George M. Sage '*""' "" # " *' 'Y ~ Textilemachinerymanufacturer President f North Adams, Massachusetts ' Bonanza Bus Lines, Inc. Alfred D. Houston i ' Compensation Committee Providence, Rhode island Vice President-Finance k. Executive Committee Samuel Huntington George P.Sasdl ' President and l. Anne Wexler Vice President bj ' Chief Executive 0fficer Chairman ?i NewEnglandElectric System - Wexler, Reynolds, Harrison ' Glenn R. Schleede bE Westborough, Massachusetts & Schule, Inc. Vice President \\ . Compensation Committee Management consultants . becutive Committee Washington, D.C. Robert C. Smith Compensation Committee Vice President i John F. Kaslow : becutive Vice President ^ James Q. Wiison ib and Chief Operating Officer Professor Treasumr ' New England Electric System Harvard University 1 Westborough, Massachusetts ~ Customer Service Committee ~ Cambridge, Massachusetts ' The Universityof Califomia atLos Angeles 7 Edward H. Ladd. Audit committee. j ;

President f

. Standish, Ayer & Wood,Inc. Investmentcounselors Boston, Massachusetts ? i Audit Committee System Subsid.. lanes New England Electric Transmission. g Corporation i J Joshua A. McClure - Massachusetts Electric Company {ar tr 25 Research Drw , l e Hampshire 03301 Pr ide y Am ricanCustomKitchens,Inc. fg,,'b*lf&g",*n Yeside at New England Hydro-Transmission l . Providence, Rhode island Corporation Audit Committee The Narragansett Electric Company 4 Park Street ! k Customer Service Committee 280 Melrose Street Concord, New Hampshire 03301 )'; Providence, Rhode Island 02901 Robert L. McCabe, President New England Hydro-Transm.ission Malcolm McLane Electric Company,Inc. I President ~ Granite State Electric Company 25 Research Drive y Orr & Reno, P. A. 33 West Lebanon Road Westborough, Massachusetts 01582 f . Attomeys Lebanon, New Hampshire 03766 Concord, New Hampshire Russell A. Holden, President NEES Energy,Inc. Audit Committee 82 Florence Street New Engfand Power Company Marlborough, Massachusetts 01752 25 Research Drive. George P. Sakellaris, President Westhorough, Massachusetts 01582 New England Power Service Company New England Energy incorporated 25 Research Drive 25 Research Drive Westborough. Massachusetts 01582 40 Westborough, Massachusetts 01582

h. 'G p" ShareholderInformation h NewEngland 1986 1985 Electric System Price range Dividend Price range Dividend common shares High Low declared High Low declared First quarter $28W $243/s 5.48 $1916hs $181/8 $.45 Seco.nd quarter $28% $25% $.48 $223/s $193/s $.45 s [ Third quarter $35% $26W $ 48 $23% $203hs $.45 Fourth quarter $31% $28 $.50 $25% $20% 5.48 The total number of shareholdus at December 31,1986 was 75,608. E Selected quarterly First Secona Third fourth financialinformation (thousands of dollars) quarter quarter quarter quarter (unsudited) 1986 Operating revenue $413,078 $331,814 $342,707 $344,344 7" Operatingincome $ 54.117 $ 42,134 $ 51,099 $ 53,391 Net income $ 49,328 $ 34,990 $ 42,558 $ 45,120 Net income per average share .93 .65 .79 .83 9 1985 Operating revenue $376,928 $341,779 $361,371 $364,201 Operating income 5 58,164 $ 45,358 5 48,555 5 49,422 Net income $ 47,055 $ 42,132* $ 39,655 5 35,236 Net income per average share .91 .81* .76 .67

• Seediscussionof Pilgrim 2(NoteC)

Shareholder Questions about shareholder records, quarterly divi-New England Electric System services dend payments, reinvestment of dividends, and Shareholder Services Department optional cash payments should be directed to: Post Office Box 770 Westborough, Massachusetts 01581-0770 Transfer agent The First National Bank of Boston and registrar 100 Federal Street + Boston, Massachusetts 02110 L Stock exchange NewYork Stock Exchange listings Boston Stock Exchange Trading symbol NES h Annualmeeting Theannual meetingof New England Electric System notice will be held at New England Life Hall,225 Clarendon Street, Boston, Massachusetts, on April 28,1987,at 10:30 a.m. Y Form 10K and Copies of the annual report on Form 10K to the Securi-New England Electric System L" Statistical Report ties and Exchange Commission and a Statistical Report Shareholder Services Department i for 1986 are available, free of charge, by writing to: Post Office Box 770 l, Westborough, Massachusetts 01581-0770 I [ / l {., The name ' New England Electnc System" means the trustee or trustees f or the time being(as trustee or trustees but not personally) under an Agreement and [ Declaration of Trust dated January 2.1926, as amenc,ed,which is hereby referred to, and a copy of which, as amended, has been hied with the Secretary of 'i The Commonwealth of Massachusetts. Any agreement, obhgation, or liabihty made,er'ered into, or incurred by or on behalf of New England Electric System .p binds only its trust estate, and no shareholder, director, trustee, of ficer, or agent thereof assumes or shall be held to any liabihty therefor. Wk T his report is not to be considered as an of fer to sell or buy or sohcitation of an of fer to sell or buy any secunty. W[ Ny

