ML20138G782

Wmec 1996 Annual Rept. Supporting Info,Encl

ML20138G782
Person / Time
Site:	Millstone, Seabrook
Issue date:	12/31/1996
From:	WESTERN MASSACHUSETTS ELECTRIC CO.
To:
Shared Package
ML20138G692	List: ML20138G690 ML20138G722 ML20138G735 ML20138G763 ML20138G782
References
NUDOCS 9705060379
Download: ML20138G782 (137)

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Western Massachusetts N/ Electric The Northeast Utilities System 9705060379 970430 PDR ADOCK 05000245 I PDR l

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DIRI(lORs 011f(lR$ '

! Robert G. Abair Bernard M. Fox John J. Roman Vice President and Chief Chairman Vice President and Controller l

2 Administrative Officer i Hugh C. MacKenzie Frank E Sabatino 1

John H. Forsgren President Vice President-Executive Vice President and Wholesale Marketing i Chief Financial Officer Bruce D. Kenyon President-Nuclear Group Roger C. Zaklukiewicz Bernard M. Fox Vice President-Transmission Chairman John H. Forsgren and Distnbution l Executive Vice President and Wilham T. Frain,Jr. Chief Financial Officer Janice P Jacque 5

President and Chief Clerk Operating Officer Cheryl W Grist Pubhc Service Company of Senior Vice President Theresa H. Allsop New Hampshire Assistant Clerk Francis L Kinney Semor Vice President-

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Cheryl W Grist Maik A.Joyse Senior Vice President Governmental Allairs Assistant Clerk Robert P Wax John B. Keane Deborah L Canyock senior Vice President.

Vice President and Treasurer Assistant Controller-

$ccretary, Assistant Clerk hianagement Information and and General Counsel D. %'on Budgetmg Sernces l President-Nutlear Group Robert G. Abair Lori A. Mahler Hugh C. MacKen:lc ' P'# #" '" '#

^55'st nt Controller-p Administrante othccr Accounting Sernces Ronald G. Chevalier MichaelJ. Mahoney Vice President-Fossil / Hydro Assistant Controller-Engmeenng and Operations Rate Regulation i

' Barry llberman Thomas V. Foley l

Vice President-Corporate and Assistant Secretary Ennronmental Affairs Margaret L Morton John B. Keane Assistant secretary Vice President and Treasurer Robert C. Aronson Keith R. Marun Assistant Treasurer-

Vice President-Purchasing and Treasury Operations l General Sernces David R. McHale John T. Muro Assistant Treasurer-Vice Presider.t-Retail Marketing Finance l

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J ftbruqv28.1997

1996 Annual Report Western Massachusetts Electric Company Index Contents Pace Balance Sheets.............................................. 2-3 Statements of Income........................................ 4 Statements of Cash Flows.................................... 5 Statements of Common Stockholder's Equity................... 6 Nstes to Financial Statements............................... 7 R; port of Independent Public Accountants.................... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 34 l

45 Salected Financial Data.....................................

Statements of Quarterly Financial Data...................... 45 Statistics.................................................. 46 Preferred Stockholder and Bondholder Information............ Back Cover l

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WESTERN MASSACHUSETTS ELECTRIC COMPANY l

I i BALANCE SHEETS l

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At December 31, 1996 1995 i (Thousands of Dollars)

ASSETS Utility Plant, at original cost:

Electric.. ...... .......... .. . ...... .... . ..... $ 1,257,097 $ 1,234,738 Less: Accumulated provision for depreciat ion (Note 1F) . . . . . . . . . . . . . . . . . . . . . . . . 503,989 462,872 753,108 771,866 Construction work in progress......... ................. 15,968 18,957 Nuclear fuel, net............. .. ........................ 30,296 31,574 Total not utility plant.......... ........ .. ........ 799,372 822,397 Other Property and Investments:

Nuclear decommissioning trusts, at market............... 83,611 69,903 Investments in regional nuclear generating companies, at equity (Note 1E)........ ...... ... . 15,448 14,820 Other, at cost..... .... ...... .. .. .... ....... ... 4,367 4,018 103,426 88,741 Current Assets:

Cash....... ............ .. ...... .... ............ .. 67 202 Receivables, less accumulated provision for uncollectible accounts of $2,121,000 in 1996 and $2,230,000 in 1995............................... 40,168 42,164 Accounts receivable from affiliated companies........... 3,525 951 .

Accrued utility revenues................................ 12,394 11,119 Fuel, materials, and supplies, at average cost.......... 5,317 5,114 Prepayments and other................................... 12,262 9,176 73,733 68,726 Deferred Charges:

Regulatory assets (Note 1H)... ......................... 210,852 160,986 Unamortized debt expense. . .......................... . 1,866 1,496 Other....... .... ...................................... 888 -

213,606 162,482 Total Assets. . ... .... .... .. .. .... .. . . $ 1,190,137 $ 1,142,346 l The accompanying notes are an integral part of these financial statements.

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WESTERN MASSACHUSETTS ELECTRIC COMPANY BALANCE SHEETS At December 31, 1996 1995 (Thousands of Dollars)

CAPITALIZATION AND LIABILITIES Capitalization:

Common stock,$25 par value--authorized and outstanding 1,072,471 shares in 1996 and 1995........ $ 26,812 $ 26,812 Capital surplus, paid in........ . . ............... . 150,911 150,182 Retained earnings. . ..... .... .. .. ...... . . 97,045 115,296 Total common stockholder's equity... ....... .. 274,768 292,290 Cumulative preferred stock--

$100 par value--authorized 1,000,000 shares; outstanding 200,000 shares in 1996 and 1995;

$25 par value--authorized 3,600,000 shares; outstanding 840,000 shares in 1996 2,300,000 shares in 1995 Preferred stock not subject to mandatory redemption. ... 20,000 53,500 Preferred stock subject to mandatory redemption.. . . 21,000 22,500 Long-term debt.. ....................... ............... 334,742 347,470 Total capitalization........................... 650,510 715,760 Obligations Under Capital Leases (Note 8)................. 29,269 20,855 Current Liabilities:

Notes payable to affiliated company.......... .......... 47,400 24,050 Long-term debt and preferred stock--current portion................................................ 14,700 1,500 Obligations under capital leases--current portion... .......................... .............. .. 2,965 15,156 Accounts payable........ .. ..... ................... . 26,698 14,475 Accounts payable to affiliated companies................ 20,256 11,604 Accrued taxes. .... .................. .......... .. 881 1,686 Accrued interest....... ............... ................ 5,643 5,670 Nuclear compliance (Note 11B)................ .......... 11,800 -

other. ........ ........ . ......... ..... ... ..... 4,754 7,768 135,097 81,909

Deferred Credits

Accumulated deferred income taxes (Note 1I)............ 245,253 259,595 )

Accumulated deferred investment tax credits 1 (Note 7)....... ..................... ......... .... . 24,833 26,302

! Deferred contractual obligations (Note 11F) . . . . . . . . .... 84,598 18,814 Other. ... . . ... . .................. ...... .... . 20,577 19,111 375,261 323,822 Commitments and Contingencies (Note 11)

Total Capitalization and Liabilities. ..... . . $ 1,190,137 $ 1,142,346  ;

The accompanying notes are an integral part of these financial statements.  ;

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h WESTERN MASSACHUSETTS ELECTRIC COMPAIE ,

STATEMENTS OF INCOME 1

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I For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars) 1 Operating Revenues.. .......................... $421,337 $420,434 $421,477 Operating Expenses:

Operation --

Fuel, purchased and net interchange power. 115,664 86,738 67,365 Other..................................... 148,724 143,000 130,683 Maintenance.................. . . . . . . . . . . . . . . . 56,201 37,447 35,430 Depreciation................................. 39,710 37,924 36,885

Amortization of regulatory assets............ 9,170 19,562 29,118 Federal and state income taxes (Note 7) . . . . . . 5,995 14,060 32,653 Taxes other than income taxes................ 19,850 18,639 18,403 Total operating expenses............... 395,314 357,370 350,537 l <

l Operating Income............................... 26,023 63,064 70,940  ;

..... ... ......... ........ j Other Income: i Equity in earnings of regional nuclear i generating companies........................ 1,800 1,771 2,031 Other, net.... .............................. 1,153 1,232 3,687 Income taxes................ ................ 1,068 262 (71)

Other income, net...................... 4,021 3,265 5,647 Income before interest charges......... 30,044 66,329 76,587 Interest Charges: . i Interest on long-term debt................... 24,094 26,840 27,67C Other interest....... ....................... 2,028 356 (548)

Interest charges, net.................. 26,122 27,196 27,130 l

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! Net Income........... ........................ $ 3,922 $ 39,133 $ 49,457

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) The accompanying notes are an integral part of these financial statements.

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WESTERN MASSACHUSETTS ELECTRIC CCNPANY I STATENENTS OF CASH FLOWS I I

.............___.....__.........___.......__.................................. ........ .......... i For the Years Ended December 31, 1996 1995 1994 i (Thousands of Dollars)

Operating Activities:

Nat Income............................ ................... . $ 3,922 $ 39,133 $ 49,457 Adjustments to reconcile to net cash from operating activities:  ;

Depreciation.............................................. 39,710 37,924 36,885 Deferred income taxes and investment tax credits, net..... (3,439) 3,418 10,256 ,

Deferred Millstone 3 return.. ............................ -

7,146 13,427 i Recoverable energy costs, net of amortization............. (10,517) 1,285 (8,622) [

Nuclear compliance, net (Note 11B)....... ................ 11,800 -

t Deferred nuclear refueling outage, net of amortization.... 6,188 (8,857) (1,016) ,

Other sources of cash..................................... 21,248 32,266 28,569 i Other uses of cash........................................ (10,270) (8,039) (23,701) >

Changes in working capital: ,

Receivables and accrued utility revenues.................. (1,853) (1,933) 6,470 Fuel, materials and supplies............. ................ (203) (285) 2,228 Accounts payable.......................................... 20,875 (11,669) 8,239  !

Accrued taxes............................... ............. (805) (3,474) (1,862) J Other working capital (excludes cash) . . . . . . . . . . . . . . . . . . . . . (8,144) 1,256 (2,991) '

Net cash flows from operating activities.. .................... 68,512 88,171 117,339 Financing Activities Issuance of long-term debt... ..... ........... ..... ... - -

90,000 Wet increase (decrease) in short-term debt................ . 23,350 24,050 (6,000)

Reacquisitions and retirements of long-term debt...... .. .

(34,550) (104,169)

Reacquisitions and retirements of preferred stock........... (36,500) (15,675) (7,325)

Cash dividends on preferred stock........................... (5,305) (4, 944) (5,897)

Cash dividends on corrmon stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,494) (30,223) (29,514)

Net cash flows used for financing activities.......... ....... (34,949) (61,342) (62,905)

Investment Activities:

Investment in plant:

Electric utility plant..... ......................... .... (23,468) (27,084) (32,680)

Nuclear fuel............................................. 541 75 (4,928)

Net cash flows used for investments in plant................ (22,927) (27,009) (37,608)

NU System Money Pool........................................ - 8,750 (8,754)

Investment in nuclear decorrmissioning trusts. . . . . . . ........ (9,794) (8,503) (7,761)

Other investment activities, net . . . ........................ (977) 46 (395)

Net cash flows used for investments......... ................. (33,698) (26,716) (54,514)

Wet Increase (Decrease) In Cash For The Period................ (135) 113 (80)

Cash - beginning of period.................................... 202 89 169 Ca sh - end o f pe riod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67 $ 202 $ 89

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Supplemental Cash Flow Information:

Cash paid during the year for:

Interest, net of amounts capitalized. ...................... $ 21,725 $ 25,551 $ 25,174

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Income taxes.................................. ........... .$ 7,816 $ 14,385 $ 30,040 l Increase in obligations:

Niantic Bay Fuel Trust........ ............................. $ 669 $ 7,851 $ 12,237

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The accompanying notes are an integral part of these financial statements.