i4 t, FINAL USDA

• REA This dito will bs us by REA to review your Form Approvsd ftuncial situation, Your veryones is required OMB No, 05 72 0016 (7 U.S.C. 901 et sen.) and is not confidential Exp. date eval, upon req, FINANCIAL AND STATISTICAL REPORT BORROWER DESIGNATION N.H. Merrimack M NH NDIN REA USE ONLY

!NSTRUCTIONS

• Submit an original and four copies to REA. Round all emounts to nearest dollar. See REA EOM 2.

CERTIFICATION We hereby certify that the entries in this report are in accordance with the accounts and other records of the systern and reflect the status of the system to the best of our knowledge and belief. ALL INSURANCE REQUIRED BY PART 1788 OF 7 CFR CHAPTER XVil, REA,WAS IN FORCE DURING THE REPORTING P RIOD ANQRENEWALS HAVE BEEN OBTAINED FOR ALL POLICIES. .f k }hM.ex.) February 12, 1987 ,.in SIGNA URE OF GEK4GGMANA4MNettR ACCOUNTANT DATE M/ Februarv 12. 1097 ,a' h SIGNATURE OF M ANAGET DATE PART Af STATEMENT OF OPERATIONS YEAR TO DATE THIS MONTH ' ITEM LAST YEAR THIS YEAR BU ET (a) (b)

1. Operating Revenue and patronage Capitai S 36,953.404

$ 38.229.326 S 39.578.954 S 3.861.243

2. Power Production Expense.

j

3. Cost of Purchased Power S 24,295,033 S 22,939,478

$ 25,334,289 S 2,345,357

4. Transmission Expense.

9,486 3,503 11,300 3

5. Distribution Expense. Operation.

807,746 824,601 856,622 91,226

6. Distribution Expense. Maintenance 1,075,657 1,135,959 1,026,015 123,627 1,030,610 1,113,808 1,112,311 92,338

7. Consumer Accounts Expense 8 Customer Service and Informational Expense 46,941 59,708 65,392 5,972

9. Sales Expense

10. Administrative and General Expense 1,907,472 2,051,095 2,085,485 139,214

11. Total operation & Maintenance Expense (2 thru l0)

S 29,172,945 S 28,128,152 S 30,491,414 S 2,797,737

12. DIpreciation and Amortization Expente 2,296,495 2,518,873 2,463,427 221,343

13. Tax Expense. Property 740,854 828,465 796,422 99,292

14. Tax Expense Other 555,881 591,701 587,736 55,672

15. Interest on Long Term oebt.

12,751,777 14,026,682 14,988,456 987,513

16. Interest Charged to construction. Credit

( 8,770,536 ) ( 10,040,363 ) ( 10,725,237 ) ( 780,059 )

17. Interest Expense Other 57,549

( 29,856) ( 12,100) 14,883 52,318 205,143 86,880 145,267 ta. Otner oeductions. 19.' Total Cost of Electric Service (11 thru 18). S 36,857,283 S 36,228,797 $ 38,676,998 3,541,648-

20. Patronage Capital & Operating Margins (1 minus 19)

S 96,121 2,000,529 S 901,956 S 319,595

21. Non Operating Margins. Interest.

695.678 535,574 517,800 41,362

22. Allowance for Funds Used During Construction

23. Non Operating Margins.Other 13,088 16,191 14,905 1,173

24. Generation and Transmission Capital Credits

25. Other Capital Credits and Patronage Dividends

26. Extraordinary items 27 patronaos capitat nr Marains (20 incu 26) 804.887 2.552,294 S

1,434,661 S 362,130 PART B. DATA ON TRANSMISSION AND DISTRIBUTION PLANT YEAR TO DATE YEAR.TO DATE j ITEM LAST YEAR THIS YEAR ITEM LAST YEAR THIS YEAR (a) (b) (a) (b)

1. New Services Connected 3,m 36.75 38.53

6. Miles Distribution.

2. Services Retired 160 195 Overhead 3,898.37 3,966.86 I

7. Miles Distribution -

3. Total Se, vices in Place 53,315 56,566 underground 201.20 240.22

4. Idle Services

8. Total Miles Energized (Exclude Seasonal)

],941 2,0 ci 3 (5 + 6 + 7) 4,136.32 4,245.41 l PAGE 1 OF 7 PAGES l REA Form 7 (Rev.10-86) .c. a

fi ) t,,' ?* FINAL 1 USDA. REA BORROWER DESIGNATIOM N.H. Merrimack FINANCIAL AND STATISTICAL REPORT ' MONTH ENDING REA USE ONLY. INSTRUCTIONS. See AEA EOM 2. December 31, 1986 PART C. BALANCE SHEET ASSETS AND OTHER DEBITS LIABILITIES AND OTHER CREDITS $ 78,612,606

26. Memberships

1. Total utility Plant in service.

.'2. Construction Work in Progress 109,886,047

27. Patronage Capitat S

7,506,391-

3. Totai utility Plant (1 + 2)

S 188,498,653 2a. Operating Margins. Prior Years .Os Accum. Provision for Depreciation and Amort.. 19,374,546

29. Operating Margins Current Year -

2,000,529 ~

5. Not Utliity Plant (3 4).

S 169,124,107

30. Non operating Margins.

551,765

6. Nonutility Property Net 169,605

31. Other Margins and Equities.

7. Invest. in Assoc. Org.. Patronage Capital 106,827

32. Total Margins & Eaultles (26 thru 31).

S 10,058,685 i

8. Invest. in Assoc. Org..Other. General Funds

33. Long Term Debt REA (Net).

56,388,141

9. Invest. in Assoc.Org..Other.Nongeneral Funds 1,887,311 (Payments Unapplied s -

) j lo. Other investments. 2,000'

34. Long Term oebt. Other (Net; -

126,138,990

11. Special Funds.

99,632 (payments-Unapplied s ) 1

18. Total Other Property & Investments (6 thru 11). S 2,265,375

35. Total Long Term Debt (33 + 34).

$ 182,527,131 s 13.' Cash. Oeneral Funds 1,614,170

36. Notes Payable.

14. Cash. Construction Funds. Trustee.

21,548

37. Accounts Payable 3,434,906 I

10. Special Deposits 500 3a. Consumers Deposits.

252,934

16. Temporary investments.

6,871,362

39. Otner Current & Accrued LIJ bilities..

636,094

17. f0otes Receivable. Net

40. Total Current & Accrued Llabilities(36 thru 39). S 4,323,934

18. Accounts Receivable. Net Sales of Energy.

2,686,399 41, oeferred Credits 1,463,110

19. Accounts Receivable. Net Other.

566,753

42. MisceHaneous Operating Reserves.

20.' Materials & Supplies. Electric and Other. 1,375,244

43. Tota Liabliities & Other Credits (32 + 35 +

21. Prepayments 613,424 40 taru 42)

$ 198,372.860

88. Other Current & Accrued Assets.

51,413 ESTIMATED CONTRIBUTIONSlN AID-OFCONSTRUCTION

83. Votal Current & Accrued Assets (13 thru 22).S 13,800,813 salance Beginning of Year 469,860 M. Deferred Debits 13,182,565 Amounts Received This Year (Net) 242,889 2a. Votal Austs & Othe, Debits (5 + 12 + 23 + 24)

$ 198.3~7?,860 TOTAL Contributions-in-Ald Of Construction. .S 712,749 PART D. NOTES TO FINANCIAL STATEMENTS THE SPACE BELOW IS PROVIDED FOR IMPORTANT NOTES REGARDING THE FINANCIAL STATEMENT CONTAINED IN THIS REPORT. (IF ADDITIONAL SPACE IS NEEDED, USE SEPARATE SHEET.) i I RE A " Forrn 7 (Rev.10 86) PAGE 2 OF 7 PAGE5 A

FINAL r' 4 u.DA.HEA BORROWER DESIGNATION M.H. hbad 1 FINANCIAL AND STATISTICAL REPORT YEAR ENDING HEA USE ONLY INSTRUCTIONS. see REA EOM 2. Decernber 31. 19 36 ~ i PART E. CHANGES IN UTILITY' PLANT j l ADDITIONS RETIREMENTS BALANCE END OF YEAR TE ITEM OF YEA AN R S S (ni (b1 (c) (dI (e) {f)