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WESTERN MASSACHUSETTS ELECTRIC COMPAM'l STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Capital Retained Common Surplus, Earnings Stock Paid In (a) Total (Thousands of Dollars)

Balance at January 1, 1994. . . . .. $26,812 $149,319 $ 97,627 $273,758 Net income for 1994. . ... . . 49,457 49,457 Cash dividends on preferred stock. . ....... .. .. ......... .. (5,897) (5,897)

Cash dividends on common stock. .. . (29,514) (29,514)

Loss on the retirement of preferred stock. .. . . ..... . . ....... (87) (87)

Capital stock expenses, net.... ... 364 364 Balance at December 31, 1994.. . . . . 26,812 149,683 111,586 288,081 Net income for 1995.. .. .. 39,133 39,133 Cash dividends on preferred stock. . . .... .. . . . (4,944) (4,944)

Cash dividends on common stock. . (30,223) (30,223)

Loss on the retirement of preferred stock. . ..... . . (256) (256)

Capital stock expenses, net... . 499 499 Balance at December 31, 1995. . 26,812 150,182 115,296 292,290 Net income for 1996.. . . ..... . 3,922 3,922 Cash dividends on preferred stock.. . . .. . .... . ... . (5,305) (5,305)

Cash dividends on common stock. .. (16,494) (16,494)

Loss on retirement of preferred stock. . . .. ... . .. .. (374) (374)

Capital stock expenses, net. . ... 729 729 Balance at December 31, 1996.... . . . . $26,812 $150,911 $ 97,04b $274,768 (a) The company has dividend restrictions imposed by its long-term debt agreements.

At December 31, 1996, these restrictions totaled approximately $21.5 million.

The accompanying notes are an integral part of these financial statements.

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COctcrn MacocchuOOtto ElCctric Cm pany NOTES TO FINANCIAL STATEMENTS

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A. About Western Massachusetts Electric Company I Western Massachusetts Electric Company (WMECO or the company),

The Connecticut Light and Power Company (CL&P), Holyoke Water Power Company (HWP), Public Service Company of New Hampshire (PSNH), and North Atlantic Energy Corporation (NAEC) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities (NU).

The system furnishes retail electric service in Connecticut, New Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP. The fifth subsidiary, NAEC, sells all of its capacity to PSNH. In addition to its retail service, the system furnishes firm and other wholesale electric services to various municipalities and other utilities. The system serves about 30 percent of New England's electric needs and is one of the 20 largest electric utility systems in the country as measured by revenues.

Other wholly owned subsidiaries of NU provide support services for the system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies. Northeast Nuclear Energy Company (NNECO) acts as an agent for system companies in operating the Millstone nuclear i

. generating facilities.

B. Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications of prior years' data have been made to conform with the current year's presentation.

All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return

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on equity, and are subject to approval by various federal and state regulatory agencies.

C. Public Utility Regulation NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act), and it and its subsidiaries, including the company, are subject to the provisions of the 1935 Act. Arrangements among the system companies, outside agencies and other utilities covering interconnections,

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COOtcrn MacccchuSOtto Elcatric C:cptny NOTES TO FINANCIAL STATEMENTS interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The company is subject to further regulation for rates, accounting, and other matters by the FERC and/or the Massachusetts Department of Public Utilities (DPU).

D. New Accounting Standards The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) 121,

" Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which established accounting standards for evaluating and recording asset impairment. The company adopted SFAS 121 as of January 1, 1996. See Note 1H, " Summary of Significant Accounting Policies

- Regulatory Accounting and Assets" for further information on the regulatory impacts of the company's adoption of SFAS 121.

See Note 10, " Sale of Customer Receivables," and Note 11C, "Commitwents and Contingencies-Environmental Matters," for information on newly issued accounting and reporting standards related to those specific areas.

E. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: WHECO owns common stock of four regional nuclear generating companies (Yankee companies). The Yankee companies, with the company's ownership interests, are:

Connecticut Yankee Atomic Power Company (a) (CY) .... 9.5%

Yankee Atomic Electric Company (a) (YAEC) ........... 7.0 Maine Yankee Atomic Power Company (MY) ..........,,... 3.O Vermont Yankee Nuclear Power Corporation (VY) ....... 2.5 (a) YAEC's and CY's nuclear power plants were shutdown permanently on February 26, 1992 and December 4, 1996, respectively.

WMECO's investments in the Yankee companies are accounted for on the equity basis due to the company's ability to exercise significant influence over their operating and financial policies.

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Cactcrn Maccachurctto Elc3 trio Cr:p2ny NOTES TO FINANCIAL STATEMENTS WMECO's investments in the Yankee companies at December 31, 1996 are:

(Thousands of Dollars)

Connecticut Yankee Atomic Power Company ... $10,165 Yankee Atomic Electric Company............. 1,673 Maine Yankee Atomic Power Company ......... 2,247 l Vermont Yankee Nuclear Power Corporation... 1.363

$15,448 The electricity produced by MY and VY is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. Under ownership agreements with the Yankee companies, WMECO may be asked to provide direct or indirect financial support for one or more of the companies.

For more information on these agreements, see Note 11F,

" Commitments and Contingencies -

Long-Term Contractual Arrangements." For more information on the Yankee companies, see Note 2, " Nuclear Decommissioning" and Note 11B,

" Commitments and Contingencies - Nuclear Performance."

Millstone 1: WMECO has a 19 percent joint-ownership interest in Millstone 1, a 660-megawatt (MW) nuclear generating unit.

As of December 31, 1996 and 1995, plant-in-service included approximately $90.2 million and $87.4 million, respectively, ara the accumulated provision for depreciation included dpproximately $37.2 million and $34.5 million, respectively, for WMECO's share of Millstone 1. WMECO's share of Millstone 1 expenses is included in the corresponding operating expenses on the accompanying Statements of Income.

Millstone 2: WMECO has a 19 percent joint-ownership interest in Millstone 2, an 870-MW nuclear generating unit. As of December 31, 1996 and 1995, plant-in-service included approximately $161.4 million and $160.0 million, respectively, and the accumulated provision for depreciation included approximately $51.7 million and $45.8 million, respectively, for WMECO's share of Millstone 2. WMECO's share of Millstone 2 expenses is included in the corresponding operating expenses on the accompanying Statements of Income.

Millstone 3: WMECO has a 12.24 percent joint-ownership interest in Millstone 3, a 1,154-MW nuclear generating unit.

As of December 31, 1996 and 1995, plant-in-service included approximately $377.7 million and the accumulated provision for l depreciation included approximately $99.8 million and $90.6 million, respectively, for WMECO's share of Millstone 3.

WMECO's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Statements of Income.

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C05 tern Macccchucetto ElectriO Crapany .

l MOTES TO FIunCTRL STATu nTS .

For more information regarding the Millstone units, see Note l 11B, " Commitments and Contingencies - Nuclear Performance."

l F. Depreciation l The provision for depreciation is calculated using the i straight-line method based on estimated remaining lives of i depreciable utility plant-in-service, adjusted for salvage  !

value and removal costs, as approved by the appropriate l regulatory agency. Except for major facilities, depreciation l rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the time ' they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less L salvage, is charged to the accumulated provision for l depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of

! 3.2 percent in 1996, 3.1 percent in 1995 and 1994. See Note 2,

" Nuclear Decommissioning," for information on nuclear plant decommissioning.

I WMECO's nonnuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future needs, the economics of the closure and  ;

environmental concerns. The costs of closure and removal are i incremental costs and, for financial reporting purposes, are l accrued over the life of the asset as part of depreciation. At i December 31, 1996, the accumulated provision for depreciation I included approximately $3.2 million accrued for the cost of ,

removal, net of salvage for nonnuclear generation property.  !

l G. Revenues other than revenues under fixed-rate agreements negotiated with l certain wholesale, industrial and commercial customers, utility ,

revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be ,

changed only through a formal proceeding before the appropriate 1 regulatory commission. At the end of each accounting period, i WMECO accrues an estimate for the amount of energy delivered j but unbilled.

E. Regulatory Accounting and Assets The accounting policies of WMECO and the accompanying financial statements conform to generally accepted accounting principles applicable to rate regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71,

" Accounting for the Etfacts of Certain Types of Regulation."

Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues.

Through.their actions, regulators may also reduce or eliminate the value of an asset, or create a liability. If any portion of the company's operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, the company would be required to write off related 10

C=tcrn Maccachu00tto ElCctric Carp 2ny MOTES TO FINANCIAL STATEMENTS regulatory assets and liabilities. The company continues to believe that its use of regulatory accounting remains appropriate.

SFAS 121 requires the evaluation of long-lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through future revenues be revalued based on estimated future cash flows. If the revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. The implementation of SFAS 121 did not have a material impact on the company's financial position or results of operations as of December 31, 1996. Management continues to believe that it is probable that the company will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as competitive factors influence wholesale and retail pricing in electric utility industry or if the cost-of-service based regulatory structure i were to change.

l The components of WMECO's regulatory assets are as follows:

l At December 31. 1996 1995 (Thousands of Dollars) 1 Income taxes, net (Note 1I)........... $ 71,519 $ 87,829 l Unrecovered contractual obligations l (Note 2) ............................ 84,598 18,814 Amortizable property investment -

Millstone 3......................... -

5,600 Recoverable energy costs (Note IJ) .... 17,510 4,974 other................................. 37.225 43.769

$210.852 $160.986 For more information on the company's regulatory environment and the potential impacts of restructuring, see Note 11A, I

" Commitments and Contingencies-Restructuring," and Managemsnt*s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

I. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance l with the ratemaking treatment of the applicable regulatory I commissions. The adoption of SFAS 109, " Accounting for Income l Taxes," in 1993 increased the company's net deferred tax  ;

obligation. As it is probable that the increase in deferred )

tax liabilities will be recovered from customers through rates, i WMECO established a regulatory asset. See Note 7, " Income Tax Expense" for the components of income tax expense.

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COOtOra MacCathu20tto ElGstric Company NOTES TO FInwCIAL STATereMTS i The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, which give rise to the accumulated deferred tax obligation is as follows: i At December 31. 1996 1995 I (Thousands of Dollars)

Accelerated depreciation and other plant-related differences....... $218,389 $222,520 Regulatory assets - income tax gross up 29,457 34,540 Other................................. (2.593) 2.535

$245.253 $259.595  ;

J. Recoverable Energy Costs Under the Energy Policy Act of 1992 (Energy Act), WMECO is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D assessment). The Energy Act requires that regulators treat D&D assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates, like any other fuel cost.

WMECO is currently recovering these costs through rates. As of l December 31, 1996, the company's total D&D deferrals were  !

approximately $11 million. j For additional information regarding recoverable energy costs see the MD&A.  ;

K. Spent Nuclear Fuel Disposal Costs  ;

Under the Nuclear Waste Policy Act of 1982, WMECO must pay the  ;

United States Department of Energy (DOE) for the disposal of spent nuclear fuel and high-level radioactive waste. Fees for  :

nuclear fuel burned on or after April 7, 1983 are billed currently to customers and paid to the DOE on a quarterly basis. For nuclear fuel used to generate electricity prior to April 7, 1983 (prior-period fuel), payment must be made prior to the first delivery of spent fuel to the DOE. The DOE was originally scheduled to begin accepting delivery of spent fuel in 1998. However, delays in identifying a permanent storage site have continually postponed plans for the DOE's long-term storage and disposal site. The DOE's current estimate for an available site is 2010.

Until such payment is made, the outstanding balance will continue to accrue interest at the three-month Treasury Bill Yield Rate. At December 31, 1996, fees due to the DOE for the disposal of prior-period fuel were approximately $37.1 million, including interest costs of $21.5 million. As of December 31, 1996, all fees had been collected through rates.

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WOctOrn Maccachusctto Elcctric Crp:ny NOTE 8 TO FINANCIAL STATEMENTS

2. NUCLEAR DECOMMISSIONING WMECO's nuclear power plants have service lives that are expected to end during the years 2010 through 2025. Upon retirement, these units must be decommissioned. The company's 1996 decommissioning study concluded that complete and immediate dismantlement at retirement continues to be the most viable and economic method of decommissioning the three Millstone units. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation.

The estimated cost of decommissioning WMECO's ownership share of >

Millstone 1, 2, and 3, in year-end 1996 dollars, is $74.1 million,

$65.5 million, and $56.6 million, respectively. The Millstone units '

decommissioning costs will be increased annually by their l respective escalation rates. Nuclear decommissioning costs are  !

i accrued over the expected service life of the units and are included in depreciation expense on the Statements of Income.

Nuclear decommissioning costs amounted to $6.2 million in 1996,

$5.0 million in 1995, and $4.8 million in 1994. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on the Balance Sheets. At December 31, 1996, the balance in the accumulated reserve for decommissioning amounted to $83.6 million.

WMECO has established external decommissioning trusts through a trustee for its portion of the costs of decommissioning Millstone 1, 2, and 3. Funding of the estimated decommissioning costs assumes levelized collections for the Millstone units and after-tax earnings on the Millstone decommissioning funds of 5.8 percent. As of December 31, 1996, WMECO has collected, through rates, $53.5 million toward the future decommissioning costs of its share of the Millstone units, all of which has been transferred to external decommissioning trusts. Earnings on the decommissioning trusts increase the decommissioning trust balance and the

, accumulated reserve for decommissioning. Unrealized gains and losses associated with the decommissioning trusts and financing fund also impact the balance of the trusts and the accumulated reserve for decommissioning.

Changes in requirements or technology, the timing of funding or dismantling, or adoption of a decommissioning method other than immedit.te dismantlement would change decommissioning cost estimates and the amounts required to be recovered. WMECO attempts to  ;

recover sufficient amounts through its allowed rates to cover its j expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by l regulatory agencies is reflected in rates of the company. Based on present estimates and assuming its nuclear units operate to the end of their respective license periods, the company expects that the decommissioning trusts will be substantially funded when the units are retired from service.

MY and VY: Each Yankee company owns a single nuclear generating unit. MY and VY have service lives that are expected to end in 13 1

COctcr:s Macccchu30tto Elcstric Crap::Cy

(

MOTES TO FIwuCIAL STAT u nTS l i

2008 and 2012, respectively. The estimated cost, in year-end 1996 f dollars, of decommissioning WMECO's ownership share of units owned and operated by MY and VY is $11.1. million and $9.1 million, I respectively. Under the terms of the contracts with the Yankee l companies, the shareholder-sponsors are responsible for their i proportionate share of the operating costs of each' unit, including l decommissioning. The nuclear decommissioning costs of the Yankee ,

companies are included as part of the cost of power purchased by '

WMECO.

CY and YAEC: On December 4, 1996, the board of directors of CY voted unanimously to cease permanently the production of power at its nuclear plant. The system companies relied on CY for approximately 3 percent of their capacity.

CY has undertaken a number of regulatory filings intended to implement the decommissioning and the recovery of remaining assets of CY . . During late December, 1996, CY filed-an amendment to-its power contracts to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1996, the estimated obligation, including decommissioning amounted to $762.8 million of which the company's share was approximately $72.5 million.

YAEC is in the process of decommissioning its nuclear facility. At December 31, 1996, the estimated remaining costs, including decommissioning, amounted to $173.3 million of which the company's share was approximately $12.1 million.

Management expects that WMECO will continue to be allowed to recover these costs from its customers. Accordingly, WMECO has recognized these costs as regulatory assets, with corresponding obligations, on its Balance Sheets.

Proposed Accounting: The staff of the SEC has questioned certain ,

of the current accounting practices of the electric utility l industry, including the company, regarding the recognition, i measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, FASB agreed to review the accounting for removal costs, including decommissioning, and issued a proposed statement entitled

" Accounting for Liabilities Related to Closure or Removal of Long-Lived Assets," in February, 1996. If current electric utility industry accounting practices for decommissioning are changed in accordance with the proposed statement: (1) annual provisions for decommissioning could increase; (2) the estimated cost for decommissioning could be recorded as a liability with an offset to plant rather than as part of accumulated depreciation, and (3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense.

14

COctern Macccchucotto Elcctric Cc3p:ny NOTES TO FINANCIAL STATEMENTS

3. SHORT-TERM DEBT Limits: The amount of short-term debt borrowings that may be incurred by WMECO is subject to periodic approval by either the SEC under the 1935 Act or by its state regulator. In addition, the  !

charter of WMECO contains provisions restricting the amount of short-term debt borrowings. Under the SEC and/or charter )

restrictions, WMECO was authorized, as of January 1, 1997, to incur '

short-term borrowings up to a maximum of $150 million.

Credit Agreements: In November, 1996, NU entered into a three-year revolving credit agreement (New Credit Agreement) with a group of 12 banks. Under the terms of the New Credit Agreement, NU, CL&P and WMECO will be able to borrow up to $150 million, $313.75 million, and $150 million, respectively. The overall limit for all of the borrowing system companies under the entire New Credit Agreement is $313.75 million. WMECO is obligated to pay a facility fee of .30 percent per annum of each bank's total commitment under the new credit facility which will expire November 21, 1999. At December 31, 1996, there were $27.5 million in borrowings under this agreement, all of which were borrowed by other system companies.

Access to the New Credit Agreement is contingent upon certain financial tests being met. NU is currently renegotiating these restrictions so that the financial impacts of the current nuclear outages do not impact the ability to access these facilities.  !

Through February 21, 1997, CL&P and WMECO have satisfied all  !'

financial covenants required under their respective borrowing facilities, but NU needed and obtained a limited waiver of an interest coverage covenant that had to be satisfied for NU to borrow under the New Credit Agreement. NU, CL&P and WMECO are currently maintaining their access to the New Credit Agreement under an interim written arrangement, under which NU agreed not to borrow more than $27.5 million against the facility.  !

In addition to the New Credit Agreement, NU, CL&P, WMECO, HWP, NNECO and The Rocky River Realty Company (RRR) have various revolving credit lines through separate bilateral credit agreements. Under the remaining three-year portion of- the facility, four banks maintain commitments to the respective system companies totaling $56.25 million. NU, CL&P and WMECO may borrow up to the aggregate $56.25 million, whereas HWP, NNECO and RRR may borrow up to their short-term debt limit of $5 million, $50 million, and $22 million, respectively. Under the terms of the agreement, the system companies are obligated to pay a facility fee of .15 percent per annum of each bank's total commitment under the three-year portion of the facility. These commitments will expire December 3, 1998. At December 31, 1996 and 1995, there were $11.3 million and $42.5 million in borrowings, respectively, under the facility all of which had been borrowed by other system companies.

Under both credit facilities above, the company may borrow funds on a short-term revolving basis under the remaining portion of its agreement, using either fixed-rate loans or standby loans. Fixed

, 15

i COcters Maccachusctto Elostric C mp32y NOTES TO FTmucin. STATunnuTS ,

i rates are set using competitive bidding. Standby loans are based upon several alternative variable rates. .

Maturities of WMECO's short-term debt obligations are for periods of three months or less.

Money Pool: Certain subsidiaries of NU, including WMECO, are i members of the Northeast Utilities System Money Pool (Pool). The ,

Pool provides a more efficient use of the cash resources of the '

system, and reduces outside short-term borrowings. NUSCO administers the Pool as agent for the member companies. Short-term i borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent. NU parent may lend to the Pool but may not borrow. .

Funds may be withdrawn from or repaid to the Pool at any time  !

without prior notice. Investing and borrowing subsidiaries receive e or p,ay interest based on the average daily Federal Funds rate. ,

However, borrowings based on loans from NU parent bear interest at  ;

NU parent's cost and must be repaid based upon the terms of NU 1 parent's original borrowing. At December 31, 1996 and 1995, WMECO ,

had $47.4 million and $24.1 million, respectively, of borrowings outstanding from the Pool. The interest rate on borrowings from the Pool at December 31, 1996 and 1995 was 6.3 percent and 4.7 percent, ,

respectively.

For further information on short-term debt see the MD&A. .

1

4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemptions i are:

December 31, Shares l 1996 Outstanding l Redemption December 31, December 31. i, Descriotion Price 1996 1996 1995 1994 l (Thousands of Dollars) ]

7.72% Series B of 1971....... $103.51 200,000 $20,000 $20,000 $20,000 1988 Adjustable Rate DARTS.... - - - 33.500 48.500 Total preferred stock not subject to mandatory redemption.... $20.000 $53.500 $68.500 All or any part of each outstanding series of preferred stock may be redeemed by the company at any time at established redemption prices plus accrued dividends to the date of redemption.

16

CoctOra MacccchucCtto Elcctric Crtynny MOTES TO FIMAMCIAL STAT u nTS

5. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are:

December 31 Shares 1996 Outstanding Redemption December 31, December 31.

Descrintion Price

• 1996 1996 1995 1994 (Thousands of Dollars) 7.60% Series of 1987....... $25.76 840,000 $21,000 $24,000 $24,675 Less preferred stock to be ,

redeemed within one year, net of reacquired stock.......... - 1,500 675

-Total preferred stock subject to mandatory redemption..... $21,000 $22,500 $24,000

• Redemption price reduces in future years.

The minimum sinking-fund provisions of the 1987 Series subject to mandatory redemption at December 31, 1996, for the years 1997 through 2001, are $0 in 1997 and $1.5 million per year for 1998 through 2001. In case of default on sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues.- If the company is in arrears in the payment of dividends on any outstanding shares of preferred stock, the company would be prohibited from redemption or purchase of less than all of the preferred stock outstanding. All or part of the 7.60% Series of 1987 may be redeemed by the company at any time at an established redemption price plus accrued dividends to the date of redemption subject to certain refunding limitations. j 4

l l

. 17

COctcrn Mac OchucOtto ElGatriS Compa2y MOTES TO FT m CTRL STAT h -ae

6. LONG-TERM DEBT Details of long-term debt outstanding are:

December 31.

1996 1995 (Thousands of Dollars)

First Mortgage Bonds:

5 3/4% Series F, due 1997........... $ 14,700 $ 14,700 6 3/4% Series G, due 1998........... 9,800 9,800 6 1/4% Series X, due 1999........... 40,000 40,000 6 7/8% Series W, due 2000........... 60,000 60,000 7 3/4% Series V, due 2002........... 85,000 85,000 7 3/4% Series Y, due 2024........... 50.000 _

50.000 Total First Mortgage Bonds................. 259,500 259,500 Pollution Control Notes:

Tax Exempt Series A, due 2028............. 53,800 53,800 Fees and interest due for spent i fuel disposal costs (Note 1K)............ 37,055 35,180 i Less: Amounts due within one year......... 14,700 -

Unamortized premium and discount, net......- (913) (1.010)

Long-term debt, net........................ $334.742 $347.470 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1996 for the years 1997 through 2001 are approximately $14.7 million, $9.8 million, $40 million,

$60 million, and $0 million, respectively. In addition, there are annual one-percent sinking- and improvement-fund requirements, currently amounting to $2.6 million for 1997, $2.4 million for 1998 and 1999, $2.0 million for 2000, and $1.4 million for 2001.

Such sinking- and improvement-fund requirements may be satisfied by the deposit of cash or bonds by certification of property additions.

All or any part of each outstanding series of first mortgage bonds  ;

may be redeemed by the company at any time at established  !

redemption prices plus accrued interest to the date of' redemption, except certain series which are subject to certain refunding limitations during their respective initial five-year redemption periods.

Essentially all of the company's utility plant is subject to the l lien of its first mortgage bond indenture. As of December 31, l 1996 and 1995, the company has secured $53.8 million of pollution control notes with second mortgage liens on Millstone 1, junior to  !

the liens of its first mortgage bond indenture. The average effective interest rate on the variable-rate pollution control notes was 3.3 percent for 1996 and 3.7 percent for 1995.

1 I

18

Ccotcra MacocchucOtta ElOctric Cccpany NOTES TO FINANCIAL STATEMENTS

7. INCOME TAI EXPENSE The components of the federal and state income tax provisions charged to operations are:

?

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Current income taxes:

Federal..................... $7,007 $ 7,419 $18,358 State....................... 1.358 2.961 4.110 Total current............. 8.365 10.380 22,468 Deferred income taxes, net:

Federal..... ............... (1,805) 4,130 9,697 State..... ................ (165) 1,003 2.267 Total deterred............ (1,970) 5,133 11.964 Investment tax credits, net... (1,468) (1.715) (1,708)

Total income tax expense...... $4,927 $13,798 $32,724 l

)

The components of total income tax expense are classified as j follows:

Income taxes charged to operating expenses.......... $5,995 $14,060 $32,653 Other income taxes ........... (1,068) (262) 71 Total income tax expense...... $4,927 $13,798 $32,724 Deferred income taxes are comprised of the tax effects of temporary differences as follows:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Depreciation, leased nuclear fuel, settlement credits, and disposal costs............ $ 32 $9,066 $ 7,016 Energy adjustment clause........ 4,102 (1,549) 3,598 Expenses associated with nuclear outagesP.............. (4,633) - -

Demand side management.......... 1,557 (1,184) 466 Nuclear plant deferrals......... (2,258) 2,468 (1,802)

Bond redemptions................ (502) (572) 1,535 Other........................... (268) (3,096) 1,151 Deferred income taxes, net...... $(1,970) $5,133 $11,964 l

t i 19

COctcra MaccOchurctto Elcstric C:mpany NOTES TO FINANCIAL STATEMENT 8 i

A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Expected federal income tax at 35 percent of pretax income for.... $2,946 $18,526 $28,763 Tax effect of differences:

Depreciation....................... 2,280 2,173 1,740 Amortization of regulatory assets.. 1,029 1,665 3,347 Investment tax credit amortization. (1,468) (1,715) (1,708)

State income taxes, net of federal benefit.................. 776 2,577 4,144 Adjustment for prior years' taxes.. -

(7,702) (825)

Dividends received reduction....... (378) (481) (520)

Other, net......................... (258) (1.245) (2,217)

Total income tax expense............. $4,927, $13.798 $32.724 O. LEASES WMECO and CL&P finance up to $450 million of nuclear fuel for Millstone 1 and 2 and their respective shares of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust (NBFT) capital lease agreement. WMECO and CL&P make quarterly lease payments for the cost of nuclear fuel consumed in the reactors, based on a units-of-production method at rates which reflect estimated kilowatt-hours of energy provided, plus financing costs associated l with the fuel in the reactors. Upon permanent discharge from the  !

reactors, ownership of the nuclear fuel transfers to WMECO and j CL&P.