1. Land and Land Rights (360).

490.417 J 52.91R 941.119

• * ^

2. Structures and improvements (361) 1.292 1.?47 1.4A

3. Station Equipment (362) 3.078.467 1.201.129 29.825 4.249.771 3.48 4, Poles, Towers, and Flutures (364).

19,508.662 862.393 267.394 20.103.661 1.4R

5. Overhead. Conductors and Devices (385) 24.603.120 3.845.019 250_.976 28.197.161 1.49

6. Underground Conduit (366),

7. Underground Conductor & Devices 067) 1.152.011 211.957 A.844 1.155.124 1.4A

8. Line Transformers (308) 8.908.758 1.123.701 73.064 9.959.395 3.48

9. Services (369).

2.AR6.900 171.A?4 16.409 1.021. A14 1.4R

10. Maters (370) 2.695.092 343.444 12.560 1.025.976 3.48

11. Installation c6 Consumers' Premises (371)

All.?64 6A.1R9 ??.O?6 A97.6?O 1.4R

12. Lened Property on Cmasm's Pnmes 072 9.004 9.004 1.4A

13. Strast Lighting (373) 241.509 33.3A7 19.242 255.654 3.49 My

14. SUBTOTAL. Distribution (I thru 13).

g 64.382.496 $ 7.916.154 S ' 1),836 e 71. 577. 814 "~

15. Land and Land Rights (389).

A2.749 A2.749

18. Structures and improvements (390) 1.459.051 432.390 25.467 1.865.974 3.00

17. Office Furniture & Equipment (391) 734.099 179.271 7A9 A67.SA1 nn

18. Transportation Equipment (392).

1.665.766 681 J59 280.579 2.066.746 VAR

19. Stores, Tools. Shop. Garage, and Laboratory Fquipment (393,304. 395) 337.455 59.828 2.296 394.987 6.00 l

20. Pow:r Operated Equipment (396) 149.855 20.275 3.346 166.784 VAR l

21. Communication Equipment (397) 215.506 6.530 180 221.856 5.00

22. Miscellaneous Equipment (398) 19.587 795 20.382 6.00

23. Other Tangible Property (399)

M '$U&h $

24. SU8 TOTAL General Plant (15 thru 23) 4.664.06A M 1.110.650 ll?.697 5.6R2.061 bd

25. Intangibles (301,302,303) s 49.783 e

49.783 dWK

26. Land and Land Rights, Roads and

'] Trails (350,359). 119 Opn ilq,OAO '^

27. Structures and improvements (352) 3.415 3.415 2.75

28. Station Equipment (353) 132.783 132,783 2.75

29. Towers and Fixtures and Poles and Fixtures (354,355) 386 676 20.023 5.651 401.048 2.75 4

30. Overhead Conductors & Devices (356).

559.869 70.763 5.655 624,977 2.75

31. Underground Conduit (357).

32. Underground Conductor & Dwun (358)

33. SU8 TOTAL Transmission Plant "p

s fg (25 thru 32). g 1_Ogg.040 A ??1.569 M 11.306 S 1.277.303

34. Production Plant. Steam (310 316)

+ vw

35. Production Plant. Nuclear (320 325).

W

36. Prouuction Plant Hydro (330 336) 37 Production Plant Other (340 346)

38. AllOtw Utility Phrit(102,104106.114,118)

?5.865 (22O) 25.645 'S Wyp 39, SUBTOTAL (14+24+25+33+34 tvu 38) $ 70.1A7.252 e 9.470.153 9 1.044.799 e 78.612.606 g}> !O. Construction Work in Progress (107) 104.560.762 5,325,285 109,886,047 &]bbi U hh

41. TOTAL UTILITY PLANT (39 + 40)

$174,748,014 S14,795,438 $ 1,044,799 S188,498,653 REA Form 7 (Rev.12 3JJ PAGE 3 OF 7 PAGES r

l i FINAL e \\ USDA - REA DORROWER DESIGNATION j N.H. Merrimack FINANCIAL AND STATISTICAL REPORT YEAR ENDING REA USE ONLY INSTRUCTIONS. SeTMA EOW2; December 31. 19 86 l PART F. ANALYSIS OF ACCUMULATED PROVISION FOR DEPRECIATION - TOTAL ELECTRIC PLANT '8 ' TI N TRANSM MION GENERAL PLANT OTHER PLANT ITLM PLANT fa) (b) (c) (d) 1 Balance neginning of Year. S15,041,727 52,232,563 s 191 n41

2. Additions Depreciation Accruals Charged tot

a. Depreciation Expense.

,324,199 167,108 27,566

b. Clearing Accounts and Others 172,063 C. Subtotal (a + b) 9,39A, Igg vg,171 27 566 2

3. Lass. Plant Retirements:

a. Plant Retired.