NMECO has also entered into lease agreements for the use of data l processing and office equipment, vehicles, nuclear control room i simulators and office space. The provisions of these lease agreements generally prcvide for renewal options. The following rental payments have been charged to expense:

Year Caoital Leases Operatina Leases 1996...................... $ 3,598,000 $6,410,000 1995...................... 12,553,000 6,398,000 1994...................... 13,594,000 6,485,000 Interest included in capital lease rental payments was $1,858,000 in 1996, $1,954,000 in 1995, and $1,845,000 in 1994.

Substantially all of the capital lease rental payments were made pursuant to the nuclear fuel lease agreement. Future minimum lease payments under the nuclear fuel capital lease cannot be reasonably estimated on an annual basis due to variations in the usage of nuclear fuel.

20

l COct ra MacccchucOtto Elcstrio C pany NOTES TO FINANCIAL STATEMENTS Future minimum rental payments, excluding annual nuclear fuel lease payments and executory costs such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable leases, as of December 31, 1996 are: I Year Operatina Leases j (Thousands of Dollars) 1997............................ $ 4,500 l 1998............................ 3,500 1999 ...................'......... 3,200 2000............................ 3,000 l 2001............................ 2,700 l After 2001...................... 24.500 i

Future minimum lease payments... $41.400 It is possible that certain operating lease payments related to NUSCO leases will be accelerated from future years into 1997.

See Note 11G, "The Rocky River Realty Company -

Obligations" for additional information.

9. EMPLOYEE BENEFITS A. Pension Benefits The company participates in a uniform noncontributory defined benefit retirement plan covering all regular system employees. Benefits are based.on years of service and the employees' highest eligible compensation during 60 consecutive months 'of employment. The company's direct portion of the system's pension income, part of which was charged to utility plant, approximated $2.0 million in 1996,

$2.7 million in 1995 and $1.0 million in 1994. The company's pension costs for 1996, 1995 and 1994 included approximately

$1.0 million, $0 million, and $0.8 million, respectively, related to workforce reduction programs.

Currently, the company funds annually an amount at least equal to that which will satisfy the requirements of' the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily- in domestic and international equity securities and bonds.

21

COctcra MaOOOchuCOtto ElC3tric Comp 2ny NOTES TO FINANCIAL STATENENTS The components of net pension cost for WMECO are:

For the Years Ended December 31, 1996 1995 1994 i (Thousand of Dollars)

Service cost................... $ 2,932 $ 1,645 $ 2,720 Interest cost.................. 7,786 7,757 7,655 Return on plan assets.......... (22,174) (29,798) 221 Net amortization............... 9.458 17.669 (11.635)

Net pension income............. S(1.998) $(2.727) S(1,039) 5 For calculating pension cost, the following assumptions were used:

For the Years Ended December 31. 1996 1995 1994

) Discount rate.................. 7.50% 8.25% 7.75%

Expected long-term rate of return.................... 8.75 8.50 8.50 Compensation / progression rate.. 4.75 5.00 4.75 The following table represents the plan's funded status j reconciled to the Balance Sheets:

i At December 31, 1996 1995 (Thousands of Dollars) )

Accumulated benefit obligation,  ;

including vested benefits at l December 31, 1996 and 1995 of '

$85,094,000 and $84,943,000,

, respectively .................. S 91.170 $ 90.154 Projected benefit obligation..... $107,816 $107,527 Market value of plan assets...... 157.861 143.632 Market value in excess of projected benefit obligation... 50,047 36,105 Unrecognized transition amount... (1,963) (2,198)

Unrecognized prior service costs. 1,213 (525)

Unrecognized net gain............ (46.486) (32.570)

Prepaid pension asset ........... $ 2.811 S 812 1

22 {

COctcra MaccashucOtto Dicstric cr p2ny NOTES TO FINANCIAL STATEMENTS The following actuarial assumptions were used in calculating the plan's year-end funded status:

At December 31, 1996 1995 Discount rate............................ 7.75% 7.50%

Compensation / progression rate............ 4.75 4.75 B. Postratirement Benefits Other Than Pensions The company provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the company who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care costs. The SFAS 106 obligation has been calculated based on this assumption. WMECO's direct portion of SFAS 106 benefits, part of which were deferred or charged to utility plant, approximated $3.8 million in 1996,

$4.4 million in 1995, and $5.0 million in 1994.

During 1994, the company began funding SFAS 106 postretirement costs through external trusts. The company is funding, on an annual basis, amounts that have been rate-recovered and which also are tax deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds.

The components of health care and life insurance costs are:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Service cost................... $ 490 $ 490 $ 519 Interest cost.................. 2,236 2,544 2,703 Return on plan assets.......... (883) (718) 19 Amortization of unrecognized transition obligation........ 1,641 1,641 1,641 Other amortization, net........ 353 473 76 Net health care and life insurance costs.............. $3,837 $4,430 $4,958 l l

23 l

Cc;ttrn MaOOcchu: Otto Cloctric Company l

NOTES TO FINANCIAL STATEMENTS J

For calculating WMECO's SFAS 106 benefit costs, the following assumptions were used:

For the Years Ended December 31. 1996 1995 1994 Discount rate.................. 7.50% 8.00% 7.75%

Long-term rate of return -

Health assets, net of tax.... 5.25 5.00 5.00 Life assets.................. 8.75 8.50 8.50 j The following table represents the plan's funded status reconciled to the Balance Sheets:

At December 31. 1996 1995 (Thousands of Dollars) ,

l Accumulated postretirement benefit obligation of:

Retirees................................ $24,614 $28,787 l Fully eligible active employees......... 28 28 ,

1 Active employees not eligible to retire. 5.449 5.847 l Total accumulated postretirement benefit obligation..................... 30,091 34,662 Market value of plan assets.............. 10.215 5.339 Accumulated postretirement benefit obligation in excess of plan assets.... (19,876) (29,323)

Unrecognized transition amount........... 26,259 27,901 Unrecognized net gain.................... (6.765) (1.399)

Accrued postretirement benefit liability. $ (382) $(2.821) i

The following actuarial assumptions were used in calculating the plan's year-end funded status

1 At December 31. 1996 1995 Discount rate............................ 7.75% 7.50%

Health care cost trend rate (a).......... 7.23 8.40 (a) The annual growth in per capita cost of covered health

care benefits was assumed to decrease to 4.91 percent by 2001.

J, 24

C ct:rn Macocchurctta Elcstric C rpnny NOTES TO FINANCIAL STATEMENTS The effect of increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $1. 8 million and the aggregate of the service and interest cost components of net periodic postretirenent benefit cost for the year then ended by $ 0. 2 million. The trust holding the health plan assets is subject to federal income taxes at a 39.6 percent tax rate.

WMECO is currently recovering SFAS 106 costs.

10. SALE OF CUSTOMER RECEIVABLES WMECO has entered into an agreement to sell up to $40 million of eligible customer billed and unbilled accounts receivable. The eligible receivables are sold with limited recourse. The agreement was entered into d" ring September, 1996 and will expire in five years. The company has retained collection responsibilities for receivables which have been sold under the agreement. As collections reduce previously sold undivided interests, new receivables would routinely be sold. The agreements provide for a loss reserve determined by a formula which reflects credit exposure. As of February 21, 1997, WMECO has sold approximately $15 million of their accounts receivable under this agreement.

The FASB issued SFAS 125, " Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June, l 1996. SPAS 125 became effective on January 1, 1997, and ,

establishes, in part, criteria for concluding whether a transfer i of financial assets in exchange for consideration should be 1 accounted for as a sale or as a secured borrowing. i 1

i WMECO is in the process of restructuring its receivable program to comply with the requirements of SFAS 125. Management believes f that the adoption of SFAS 125 will not have a material impact on  !

the company's financial position or results of operations.

11. COMMITMENTS AND CONTINGENCIES A. Restructuring Although WMECO continues to operate under cost-of-service based regulation, various restructuring initiatives in its  !

jurisdiction have created uncertainty with respect to future rates and the recovery of strandable investments and certain future costs such as purchase power obligations. Strandable ,

investments are regulatory assets or other assets that would I not be economical in a competitive environment. Management is unable to predict the ultimate outcome of restructuring initiatives; however, it believes that it is entitled to full recovery or its prudently incurred costs, including regulatory assets and strandable investments based on the general nature of public utility cost of service regulation. .

For further information on restructuring, see the MD&A. l l

25 l

l 1

)

Coctorn Macccchu30tto Electric CCCp2ny MQTES TO FIMMCIAL STATEMENTS B. Nuclear Performance Millstone: The three Millstone units are managed by NNECO.

Millstone 1, 2, and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively, and are on the Nuclear Regulatory Commission's (NRC) watch list. The company has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units.

According to the plans, each unit's recovery team will be .

working towards restart of its respective unit on a parallel basis with the other two units. Based upon management's '

current plans, it is estimated that one of the units will be ready for restart in the third quarter of 1997 with the other two units being ready for restart during the fourth quarter of 1997 and the first quarter of 1998, respectively.

The NRC has also issued two orders affecting the Millstone units on the subjects of independent corrective action verification and employee concerns. Independent third parties have been retained by NNECO and are awaiting NRC approval.

Prior to and following notification to t.'le NRC that the units are ready to resume operations, the NRC staff will conduct extensive reviews and inspections and, prior to such notification, independent corrective action, verification teams will also inspect each unit. The units will not be allowed to restart without an affirmative vote of the NRC commissioners following completion of these reviews and inspections. Management cannot estimate when the NRC will allow any of the units to restart, but hopes to have at least one unit operating in the second half of 1997.

The company is currently incurring substantial costs, including replacement power costs, while the three Millstone units are not operating. Management does not expect to recover a substantial portion of these costs. WMECO expensed approximately $33 million of incremental nonfuel nuclear operation and maintenance costs (O&M) in 1996, including a reserve of $12 million against 1997 expenditures. Management estimates WMECO will expense approximately $73 million of nonfuel nuclear O&M costs in 1997.

As discussed above, management cannot predict when the NRC will allow any of the Millstone units to return to service and thus cannot estimate the total replacement power costs WMECO will ultimately incur. Replacement power costs for WMECO are expected to average approximately $5 million per month during 1997 while all three Millstone units remain out of service. Management believes the system has sufficient resources to fund the restoration of the Millstone units to service under its present timetable.

26 'l i

1

C :tcra Macccchunctto Electric c rp2ny MpTES TO FINANCIAL STATEMENTS MY: The system companies rely on MY for approximately two percent of their capacity. The MY nuclear generating plant has been limited to operating at 90 percent of capacity since early 1996, pending the resolution of issues related to investigations initiated by the NRC, and on December 6, 1996, was taken off line to resolve cable-separation and associated issues. The NRC has notified MY that the NRC staff has placed the MY plant on its watch list. Returning the plant to service will require NRC approval. Management cannot predict when MY's plant will be allowed to return to service and expects there will be substantial costs associated with the NRC's actions that cannot be accurately estimated at this time.

Potential Litigation: The non-NU owners of Millstone 3 have been paying their share of the monthly costs for Millstone 3 since the unit went out of service in March, 1996, but have reserved their rights to contest whether the NU system companies have any responsibility for the additional costs the non-NU owners have borne as a result of the current outage. No formal claims have been made, but management believes that it is possible that some or all of the non-NU owners will assert liability on the part of the NU system.

CL&P and WMECO, through NNECO as agent, operate Millstone 3 at cost, and without profit, under a Sharing Agreement that obligates them to utilize good utility operating practice and requires the joint owners to share the risk of employee negligence and other risks pro rata in accordance with their ownership shares. The Sharing Agreement provides that CL&P and WMECO would only be liable for damages to the non-NU owners for a deliberate breach of the Sharing Agreement. At December 31, 1996, the costs related to this potential litigation were estimated to be $2.5 million for incremental O&M costs and to be between $8 and $10 million for replacement power costs. These costs are likely to increase as long as Millstone 3 remains out of service. NU will vigorously contest such suits if they are brought.

C. Environmental Matters WMECO is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products.

WMECO has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations.

Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations, and other facilities. Changing environmental requirements could also require extensive and costly modifications to WMECO's existing generating units, and transmission and distribution systems, and could raise operating costs significantly. As a result, WMECO may incur significant additional environmental costs, greater than

- 27

1 Western Massachusotts Electric company l NOTES TO FINANCIAL STATEMENTS

, amounts included in cost of removal and other reserves, in connection with the generation and transmission of electricity and the storage, transportation and disposal of

! by-products and wastes. WMECO may also encounter

. significantly increased costs to remedy the environmental l effects of prior waste handling activities. The cumulative 4

long-term cost impact of increasingly stringent environmental

! requirements cannot accurately be estimated.

WMECO has recorded a liability based upon currently available

. information for what it believes are its estimated environmental remediation costs for waste disposal sites. In most cases, additional future environmental cleanup costs are j not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of 3

technological changes. At December 31, 1996, the liability recorded by WMECO for its estimated environmental remediation

costs, excluding any possible insurance recoveries or

! recoveries from third parties, amounted to approximately $1.4 million, which management has determined to be the most

- probable amount within the range of $1.4 million to $5.9 l million.

i WMECO cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws and regulatory practices, management does not

, believe the matters disclosed above will have a material l effect on WMECO's financial position or future results of 3

operations.

On October 10, 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1,

" Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The SOP became effective January 1, 1997. The company believes the adoption of this SOP will not have a material impact on the company's financial position or results of operations.

D. Nuclear Insurance Contingencies Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the company could be assessed, in proportion to its ownership interest in each nuclear unit up to $75.5 million not to exceed $10 million per nuclear unit in any one year.

Based on its ownership interest in Millstone 1, 2, and 3, WMECO's marimum liability including any additional potential assessments, would be $39.8 million per incident. In addition, through power purchase contracts with MY, VY and 28

Ccatcra Macccchurctta Ulcstric C cp ny NOTES TO FINANCIAL STATEMENTS CY, WMECO would be responsible for up to an additional $11.9 million per incident. Payments for WMECO's ownership interest in nuclear generating facilities would be limited to l a maximum of $6.5 million per incident per year.

)

Insurance has been purchased to cover the primary cost of j repair, replacement or decontamination of utility property 1 resulting from insured occurrences. WMECO is subject to l retroactive assessments if losses exceed the accumulated j funds available to the insurer. The maximum potential ,

assessment against WMECO with respect to losses arising during the current policy year is approximately $2.5 million  !

under the primary property insurance program.

I Insurance has been purchased to cover certain extra costs .

incurred in obtaining replacement power during prolonged I accidental outages and the excess cost of repair, I replacement, or decontamination or premature decommissioning j of utility property resulting from insured occurrences.  !

WMECO is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum j potential assessments against the company with respect to )

losses arising during current policy years are approximately {

$2.0 million under the replacement power policies and $4.9 l million under the excess property damage, decontamination and j decommissioning policies. The cost of a nuclear incident l could exceed available insurance proceeds. l Insurance has been purchased aggregating $200 million on a industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3.0 million per reactor. The maximum potential assessment against WMECO with respect to losses arising during the current policy period is approximately $2.2 million.

E. Co14struction Program The construction program is subject to periodic review and revision by management. WMECO currently forecasts construction expenditures of approximately $169 million~ for the years 1997-2001, including $37 million for 1997. In addition, the company estimates that nuclear fuel requirements, including nuclear fuel financed through the NBFT, will be approximately $54.1 million for the years 1997-2001, including $2.4 million for 1997. See Note 8, " Leases" for additional information about the financing of nuclear fuel.

F. Long-Term contractual Arrangements Yankee Companies: WMECO along with CL&P and PSNH, relies on MY and VY for approximately three percent of their capacity under long-term contracts. Under the terms of their agreements, the system companies pay their ownership (or entitlement) shares of costs, which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a 29

. _ _ __ . _ _ _ ~ _ _ _ _ _ _ _ _ _ _ . _ . , _ _ _ . __ ___ __ ._._ .-

4 COctorn MScOS,shuOstto ElCstric C rpOny NOTES TO FINANCIAL STATEMENTS return on invested capital. These costs are recorded as purchased power expense and recovered through the company's rates. WMECO's total cost of purchases under these contracts with the Yankee companies excluding YAEC, amounted to $28.3 million in 1996, $28.9 million in 1995, and $28.8 million in 1994. See Note 1E, " Summary of Significant Accounting

. Policies-Investments and Jointly Owned Electric Utility Plant, " and Note 2, " Nuclear Decommissioning" for more information on the Yankee companies.

Nonutility Generators (NUG) : WHECO, along with CL&P and PSNH, has entered into various arrangements for the purchase of capacity and energy from NUGs. These arrangements have terms form 15 to 25 years, currently expiring in the years 2008 through 2013, and requires WMECO to purchase energy at specified prices or formula rates. For the 12 months ended December 31, 1996, approximately 13 percent of system electricity requirements were met by NUGs. WMECO's total cost of purchases under these arrangements amounted to $29.5  !

million in 1996, $28.6 million in 1995, and $27.5 million in 1994. These costs are eventually recovered through the company's rates. 1 Hydro-Quebec: Along with other New England utilities, WMECO, CL&P, PSNH and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. WMECO is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M and capital costs of these facilities.

The estimated annual costs of the WMECO's significant long-term contractual arrangements are as follows: ,

l 1997 1998 1999 2000 2001 (Millions of Dollars)

MY and VY.............. $10.4 $ 8.9 $10.5 $10.4 $ 9.5 Nonutility generators.. 33.0 35.0 37.0 39.0 42.0 Hydro-Quebec........... 3.9 3.8 3.7 3.6 3.5 30

COctcra MacOOchucctto Elcatric C:mptny NOTES TO FTu nc m STATEMENTS G. The Rocky River Realty company - Obligations ,

RRR provides real estate support services which includes the leasing of property and facilities used by system companies.

• RRR is the obligor under financing arrangements for certain system facilities. Under those financing arrangements, the holders of notes for $38.4 million would be entitled to '

request that RRR repurchase the notes if any major subsidiary of NU (as defined by the notes) has debt ratings below investment grade as of any year-end during the term of the financing. The notes are secured by real estate leases between RRR as lessor and NUSCO as lessee. The leases  :

provide for the acceleration of rent equal to RRR's note obligations if RRR is unable to repay the obligation. The operating companies, primarily CL&P, WMECO and PSNH may be billed by NUSCO for their proportionate share of the l accelerated lease obligations if the rateholders request repurchase of the nctes. NU has guaranteed the notes.

Based on the terms of the notes, PSNH and NAEC will be i defined as major subsidiaries of NU, effective as of the end ,

of 1996, and both PSNH's and NAEC's debt ratings were below investment grade. Accordingly, under the terms of the RRR ,

financing arrangements, the holders may elect to require RRR l to repurchase the notes at par. If the noteholders make such an election, RRR has the option to refinance the notes with an institutional investor. However, it is possible that RRR '

may be required to repurchase the notes. As of February 21,  :

1997, the holders had not made such an election. RRR plans to  !

~

engage in discussions with the noteholders regarding this issue and management does not expect the resolution to have a ,

material impact on its financial condition.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS '

The following methods and assumptions were used to estimate the fair value of each of the following financial instruments: l Cash and nuclear decommissioning trusts: The carrying amounts  ;

approximate fair value.

SFAS 115, " Accounting for Certain Investments in Debt and Equity  ;

Securities," requires investments in debt and equity securities to i be presented at fair value. As a result of this requirement, the i investments held in the company's nuclear decommissioning trust  !

were adjusted to market by approximately $8.4 million as of ,

December 31, 1996 and by approximately $4.5 million as of December 31, 1995, with a corresponding offset to the accumulated provision for depreciation. The amounts adjusted in 1996 and 1995 represent '

cumulative gross unrealized holding gains. The cumulative gross unrealized holding losses were immaterial for both 1996 and 1995.  ;

Preferred stock and long-term debt: The fair value of NHECO's i fixed-rate securities is based upon the quoted market price for l those issues or similar issues. Adjustable rate securities are l assumed to have a fair value equal to their carrying value.  !

l 31 t l

l l

_ __ . . .. _~ _ _ __

Cootorn MacccchuSOtto ElCotric Crtp2ny l NOTES TO FINANCIAL STATEMENTS The carrying amount of WMECO's financial instruments and the estimated fair values are as follows:

Carrying Fair At December 31, 1996 Amount Value (Thousands of Dollars)

Preferred stock not subject to mandatory redemption.................. $ 20,000 $ 15,200

" referred stock subject to mandatory redemption................... 21,000 18,404 Long-term debt - First Mortgage Bonds... 259,500 260,440 Other long-term debt.................... 90,855 90,855 l

Carrying Fair At December 31. 1995 Amount Value (Thousands of Dollars) 3 i

Preferred stock not subject to mandatory redemption................... $ 53,500 $ 53,700 Preferred stock subject to mandatory redemption................... 24,000 25,085 Long-term debt - First Mortgage Bonds... 259,500 265,280 Other long-term debt.................... 88,980 88,980 The fair values shown above have been reported to meet the ,

disclosure requirements and do not purport to represent the j amounts at which those obligations would be settled. j 32

CC tcra MacccchuOctto Dicstric company REPORT OF INDEPENDFNT PUBLIC ACCOUNTANTS To the Board of Directors of Western Massachusetts Electric Company:

W3 have audited the accompanying balance sheets of Western Mncsachusetts Electric Company (a Massachusetts corporatita and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1996 and 1995, and the related statements of income, common etockholder's equity, and cash flows for each of the three years in ths period ended December 31, 1996. These financial statements are th3 responsibility of the Company's management. Our responsibility is 1 to express an opinion on these financial statements based on our )

audits.

Ws conducted our audits in accordance with generally accepted auditing ctandards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements

( are free of material misstatement. An audit includes examining, on a teet basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well oc evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present l fcirly, in all material respects, the financial position of Western l Mncrachusetts Electric Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with gansrally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 21, 1997

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! Destern Massachusetts Electric Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ARH_ULTS OF OPERATIONS This section contains management's assessment of WMECO's (the company) l financial condition and the principal factors having an impact on the j results of operations. The company is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's financial statements and footnotes.

FINANCIAL CONDITION i

l Earnings Overview WMECO faced an extremely difficult year in 1996 as a result of the i prolonged outages at the three Millstone units (Millstone). These outages resulted in significantly increased expenditures for i replacement power and work undertaken at Millstone, which had a l significant negative impact on WMECO's 1996 earnings. In 1997, while l l all three units are out of service, WMECO expects to operate on a

< roughly break-even basis. The combination of higher expenditures and the uncertainty surrounding when the units will return to service made it necessary to ensure that access to adequate cash levels would be

available for the duration of the outages. Management took various

! actions during 1996 to address NU's nuclear program and liquidity l issues, however, 1997 will continue to be a serious challenge in these 1 areas, i

I WMECO faces future uncertainty with the rapidly moving trend toward industry restructuring. While restructuring had little direct impact

on 1996 financial results, it creates an environment of significant uncertainty and financial risk for the coming years. As discussed in further detail in " Restructuring," the financial treatment that strandable investments will be accorded will impact WMECO's ability to

compete in a restructured environment.

Net income was approximately $4 million in 1996, compared to $39 i million in 1995. WMECO's 1996 net income was significantly lower i primarily due to the ongoing outages at Millstone which totaled approximately $74 million and reduced WMECO's earnings by approximately $43 million. These costs included replacement power, l higher 1996 Millstone operation and maintenance costs and a reserve recognized in 1996 for 1997 expenditures to return the Millstone units to service. These decreases were partially offset by higher retail l sales and lower regulatory asset amortization. l j Retail kilowatt-hour sales increased by 2.7 percent in 1996 as a j'

result of modest economic growth. In 1997, management expects that the Massachusetts economy will continue to experience modest economic growth.

4 k

34

l i

Millstone Outages WMECO has a 19 percent ownership interest in Millstone 1 and 2 and a 12.24 percent ownership interest in Millstone 3. Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996, and March 30, 1996, respectively.

Subsequent to its January 31, 1996, announcement that Millstone had been placed on its watch list, the Nuclear Regulatory Commission (NRC) has stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. Upon successful completion of these reviews, the NRC must approve the restart of each unit through a formal commission vote.