637.616 97n nGR

b. Removal Custs 171.164

c. Suntotal (a + b)

Ang.7Aq 230,098

4. Plus Salvaged Materials 1?? 049

5. TOTAL (2c. 3c + 4).

$1.642.506 $ 109.073 S27,566

6. Other Adjustments. Debl* or Credit

7. Balance End of Year (1 + 5 ! 6).

$16,684,233 $2,341,656 $348,657 PART G. MATERIALS AND SUPPLIES ^ PURCHASED SALVAGED USED (NET) SOLD ADJUSTMENT ITEM OF Y R END EAR (a) (bt (c) (d) (e) (f) (g)

1. Elsctric 1,395,536 1,889.913 148.260 1.601.757 (as6.7mA) 1 17;_9aa

2. Other (155 + 156)

3. Ratio of Inventory Turnover - Electric

4. Inventory - Electric as Percent of Total Utility Plant item Id + I" * "

• 1.16 Item die. Part E X 100 =

) PART H. SERVICE INTERRUPTIONS AVERAGE HOURS PER CONSUMER BY CAUSE TOTAL ITEM POWER SUPPLIER EXTREME STORM PREARRANGED ALL OTHERS (a) (b) (c) (d) (e)

1. Prtsent Year

.46 7 _ c;Q gn 1_ m 6.52 ?. Five Year Average .51 3.19 .23 1.18 5.11 PARTl. EMPLOYEE. HOUR AND PAYROLL STATISTICS

1. Number of Full Time Employees

?Qa

4. Payroll Expensed 2,857,939

2. Employee. Hours Worked - Regular Time 387,926

s. Payrois. capitaiized 1,757,824

3. Employee. Hours Worked Overtime 17,272

6. Payroll Other 186,222 PART J.

PATRONAGE CAPITAL PART K. DUE FROM CONSUMERS THIS YEAR CUMULATIVE FOR ELECTRIC SERVICE ITEM (a) (b)

1. General Retirement

1. AMOUNT DUE OVER 60 DAYS

2. Special Retirement s

$ 151,676.65

3. Total Retirements (1 + 2)

2. AMOUNT WRITTEN OFF DURING YEAR d

P8 nage capHal An@ned

5. Patronage Capital Assignable 10,058,685 89,011.15 PART L.

kWh PURCHASED AND TOTAL COST REA USE ONLY AVERAGE INCLUDED IN TOTAL COST NAME OF SUPPLIER SUPPLIER kWh PURCHASED TOTAL COST CODE PER kWh FUEL COST LIN O HER CHA S (cen ts) ADJUSTMENT (or Credits) to) Ib) (c) id) fel If) (El 1.P.S. CO. Of N.H. 444,627,276 21,402,890 4.81 8,062,257 13,340,633

2. Maine Yankee Atomic 45.769,100 951,660 2.08 951,660

3. N. E. Power Co.

5.286.700 282,793 5.35 95,800 186,993 c.cnnern1 vormnnt 10.121.810 586.184 5.79 7,597 578,587 3.Te*Aw Sub-total 505,804,886 23,223,527 8,165,654 15,057,873 REA Form 7 (Rev.12 83) PAGE 4 OF 7 PAGES

( ( 13 BORROWER DESIGNATION USDA. REA - FINANCIAL' AND STATISTICAL' REPORT YEAR ENDING , REA USE ONLY f' December 31,19 INSTRUCTIONS 57T~1tTA E5lcr:27 - PART f.n ANALYSIS OF ACCUMULATED PROVISION FOR DEPRECIATION - TOTAL ELECTRIC PLANT - TRA SM ION UTION GENERAL PLANT OTHER PLANT 'ATEM PLANy (a) (b) (el: Id)

1. Selance Beginning of Year, g

2. Additions. Depreciation Accruals Charged to

a. Depreciation Expense. V

.l ^ D. Clearing Accounts and Others ' ~. ' S

c. Subtotal (a + b)

.. j.

3. Less. Plant Retirementst

3. Plant Retired.

b. Removal Costs.

. c. Subtotal (a + b)

4. Plus Salvaged Materials 1

5. TOTAL (2c m 3c + 4).

6. Other Adjustments. Debit or Credit i

7. Balance E.1d of Year (1 + 5 t 6),

l PART G. MATERl'ALS AND SUPPLIES PU RCHASED SALVAGED USED (NET) SOLD ADJUSTMENT ALAN END 0 EAR ITEM OF Y AR ra) (M (e) (d) (e) (f) (g)

1. Electric

2. Other (155 + 156) 4! Inventory - Electric as Percent of Total Utility Plant 3.' Ratio of Inventory Turnover - Electric.