Management took several key steps toward improving NU's nuclear program during 1996 and will continue to place a high priority on its recovery in 1997. The NU Board of Trustees formed a committee in April, 1996, to provide high-level oversight of the safety cnd effectiveness of NU's nuclear operations, progress toward resolving open NRC issues and progress in resolving employee, community and customer concerns. In September, 1996, Bruce D. Kenyon was appointed President and Chief Executive Officer of Northeast Nuclear Energy Company (NNECO), a wholly-owned subsidiary of NU that operates Millstone, and retired Admiral David M. Goebel was selected to serve as Vice President for Nuclear Oversight. In early 1997, Neil S. Carns was selected to serve as Senior Vice President and Chief Nuclear Officer to oversee Millstone operations. Shortly after his arrival, Mr. Kenyon unveiled a reorganization of NU's nuclear organization that includes executives loaned from unaffiliated utility companies. The new organization is intended to establish direct accountability for performance at each of the nuclear units that the NU system operates end includes a recovery team for each Millstone unit.

Under the new nuclear organization, each unit's recovery team will be working toward restart of its respective unit simultaneously with the other two units. Management estimates that one of the units will be reaay for NNECO to request the NRC's approval for restart in the third quarter of 1997, with the second and third units ready in the fourth quarter of 1997 and the first quarter of 1998, respectively.

Subsequent to NNECO's request to restart any of the units, the NRC will require a period of time to assess the results of the reviews performed by the NRC and the independent third-party teams. Management cannot estimate when the NPC will allow any of the units to restart, however, it hopes to have at least one unit operating in the second half of 1997. A period of time will be required subsequent to restart for each unit to return to operating at full power.

Higher costs related to the Millstone outages will continue throughout 1997. Monthly replacement power costs for WMECO are projected to average approximately $5 million in 1997, while all three Millstone units remain out of service. Replacement power costs for the Millstone units expensed in 1996 were $41 million, which was a substantial portion of the total 1996 replacement power costs. WMECO will continue 35

l to expense its replacement power costs in 1997. Nonfuel operation and maintenance costs for WMECO's share of Millstone to be expensed in 1997 are estimated to be $73 million. A total of $76 million was expensed in 1996 for nonfuel operation and maintenance costs for Millstone, including $21 million for incremental costs related to the outages and $12 million reserved for future costs. Nonfuel operation and maintenance costs have been, and will continue to be, absorbed through WMECO's current rates.

Although WMECO is not precluded from seeking rate recoveries in the future, management has committed not to seek rate recovery for the portion of these costs attributable to failure to meet industry standards in operating Millstone. In light of that commitment, WMECO will not seek rate recovery for a substantial portion of these costs.

Management does not currently intend to request any such recoveries until after the Millstone units begin returning to service; therefore, it is unlikely that any additional revenues from any permitted recovery of these costs will be available to contribute to funding the recovery efforts while the units are out of service.

Under its present planning assumptions, management believes WMECO has l sufficient funds to restore the Millstone units to service and purchase replacement power. See " Rate Matters" for further information on the recovery of outage-related costs. See " Liquidity and Capital Resources" for further information regarding WMECO's liquidity.

As a result of the nuclear situation, a number of civil lawsuits and I criminal investigations have been initiated, including shareholder i litigation. In addition, there is the potential for claims by the non-NU owners of Millstone 3 for the costs associated with the current outage. To date, no reserves have been established for existing or potential litigation. See the " Notes to Financial Statements" Note 11B, for further information on litigation.

capacity During 1996 and continuing into 1997, the NU system companies have taken measures to improve their capacity position, including obtaining additional generating capacity, improving the availability of NU's generating units and improving the NU system's transmission capability.

Assuming normal weather conditions and generating unit availability, management expects that the NU system will have sufficient capacity to meet peak load demands even if Millstone is not operational at any time through the summer of 1997. If there are high levels of unplanned outages at other units in New England, or if any of the system's transmission lines used to import power from other states are unavailable, at times of peak load demand, WMECO and the other New England utilities may have to resort to operating procedures designed to reduce customer demand. Uncertainties associated with having sufficient capacity through the summer of 1997 include: a Seabrook refueling outage scheduled for 49 days beginning on May 10, 1997; the availability of Maine Yankee, which was put on the NRC's watch list in January, 1997, and is currently not expected to return to service earlier than late summer 1997; and the timing of the repairs to the 36

Long Island Cable which is capable of providing as much as 300 megawatts of transmission capability.

See the " Notes to Financial Statements" Note 11B, for further information on Maine Yankee.

Liquidity and Capital Resources During 1996, WHECO took various actions to ensure that it will have i access to adequate cash resources, at reasonable cost. WMECC )

established a facility under which it may sell up to $40 million of its billed and unbilled accounts receivable. As of February 21, 1997,

$15 million had been sold using this facility. Additionally, NU, The Connecticut Light and Power Company (CL&P) and WMECO entered into a new $313 million three-year revolving credit agreement (the New Credit Agreement). Under the New Credit Agreement, NU has a contractual short-term borrowing limit of $150 million, CL&P has a limit of $313 million and WMECO has a limit of $150 million. The overall limit for all borrowers is $313 million. 1 l

l Management believes that the borrowing facilities that are currently in place provide the system companies with adequate access to the funds needed to bring Millstone back to service if the units begin operating close to the currently envisioned schedules, and if the l other assumptions on which management has based its planning do not I

, change substantially. '

l Some of the borrowing facilities contain financial covenants that must be satisfied before borrowings can be made and for outstanding borrowings to remain outstanding. Through February 21, 1997, CL&P and l WMECO have satisfied all financial covenants required under their respective borrowing facilities, but NU needed and obtained a limited waiver of an interest coverage covenant that had to be satisfied for NU to borrow under the New Credit Agreement.

NU, CL&P and WMECO are currently maintaining their access to the New Credit Agreement under a written arrangement, which expires March 28, 1997, unless extended by mutual consent, under which NU agreed not to borrow more than $27 million against the facility for a period of time. In addition, NU agreed to enter into an interim written arrangement whereby NU, CL&P and WMECO will seek regulatory approval for certain amendments in order to maintain access to the New Credit Agreement through its maturity date. It is anticipated that these amendments will include (i) CL&P and WMECO providing lenders first mortgage bonds as collateral for specified periods and subject to cpecified terms for releasing the collateral, (ii) revised financial i covenants that are consistent with NU's, CL&P's and WMECO's current financial forecasts and (iii) an upfront payment to the lenders in order to maintain commitments under the New Credit Agreement.

The holders of $38 million of notes issued by NU's real estate company (Rocky River Realty Company or RRR) are entitled to require that RRR purchase the notes because, as of December 31, 1996, Public Service Company of New Hampshire and North Atlantic Energy Corporation were rated below investment grade; these notes are guaranteed by NU. NU is currently engaged in discussions with the noteholders regarding this 37

issue. See the " Notes to Financial Statements" Note 11G, for further information on these notes.

During 1996, Standard & Poor's Ratings Group (S&P) and Moody's Investors Service (Moody's) downgraded all non-New Hampshire NU system securities at least once, and in some cases twice, as a direct result of the Millstone outages. As of December 31, 1996, the CL&P and WMECO first mortgage bonds were the only securities on the NU system rated at investment grade. S&P and Moody's are reviewing all NU system securities for further downgrades. These actions will adversely affect the availability and cost of funds for the NU system companies.

Cash provided from operations decreased by approximately $20 million in 1996, primarily due to higher cash operating costs related to the nuclear outages, partially offset by higher retail sales and lower interest charges. Cash flows from operations were also impacted by a charp increase in the level of accounts payable caused principally by costs related to a severe December storm and costs associated with the Millstone outages that had not been paid by year end. Net cash used for financing activities decreased by approximately $26 million in 1996, primarily due to lower reacquisitions and retirements of long-term debt and lower cash dividend payments on common shares, partially offset by higher reacquisitions and retirements of preferred stock.

Cash used for investments increased by approximately $7 million in 1996, primarily due to lower loan repayments from other companies under the NU system Money Pool, partially offset by lower construction expenditures in 1?'6.

If the return to service of one or more of the Millstone units is delayed substantially, or if the needed waivers or modifications discussed above are not forthcoming on reasonable terms, or if some borrowing facilities become unavailable because of difficulties in meeting borrowing conditions, or if the system encounters additional significant costs or other significant deviations from management's current assumptions, the currently available borrowing facilities could be insufficient to meet all of the system's cash requirements.

In those circumstances, management would take actions to reduce costs and cash outflows and would attempt to take other actions to obtain additional sources of funds. The availability of these funds would be dependent upon the general market conditions and the NU system's credit and financial condition at the time. l See the " Notes to Financial Statements" Notes 11E, 6 and 11F, for information on construction, long-term debt funding and long-term contractual requirements.

Restructuring The movement toward electric industry restructuring continues to gain momentum nationally as well as within Massachusetts. Factors that are driving the move toward restructuring, in the Northeast in particular, include legislative and regulatory actions and relatively high electricity prices. These actions will impact the way that WMECO has historically conducted its business. Although WMECO continues to operate under cost-of-service based regulation, various restructuring initiatives in Massachusetts have created uncertainty with respect to

future rates and the recovery of strandable investments. Strandable 1

1 38

investments are regulatory assets or other assets that would not be economical in a competitive environment. WMECO has exposure to strandable investments based on its investment in high-priced nuclear generating plants, state mandated purchased power arrangements that are priced above the market and significant regulatory assets that represent costs deferred by state regulators for future recovery.

WMECO's exposure to strandable investments and purchased power obligations exceeds its shareholder's equity. WMECO's ability to compete in a restructured environment would be negatively affected unless WMECO was able to recover substantially all of these past investments and commitments.

In December, 1996, the Massachusetts Department of Public Utilities (DPU) issued its Model Rules on Restructuring (Model Rules) that set forth the framework for full customer choice of energy suppliers  !

beginning January 1, 1998, and proposed legislation to support the l DPU's framework. After January 1, 1998, the DPU has stated that it will no longer set rates for competitive suppliers of generation. The DPU also reiterated its concern for the maintenance of the current level of overall system reliability by stating that it will continue to regulate distribution companies. In March, 1997, WMECO filed "unbundled" bills (separate charges on bills for generation, transmission, distribution and access) with the DPU, as required by the Model Rules.

The Model Rules require a number of statutory changes be enacted in I order to implement the rules. Additionally, the Massachusetts General Court has established a legislative task force to review restructuring during the 1997 legislative session. The Massachusetts legislature has given no formal indication as to whether it will enact the statutory changes requested by the DPU. It is unclear at this time how the DPU will proceed if the requested statutory changes are not enacted.

While the DPU's Model Rules indicate that utilities will have a reasonable opportunity to recover strandable investments, the criteria to be used in this process will likely be subject to review in a rate

, proceeding. Management believes that it is entitled to full recovery l of its prudently incurred costs, including regulatory assets and other

, strandable investments, based on the general nature of public utility industry cost-of-service based regulation.

Potential Accounting Impacts WMECO follows accounting principles in accordance with Statement of Financial Accounting Standards (SFAS) 71, " Accounting for the Effects

of Certain Types of Regulation," which allows the economic effects of rate regulation to be reflected. Under these principles, regulators may permit incurred costs for certain events or transactions, which would be treated as expenses by nonregulated enterprises, to be deferred as regulatory assets and recovered through revenues at a later date.

If future competition or regulatory actions cause any portion of its operations to no longer be subject to SFAS 71, WMECO would no longer be able to recognize regulatory assets and liabilities for that portion of its business unless those costs would be recoverable by a portion of the business remaining on cost-of-service based regulation.

. 39

, m .

Under its current regulatory environment, management believes that WMECO's use of SFAS 71 remains appropriate.

If events create uncertainty about the recoverability of any of WMECO's remaining long-lived assets, WMECO would be required to determine the fair value of its long-lived assets, including regulatory assets, in accordance with SFAS 121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The implementation of SFAS 121 did not have a material impact on the company's financial position or results of operations as of December 31, 1996. Management believes that it is probable that WMECO will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as competitive l factors influence wholesale and retail pricing in the electric utility  ;

industry or if the cost-of-service based regulatory structure were to i change. j See the " Notes to Financial Statements" Note 1H, for further information on regulatory accounting.

Competition In addition to legislative and regulatory actions, competition in the electric utility industry continues to grow at a rapid pace as a '

I result of technological advances; relatively high electricity prices in certain regions of the country, including New England; surplus generating capacity; and the increased availability of natural gas.

Competitive forces in the electric utility industry have already caused some customers to choose alternative energy suppliers or relocate outside of WMECO's service territory. In response, WMECO is preparing for a competitive environment by expanding previously established programs and developing new ways to fortify its relationships with existing customers and attract new customers, both within and outside its service territory.

During 1996, WMECO continued to negotiate long-term power supply arrangements with certain large commercial and industrial retail customers who require an incentive to locate or expand their operations within WMECO's service territory, are considering leaving ,

or reducing operations in the service territory, are facing short-term l financial problems, or are considering generating their own electricity. Approximately 17 percent of WMECO's commercial and industrial retail revenues were under negotiated rate agreements at the end of 1996. In 1996, these negotiated rate reductions amounted to approximately $6 million, down slightly from $7 million in 1995. These activities are expected to continue in 1997.

During 1996, the NU system devoted significantly more resources to its Retail Marketing Organization, whose primary mission is to provide value added energy solutions to customers. Training was emphasized for its 170 new employees, the majority of whom are account executives charged with developing tailored solutions for NU's customers and positioning NU as a valuable partner for the future. The ability of these account executives to obtain an intimate understanding of customers' needs and concerns and provide value added energy solutions will play a key role in the NU system's ability to effectively compete in the future.

40

NU subsidiaries competed actively in two pilot retail access programs that were initiated in New England in 1996. In a pilot covering four Massachusetts communities outside of WMECO's jurisdiction, NU attained approximately 60 percent of the total energy market share and 70 percent of the commercial energy market share. In addition to exposing NU to a competitive environment, these pilots have enabled NU to develop relationships with customers outside of its service territory ond to secure energy contracts with major commercial customers.

Revenue erosion from traditional retail electric sales may be significant after restructuring. While margins on retail electric sales are likely to be thin, utilities can compete successfully if they are allowed to recover their strandable investments. During 1997 and beyond, NU will continue to participate in state sanctioned retail access programs; invest in new unregulated businesses; develop new energy-related products and services; and pursue strategic alliances with companies in various energy-related fields, including fuel supply and management, power quality, energy efficiency and load management services. Strategic alliances will allow NU to enter markets that provide access to new product lines and technologies that complement NU's current products and services.

Rate Mattern In April, 1996, the DPU approved a settlement (the Agreement) that included the continuation through February, 1998, of the 2.4 percent rate reduction instituted in June, 1994. Additionally, the Agreement terminated certain pending and potential reviews of WMECO's generating plant performance and accelerated its amortization of strandable generation assets by approximately $6 million in 1996 and $10 million l

in 1997. The Agreement did not have a material impact on earnings for i l 1996.

In February, 1997, the DPU approved a joint settlement proposed by l WMECO and the Massachusetts Attorney General that provides for a continuation of WMECO's August, 1996, fuel adjustment charge (FAC) through August, 1997, and stipulates that WMECO will not seek carrying charges on any deferred fuel costs not currently recovered as a result of maintaining the prior FAC rata. In accepting this settlement, the DPU deferred any inquiry into WMELO's replacement power costs related

, to the Millstone outages. Management does not expect to seek recovery l of a substantial portion of these costs.

Nuclear Decommissioning WMECO has a 9.5 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4, 1996, the CY Board of Directors voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the remaining period of the plant's operating licence, which expires in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings.

l I

41

CY has undertaken a number of regulatory filings intended to implement 1

the decommissioning. In late December, 1996, CY filed an amendment to its power contracts with the Federal Energy Regulatory Commission (FERC) to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1996, WMECO's share of these obligations was approximately $73 million, including the cost of decommissioning and the recovery of existing assets. Management expects that WMECO will continue to be allowed to recover such FERC-approved costs from its customers.

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

a regulatory asset, with a corresponding obligation, on its Balance i Sheets.

i

! WMECO's estimated cost to decommission its shares of Millstone 1, 2

] and 3 is approximately $196 million in year end 1996 dollars. These

. costs are being recognized over the lives of the respective units with i a portion being currently recovered through rates. As of December 31, i 1996, the market value of the contributions already made to the decommissioning trusts, including their investment returns, was approximately $84 million.

a See the " Notes to Financial Statements" Note 2, for further 4 information on nuclear decommissioning, including WMECO's share of l costs to decommission the regional nuclear generating units.

1 Environmental Matters

WMECO is potentially liable for environmental cleanup costs at a

! number of sites inside and outside its service territory. To date, the

! future estimated environmental remediation liability has not been material with respect to the earnings or financial position of WMECO.

At December 31, 1996, WMECO had recorded an environmental reserve of ,

approximately $1 million, the most probable amount as required by I

SFAS 5, " Accounting for Contingencies."

i See the " Notes to Financial Statements" Note 11C, for further information on environmental matters.

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RESULTS OF OPERATIONS Income Statement variances I (Millions of Dollars) 1996 over/(under) 1995 1995 over/(under) 1994 Amount Percent Amount Percent operating revenues $1 -% $(1) -%

Fuel, purchased and net interchange power 29 33 19 29 Other operation 6 4 12 9 Maintenance 19 50 2 6 Amortization of j regulatory assets, 1 net (10) (53) (10) (33)

Federal and state income taxes (9) (64) (19) (58)

Other, net - -

(2) (67)

Interest on long-term debt (3) (10) (1) (3)

Net income (35) (90) (10) (21)

(a) Percentage greater than 100 Operating Revenues Total operating revenues increased in 1996, primarily due to higher retail sales, partially offset by lower fuel and conservation recoveries. Retail kilowatt-hour sales increased 2.7 percent ($9 million) primarily due to modest economic growth in 1996. Fuel recoveries decreased $6 million, primarily due to the timing of the recovery of costs under the company's fuel clause. Conservation recoveries decreased approximately $6 million primarily due to lower demand side management costs.

Total operating revenues decreased in 1995, primarily due. to regulatory decisions and lower other revenues, partially offset by higher fuel recoveries. Revenues related to regulatory decisions decreased $2 million, primarily due to the effects of the June 1994 retail rate reduction, partially offset by higher demand side nanagement costs. Other revenues include higher price discounts to customers in 1995. Fuel recoveries increased $7 million, primarily due to higher energy costs, partially offset by lower interchange revenues.

i Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 1996, primarily due to higher replacement power costs due to the nuclear outages, partially offset by the timing of the recognition of costs under the company's fuel clause and lower nuclear generation.

I 43 l

1 l

1 Fuel, purchased and net interchange power expense increased in 1995, l primarily due to a one-time benefit in May, 1994, from a rate case cettlement agreement and higher energy costs in 1995 as a result of the extended Millstone 2 outage.

Other Operation and Maintenance Other operation and maintenance expenses increased in 1996, primarily due to higher costs associated with the Millstone outages ($33 nillion, including $12 million reserved for future costs), partially offset by lower costs for demand side management programs and a 1995 work stoppage.

Other operation and maintenance expenses increased in 1995, primarily due to higher capacity charges from the regional nuclear units primarily due to Maine Yankee, which was in an extended refueling outage throughout 1995; higher benefit costs; higher demand side management programs; higher 1995 storm costs; higher costs associated with a work stoppage; and higher outside services employed, partially ,

offset by lower reserves for excess / obsolete inventory and lower '

maintenance costs at the company's fossil units.

Amortization of Regulatory Assets, Net Amortization of regulatory assets, net decreased in 1996, primarily due to the completion of the amortization of the Millstone 3 phase-in in 1995 and unuseful investment in June, 1996, partially offset by higher amortization as a result of the 1996 rate settlement.

1 Amortization of regulatory assets, net decreased in 1995, primarily due to the completion of the company's amortization of Millstone 3 ,

phase-in costs in June, 1995. l Federal and State Income Taxes Federal and state income taxes decreased in 1996, primarily due to lower 1996 book taxable income, partially offset by 1995 tax benefits from a favorable tax ruling and the expiration of the 1991 federal statute of limitations.

Federal and state income taxes decreased in 1995, primarily due to tax ,

benefits from a favorable tax ruling, the expiration of the 1991 )

federal statute of limitations and lower book taxable income.

Other, Net Although the change in 1996 was not significant, other, net decreased in 1995, primarily because of lower deferred return due to the completion of the Millstone 3 phase-in in 1995.

Interest on Long-Term Debt Interest on long-term debt decreased in 1996, primarily due to lower average interest rates. The change in 1995 was not significant.

44

Wr tern Massachusetts Electric Company l

SELECTED FINANCIAL DATA (*) 1996 1995 1994 1993 1992 j (Thousands of Dollars)

Opercting Revenues........... $421,337 $ 420,434 $ 421,477 $ 415,055 $ 410,720 Opercting '.ncome............. 26,023 63,064 70,940 60,348 60,563 N;t Income................... 3,922 39,133 49,457 40,594(b) 37,022 Cach Dividends on Common Stock............... 16,494 30,223 29,514 28,785 29,536 Total Assets................. 1,190,137 1,142,346 1,183,618 1,204,642 1,130,684 Long-Term Debt (C)........... 349,442 347,470 379,969 393,232 392,976 Prsferred Stock Not Subject to Mandatory Rndemption................. 20,000 53,500 68,500 73,500 73,500 PrSftrred Stock Subject to Mandator Ridemption(y)..............

c 21,000 24,000 24,675 27,000 28,500 Obligations Under C:pital Leases (C).......... 32,234 36,011 36,797 36,902 41,509

(*) R2 classifications of prior data have been made to conform with the current presentation.

(b) Includes the cumulative ef fect of change in accounting for municipal property tax expense, which increased earnings for common shares by $3.9 million.

IC) Includes portion due within one year.

STATEMENTS OF OUARTERLY FINANCIAL DATA (Unaudited)

Ouarter 2nded (a) 1996 March 31 June 30 Sept. 30 Dec. 31 Opercting Revenues.............. $114,797 $102,602 S 99,866 1104,072 Opertting Income (Loss)......... S 13,692 S 9,377 $ 4,327 S (1,373)

N t Income (Loss)............... S 8,109 S 4,016 S (396) $ (7,807) 1995 l

Operating Revenues.............. $106,684 $100,593 S107,960 $105,197 Opercting Income................ S 18,085 S 8,977 $ 19,799 $ 16,203 Nat Income...................... S 12,076 $ 3,289 S 14,141 S 9,627 i

, 45

Wastern Massachusetts Electric Company STATISTICS Gross Electric Average Utility Plant Annual December 31, Use Per Electric (Thousands kWh Sales Residential Customers Employees of Dollars) (Millions) Customer (kWh) (Averace) (December 31) 1996 $1,303,361 4,626 7,335 194,705 497 1995 1,285,269 4,846 7,105* 193,964 527  ;

1994 1,271,513 4,978 7,433 193,187 617 1993 1,242,927 4,715 7,351 192,542 657 l 1992 1,214,386 4,155 7,433 191,920 739 ]

1

• Effective January 1, 1996, the amounts shown reflect billed and unbilled cales. 1995 has been restated to reflect this change. .

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(This page intentionally left blank) g . . .

WI SII R % hl A% At lilAl Th II.11 TRIC C0hfPANY First and Refunding htortgage Bonds Trustee and Interest Paying Agent State Street Bank and Trust Company Corporate Trust Department Two International Place,4th Floor Boston, Massachusetts 02110 Preferred Stock Transfer Agent, Dividend Disbursing Agent and Registrar Northeast Utilities Service Company Shareholder Services PO. Ik)x 5006 Hartford, Connecticut 06102-5006 1997 Dividend Payment Dates 7.72% Series B January 1, Apnl 1, July 1, and October 1 7.60% Series February 1, May 1, August 1, and November 1 Adducss General Correspondence in Caic of:

Northeast Utilities Service Company investor Relations Department PO. Box 270 Hartford, Connecticut 061410270 Telephone: (860) 665-5000 muummmmmmmum Data wntained in this Annual Report arc submitted General Offices for the sole purpose of providinginferrnation to 107 Selden Street present secunty holders about the Company. Berlin, Connecticut 06037-1616 f

c., .,

Form U 60 Mutual and Subsidiary Service Companies A N N U AL R E P O RT FOR THE PERIOD

- Beginning January 1,1996 and Ending December 31,1996 TO THE U. S. SECURITIES AND EXCHANGE COMMISSION OF l

NORTHEAST NUCLEAR ENERGY COMPANY A Subsidiary Selvice Company l

Date of incorporation - November 14,1950 l

I State of Soverign Power underwhich incorporated or Organized - Connecticut i I

Location of Principal Executive Offees of Reporting Company - Selden Street, Berlin, CT. 06037 Name, title, and address of offcer to whom correspondenes ::enceming this report should be addressed.