item 1d & = ttem ele. Part E X 100 m PART H. SERVICE INTERRUPTIONS j AVERAGE HOURS PER CONSUMER BY CAUSE f ITEM POWER SUPPLIER. EXTREME STORM PREARRANGED' ALL OTHERS '(a) (b) (e) (d) ' (el

1. Present Year 2, Five. Year Average

.PART 1. EMPLOYEE HOUR AND PAYROLL STATISTICS i o

4. Payroll. Expensed

1. Number of Full Time Employees

2. Emoloyee. Hours Worked Regular Time S. Payroll. Caoltalized

3. Employee. Hours Worked. Overtime

6. Payroll. Other j

/ PART J. PATRONAGE CAPITAL PART K. DUE FROM CONSUMERS - FOR ELECTRIC SERVICE THIS YEAR CUMULATIVE ITEN1 ' (a) (b)

1. AMOUNT DUE OVER 60 OAYS 1, General R etirement " -

2. Sone *al R etirement s

3. Total Rettroments (1 + 2)

2. AMOUNT WRITTEN OFF OURING YEAR 4 Patronage Capital Assugned s

J

3. Patronaos Capital Astlanable 6

PART L. kWh PURCHASED AND TOTAL COST l REA USE ONLY AVERAGE INCLUDED IN TOTAL COST l " E LI NAME OF SUPPLIER SUPPLIER kWh PURCHASED TOTAL COST FUEL COST O hep CHA S PER h ADJUSTM ENT gor creggrap CODE (cen ts) (a) (M le) (d) (e) In ts)

1. Balance Forward 505,804,886 23,223,527 8,165,654 15,057,873 i

e, Green Mountain Power 1.809.900 128.819 7.17 11 1 71 06 AaR s, Miscellaneous 4.611 154 1.14 7R 7A i I .a. 8,198,903 15,153,597 507.614.307 23.35?.R00 4.An

5. TOTAL PAGE 4 OF 7 PAGES REA Form 7.

(iter. J2 83;

r FINAL US DA. R EA BORROWER DESIGNATION FINANCIAL AND STATISTICAL REPORT YEAR 5NG REA USE ONLY - l INST 8t UfTIONS. See R E A E OM 2. December 31, 19 86 PART M. LONG TERM LEASES (Ifadditional space is needed, 'use separate sheet.) LIST DELOW ALL " RESTRICTED PROPERTY"" HELD UNDER LONG. TERM" LEASE. (1/ none, state "NONE") RENTAL NAME OF LESSOR TYPE OF PROPERTY THIS YEAR 1. 2.

3. TOTAL v.

"RESTil!CTED PitOPERTY" means all properties other than automobiles, trucks, trailers, tractors, other vehicles (including without limitation aircraft and ships), office, garage and warehouse space and office equipment (including without limitation computers). "LONG-TERM" means leases having unuaired terms of more than i2 months (taking into creount terms of rental at the option of the lessor, whether or not such leases have been renewed). PART N. ANNUAL MEETING AND BOARD DATA 5 Date of Last Annual Meeting

2. Total Number of MemDers

3. Number of Members Present at -

4. Was Quorum Present?

06/03/86 43,525 247 50 YES [] NO L

6. Number of Memoers voting Dy

6. Total NumDer of Boara Memoors

7. Total Amount of Fees and Expenses

8. Does Manager Have written Contract?

Proxy or Mall 8 192-11 e r soara uomoers g g PART O, LONG. TERM DEBT-OTHER AND DEBT SERVICE REQUIREMENTS BALANCE BILLED THIS YEAR REA USE ITEM END OF YEAR INTEREST . PRlhCIPAL TOTAL ONLY (a) (b) (c) (d) (e)

1. National Rural Utilities Cooperative Finance Corporation 5.465.447 554.926 22.773 577,699

2. Bank for Cooperatives

3. F*deral Financing Bank 120.537.000 11.164.541 11.164.541

4. Other (List Geparately) 5.p1vmonth anarantv Savinas Bank 136.543 12.435 17.772' 30,207 6.

7.

8. TOTAL (Sum of 1 thru 7) 196.139.990 11.731.002 40.545

'11.772.447 PART P. CONSERVATION DATA LAST YEAR THIS YEAR LAST. YEAR THIS YEAR ITEM ITEM (a) (b) (a) (bl 1 Number of Employees. Full Time 1

4. Payroll 5.450 22.086

2. Number of Employees. Part Time 1

1

5. Other Expenses 741 2.950

3. Total ' Employees. Hours 1A4 1.971 6.' Member Contacts 100 225 PART Q.

TYPICAL MONTHLY BILLS FOR ELECTRIC SERVICE

1. RESIDENTIAL SERVICE (Farrn and nonform for domestic and farm used SCHEDULE NAME AND DESIGNATION nne4Mne4,1 j

MINIMUM BILL I { 00 250 kWn 500 kWn 750 kWn 1,000 kwn 2,500 kWn i M9140 $18.20 $39.82 $60.31 $80.95 $202.77

2. COMMERCIAL SERVICE (commercial business establishments: stores, offices, restaurants, garages, etc., for llahting and power purposes.)

SCHEDULE NAME AND DESIGNATION rnnne,1 6 kW 12 kW 30 kW 40 kW 50 kW 100 kW 750 kWh 1,500 kWh 6,000 kWh 10,000 kWh 12,500 kWh

• J0,000 kWh

<77 11 s163.85 $538.09 $815.72 S1,006.23 S2,249.17

3. INDUSTRIAL SERVICE (industrial establishments having demands of more than 60 kW or consumption of more than 15,000 kWh per month.)

SCHEDULE NAME AND DESIGNATION Primary General 150 kW 300 kW 500 kW 30,000 kWh 60,000 kWh 60,000 kWh 120,000 kWh 100,000 kWh 200,000 kWh '92.239.97 93.849.17 94.47A.1? $7.600.?O $7.463.72 $12.817.22 1,000 kW 5,000 kW 200.000 kWh 400,000 kWh 1,500,000 kWh 2,500,000 kWh s14 o'7.?? $25.634.22 $101,402.72 S154,937.72 REA Form 7 (flev. 12.s3) PAGE 5 OF 7 PAGES

i 1 ( i a FINAL 5 USDA -nEA BORROWER DESIGNATION N.H. Merrimack FINANCIAL AND STATISTICAL ' REPORT YEAR ENDING HEA USE ONLY l INSTRUCTIONS. S.e REA 20M-2. Decernber 31.19 86 l PART R. POWER REQUIREMENTS DATA BASE 0" CLAS$1FICATION AND (a) (b) (c) (d) (e) (f) .. No.Connm m S.rwd 44,514 44,783 44,781 44,889 44,986 45,233

1. Residential sales

b. kwn soid 37,743,933 34,124,197 33,128,890 26,084,445 20,818,797 18,955,223 (escluding smond)

.. n. nu. 3,295,482 2,924,371 2,630,945 2,146,089 1,567,838 1,448,391 .. No. Consumers 8.md

2. Residential Sales -

Szasonal b, d - e. n.wnue

a. No. Consumers S.rnd

3. I,rigation Sales

b. kWh Sold

c. n.=nue

.. No. Conume,s s.*d 5,110 5,140 5 155 8 5,291

4. Comm. and Ind.

1000 kVA or Less D kWh 808d 13,127,958 12,413,933 12,075 156 1 , 33 1,104,234 1,036,443 946,426 85 ,0 9 .. No. Consumm serwd 6 6 6 6 6 6 5 $Md,'y"[

u. kwn Soid 3,518,092 3,376,524 1,883,148 1,040,656 713,612 646,672

.. n.wnu. 226,129 212,171 119,979 73,489 46,459 43,063

a. No. Cone =rs s.md 1,995 2,002 2,003 2,007 2,004 2,005 8' Ig$'",8"'[g'n't ng "d

b. hwn soio 114,832 115,526 115,993 116,021 116,136 116,140 y

c. n.=nue 21,174 20,825 19,432 20,174 18,276 18,699

s. No. Consumers 6.rnd

7. Other Sales to Public Auth.

D kWh 8'id e R.wnue

a. No.Consum.rs S.rwd

8. Sales for Resales -

REA Dorrowers

b. kWh Sold

c. R v.nu.

a. No.Conau,n.rs Gerwd Oth

b. kWh Sold

.. n.wnue 10, TOTAL No. Consumers (lines 1a 9a) 51,625 51,931 51,945 52,082 52,234 52,535 l

11. TOTAL kWh Sold (lines Ib Ob) g

12. TOTAL Revenue Received From Sales of Electric Energy (lines 1c - 9c) 4,647,019 4,193,810 3,716,782 3,093,261 2,352,982 2,295,675 i

13. Other Electric Revenue 113,408 101,485 93,003 91,744 90,868 95,459

14. kWh Own Use 159,152 131,287 133,508 99,870 65,283 52,196 l

15. TOTAL kWh Purchased 61,627,035 55,673,370 46,886,279 39,445,091 30,459,452 32,448,166 l

16. TOTAL kWh Generated IL Cost of Purchases and Generation 3,037,197 2,681,382 2,164,240 1,874,768 1,335,035 1,421,530 1

18. Int 3rchange kWh Net i

19. Trak Sum All kW input (Metered)

O Coincident G9 NonCoincident 127,446 119,440 112,851 98,108 71,645 71,151 REA Form 7 (Rev.1223) PAGE 6 OF 7 PAGES i

• - 3'.

( (~ FINAL-t USDA. REA BORROWER DESIGNATION - N H. Merrimack FINANCIAL AND' STATISTICAL REPORT-YEAR ENDING. REA USE ONLY INSTRUCTIONS - see AEA E o M.2. 00cernber 31, 19 86 PART R. POWER REQUIREMENTS DAT'A BASE (Continued) (SEE PRECEDING PAGE 6 OF REA FORM 7 FOR HEADINGS OF LINE ITEM NUMBERS BELOW.) l lT JULY. AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER TOTAL NUMBER n> th) to U) (k) (U (Columns a th,u U 45,511 45,799 46,137 46,536 46,758 47,005 ss 1, b. 18,988,753 21,094,572 21,274,921 20,273.939 23,875,890 31.91n.1on 307.591.750 c. 1,510,540 1,582,221 1,607,526 1,549,811 1.901.652 2.538.862 24.703.729 a. t s 3. b. c. g, 's i '3. b. c. a. 5,320 5,379 5.406 5.44A 9.47? R. 914 ~ - 4. b. 10,827,893 12.662.164 12.015.510 10.42A.451 10.796.491 19.non.19 7 11 A :194. Ao? e. 868.489 945.137 917.479 A91_744 A71.777 oAM.7A7 in A1A oAo a. 6 6 6 6 'A A

• +

5. b. 757.864 849.940 915.932 957.512 1.106.A1A 1.Aq1.96A 14.AAn.nqA c. 50,214 52,890 59.699 60.966 A1.941 919.79A

1. 9al : 177

) a. 2,006 1,984- '1.986 1.9A7 1.4A7 1.9A7 'i 6. b. 116.187 114,882 115.219 115.102 119.nA4 119.nno 1.1AA.91A l e. '20.035 19.01A 19.209 lo.9AA 9n.n,A on-aan 9,A An? a. 7. b. c. a. s 8. b, c. 9. b, c. l k,h .~ 52,851 53,168 53,535 53,977 54,223 54,513 h5i s 11 30,690,697 34,721,558 34,321,582' 31,775,024 36,094,248 47,128,674 464,835,919 12, 2,449,278 2,599,266 2,603,901 2,451,157 2,876,760 3,740,803 37,020,694 13. 97,499 97,907 102,410 102,164 102,245 120,440 1,208,632 14. 52,186 56,672 52,829 61,814 74,680 128,428 1,067,905 16' 36,253,880 36,562,022 36,262,993 37,860,359 41,215,267 52,925,483 507,619,397 16. 17. 1,601,359 1,535,478 1,554,751 1,563,665 1,824,717 2,345,357 22,939,479 18. 19' 80,952 81,075 81,431 93,376 99,714 121,077 127,446 s REA Form.7 (Rep. 12-83) PAGE 7 OF 7 PAGES f

J-n 4

m..,7 T ief:'

- 2.

D Hotes -; Dur participation in Seabrook has resulted in l'ncreases ' FINAL on the' following lines as of 12/31/86:- 71 i BALANCE SHEET - ,8 ' LINE 2 1108,316,303'. LINE 33 450,906 LINE 3 l108,316,303 .LINE 34 120,537,000-LINE 5 : 108,316,303'- LINE 39 5,120 LINE 13

-222,948

'LINE.40 5,120. LINE14 19,333-LINE 21. 108,632 n L! tie 24 12,771,706 LINE 25 120,993,026 LINE 43 .120,993,026-STATEMENT OF OPERATIONS' .THIS YEAR s. L!tE 15 11,175,507 'LINE 16 -10,040,363 ~LINE 27 1,135,144 3 4 -. TIER CALCULATION'- a (: NORMAL ' TIER ' . TIER

i REA CALCULAT10H LESS LNIT I LESS Wilt I MD 11 a

1. TOTAL. INTEREST 14,026,682 14,'026,682' 14,026,682 2.

LESS RilT I ItREREST -9,915,870 -9,915,870 3.- LESS LNIT 11 ItHEREST -1,259,636 4.ADJUSTEDINTEREST 14,026,682 4,110,812 2,851,176 - 5. TOTAL t%RGINS 2,552,294 2,552,294 2,552,294 - 6. PLUS lNIT 11 ItREREST 1,259,636 . 7. ADJUSTED t%RGlNS 2,552,294 2,552,294 3,811,930 1 8.- TIER 1.18 1.62 2.34 i CONSTRUCTION WORK IN PROGRESS EXCLUDING SEABROOK ----- $1,586,791 !}}