John J. Roman, Vice President and Controller, P.O. Box 270, Hartford, Ct. 06141-0270 Name of Principal Holding Company Whose Subsidiaries are served by Reporting Company:

NORTHEAST UTILITIES

INITRUCTIONS FOR USE ON FORM U-13-60

1. TIME OF FILING l 1

Rule 94 provides that on or before the first day of May in each calendar i year, each mutual service company and each subsidiary service company as to j which the Commission shall have made a favorable finding pursuant to Rule 88, I and every service company whose application for approval or declaration '

pursuant to Rule 88 is pending shall file with the Commission an annual report on Form U-13-60 and in accordance with the instructions for that form.

2. NUMBER OF COPIES Each annual reprt shall be filed in duplicate. The company should prepare i and retain at 2 a st one extra copy for itself in case correspondence with  !

reference to the report becomes necessary. )

3. PERIOD COVERED BY REPORT l The first report filed by any company shall cover the period from the date i ther Uniform system of Accounts was required to be made effective as to that  !

company under Rules 82 and 93 to the end of that calendar year. Subsequent l reports should cover a calendar year. j i

4. REPORT FORMAT l

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

5. MONEY AMOUNTS DISPIAYED All money amounts required to be shown in financial statements may be expressed in whole dollars, in thousands of dollars or in hundred thousands of dollars, as appropriate, and subject to provisions of Regulation S-X (5210. 3 - 0.1 (b) )

6. DEFICITS DISPIAYED Deficits and other like entries shall be indicated by the use of either brackets or a parenthesis with corresponding reference in footnotes.

(Regulation S-X, (5210.3-0.1(c)).

7. MAJOR AMENDMENTS OR CORRECTIONS Any company desiring to amend or correct a major omission or error in a I report after it has been filed with the Commission shall submit an amended report including only those pages, schedules, and entries that are to be amended or corrected. A cover letter shall be submitted requesting the Commission to incorporate the amended report changes and shall be signed by a duly authorized officer of the company.

8. DEFINITIONS Definitions contained in Instruction 01-8 to the Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies, Public Utility Holding Company Act of 1935, as amended February 2, 19*19 shall be applicable to words or terms used specifically within this Form U-13-60.

l

9. ORGANIZATION CHART l The service company shall submit with each annual report a copy of its current organizat on chart

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

11. ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED The service company shall submit with each annual report a copy of the annual statemer.t supplied to each associate company in support of the amount of compen ution for use in capital billed during the calendar year.

= ,

LISTING OF SCHEDULES AND ANALYSIS OF ACCOUNTS

............................................. j l

Schedule or Page Description of Schedules and Accounts Acet. No. No.

COMPARATIVE BAIANCE SHEET Schedule I 4-5 SERVICE COMPANY PROPERTY Schedule II 6-7 ACCUMULATED PROVISION FOR DEPRECIATION AND AMORTIZATION OF SERVICE COMPANY Schedule III 8 INVESMENTS Schedule IV 9 l

l ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES Schedule V 10  ;

1 I l FUEL STOCK EXPENSES UNDISTRIBUTED Schedule VI 11  ;

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STORES EXPENSE UNDISTRIBUTED Schedule VII 12 MISNt.tANEOUS CURPLNT AND ACCRUED ASSETS Schedule VIII 13 .

l MISCELLANEOUS DEFERRED DEBITS Schedule IX 14  !

RESEARCH, DEVELOPMENT, OR DEMONSTRATION EXPENDITURES Schedule X 15 PROPRIETARY CAPITAL Schedule XI 16 LONG-TERM DEBT Schedule XII 17 CURRENT AND ACCRUED LIABILTIES Schedule XIII 18 EOTES TO FINANCIAL STATEMENTS Schedule XIV 19 COMPARATIVE INCOME STATEMENT Schedule XV 20 i

ANALYSIS OF BILLING . ASSOCIATE COMPANIES Account 457 . 21 l ANALYSIS OF BILLING - NONASSOCIATE COMPANIES Account 458 22 l ANALYSIS OF CHARGES FOR SERVICE - ASSOCIATE AND NONASSOCIATE COMPANIES Schedule XVI 23 SCHEDULE OF EXPENSE BY DEPARTMENT OR SERVICE FUNCTION Schedule XVII 24-25 DEPARMENTAL ANALYSIS OF SALARIES 26 OUTSIDE SERVICES EMPLOYED 27 EMPLOYEE PENSIONS AND BENEFITS Account 926 28 GENERAL ADVERTISING EXPENSES Account 930.1 29 MISCELLANEOUS GENERAL EXPENSES Account 930.2 30 RENTS 31 TAEES OTHER THAN INCOME TAXES Account 40E 32 DONATIONS Account 426.1 33 OTHER DEDUCTIONS Account 426.5 34 NOTES TO STATEMENT OF INCOME Schedule XVIII 35 2

a a LISTING OF INSTRUCTIONAL FILING REQUIREMENTS Page Description of Reports or Statements No.

ORGANIZATION CHART 36 BIETHODS OF ALLOCATION 37-l ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED 38 SIGNAIURE PAGE 39 1

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. i ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY SCHEDULE I - COMPARATIVE BALANCE SHEET Give balance sheet of the Company as of December 31 of the current and prior year.

ACCOUNT ASSETS AND OTHER DEBITS AS OF DECEMBER 31  !

....... ......................................................... ............ ......... l 1996 1995 SERVICE COMPANY PROPERTY (Thousands of Dollars) l l

101 - Service company property (Schedule II) $ 38,117 $ 37,880 l 107 Construction work in progress (Schedule II) 1,556 1,623 Total Property 39,673 39,503 108 Less accumulated provision for depreciation and amortization of service company property (Schedule III) 11,202 9,541 Net Service Company Property 28,471 29,962 INVESTMENTS 123 Investments in associate companies (Schedule IV) . .

124 Other investments (Schedule IV) . .

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Total Investments - - i

.......... ......... I CURRENT AND ACCRUED ASSETS 131 Cash . . i 134 Special deposits . -

135 Working funds 2 5 136 Temporary cash investments (Schedule IV) - -

141 Notes receivable . .

143 Accounts receivable 9,694 6,910 144 Accumulated provision of uncollectible accounts - .

146 Accounts receivable from associate companies (Schedule V) 111,590 70,795 152 Fuel stock expenses undistributed (Schedule VI) . .

154 Materials and supplies 61,117 66,401 163 Stores expense undistributed (Schedule VII) 18 54 165 Prepayments 5,557 5,399 174 Miscellaneous current and accrued assets (Schedule VIII) - .

Total Current and Accrued Assets 187,978 149,564 DEFERRED DEBITS 181 Unamortized debt expense 152 159 184 Clearing accounts 608 4 186 Miscellaneous deferred debits (Schedule IX) 5,756 2,286 188 Research, development, or demonstration expenditures (Schedule X) - -

190 Accumulated deferred income taxes 15,197 10,943 Total Deferred Debits 21,713 13,392 TOTAL ASSETS AND OTHER DEBITS $ 238,162 $ 192,918

-4

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY SCHEDULE I - COMPARATIVE BAIANCE SHEET Give balance sheet of the company as of December 31 of the current and prior year.

ACCOUNT LIABILITIES AND PROPRIETARY CAPITAL AS OF DECEMBER 31 1996 1995 PROPRIETARY CAPITAL (Thousands of Dollars) 201 Common stock issued (Schedule XI) $ 15 $ 15 211 Miscellaneous paid-in-capital (Schedule XI) 15,350 15,350 215 Appropriated retained earnings (Schedule XI) . .

216 Unsppropriated retained earnings (Schedule XI) 867 933 Total Proprietary Capital 16,232 16,298 LONG-TERM DEBT 223 Advances from associate companies (Schedule XII) - -

224 Other long. term debt (Schedule XII) 24,182 24,573 225 Unamortized premium on long. term debt. - .

226 Unamortized discount on long-term debt-debit - .

Total Long-Term Debt 24,182 24,573 CURRENT AND ACCRUED LIABILITIES 231 Notes payable - .

232 Accounts payable 71,954 48,105 233 Notes payable to associate companies (Schedule XIII) - -

234 Accounts payable to associate companies (Schedule XIII) 18,784 9,260 236 Taxes accrued 7,257 4,546 237 Interest accrued -

152 238 Dividends declared 500 .

241 Tax collections payable 672 228 242 Miscellaneous current and accrued liabilities (Schedule XIII) 81,745 68,624 Total Current and Accrued Liabilities 180,912 130,915 DEFERRED CREDITS 253 Other deferred credits 15,595 19,825 255 Accumulated deferred investment tax credits 1,241 1,307 Total Deferred Credits 16,836 21,132 282 ACCUMULATED DEFERRED INCOME TAXES . .

TOTAL LIABILITES AND PROPRIETARY CAPITAL $ 238,162 $ 192,918

ANNUAL REPORT CF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE II . SERVICE COMPANY PROPERTY BALANCE AT RETIREMENTS BALANCE BEGINNING OR OTHER AT CLOSE DESCRIPTION OF YEAR ADDITIONS SALES CHANGES (1) OF YEAR (Thousands of Dollars)

SERVICE COMPANY PROPERTY Account 301 ORGANIZATION 303 MISCELLANEOUS INTANGIBLE PLANT 304 LAND AND LAND RIGHTS '

305 STRUCTURES AND IMPROVEMENTS 306 LEASEHOLD IMPROVEMENTS 307 EQUIPMENT (2) 308 OFFICE FURNITURE AND EQUIPMENT 309 AUTOMOBILES, OTHER VEHICLES AND RELATED GARAGE EQUIPMENT 310 AIRCRAFT AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY (3) 321 STRUCTURES AND IMPROVEMENTS $32,861 $5 $32,866 322 REACTOR PLANT EQUIPMENT 324 ACCESSORY ELECTRIC EQUIPMENT 27 27 325 MISCELLANEOUS POWER PLANT EQUIPMENT 3,818 227 4,045 391 OFFICE FURNITURE AND EQUIPMENT 1,174 5 1,179 SUB-TOTAL 37,880 237 38,117 107 CONSTRUCTION WORK IN PROGRESS (4) 1,623 (67) 1,556 TOTAL $39,503 $170 $0 $0 $39,673

..................................................en............... ......................_.

(1) PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL:

NONE

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SCHEDULE II - CONTINUED (2) SUBACCOUNTS ARE REQUIRED FOR EACH CIASS OF EQUIPMENT OWNED. THE SERVICE COMPANY SHALL PROVIDE A LISTING BY SUBACCOUNT OF EQUIPMENT ADDITIONS DURING THE YEAR AND THE BALANCE AT THE CLOSE OF THE YEAR:

~

BALANCE AT CLOSE SUBACCOUNT DESCRIPTION ADDITIONS OF YEAR

........................................................................................... t (Thousands of Dollars)

NONE l

l (3) DESCRIBE OTHER SERVICE COMPANY PROPERTY: l

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........................................................................................... 1 (4) DESCRIBE CONSTRUCTION WORK IN PROGRESS:

This account includes simulator upgrade, tools and general plant items.

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$ s eauJ. e '

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i ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE III

ACCUMULATED PROVISION FOR DEPRECIATION AND AMORTIZATION OF SERVICE COMPANY PROPERTY ADDITIONS OTHER BALANCE AT CHARGED CHANGES BALANCE BEGINNING TO ADD AT CLOSE

- DESCRIPTION OF YEAR ACCT 403 RETIREMENTS (DEDUCT)1/ OF YEAR (Thousands of Dollars)

Account 301 ORGANIZATION

. 303 MISCELLANEOUS INTANGIBLE PLANT 304 LAND AND LAND RIGHTS 305 STRUCTURES AND IMPROVEMENTS 306 LEASEHOLD IMPROVEMENTS 307 EQUIPMENT 1 308 OFFICE FURNITURE AND FIXTURES l 309 AUTOMOBILES, OTHER VEHICLES AND RELATED GARAGE EQUIPMENT l l 310 AIRCRAFT AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY 321 STRUCTURES AND IMPROVEMENTS 6,369 1,398 (23) 7,744 122 REACTOR PLANT EQUIPMENT 324 ACCESSORY ELECTRIC EQUIPMENT 12 1 13 I 325 MISCELLANEOUS POWER PLANT EQUIPMENT 2,472 194 62 2,728 391 OFFICE FURNITURE AND FIXTUR"S 688 28 1 717- i I

i TOTAL $9,541 $1,621 $0 $40 $11,202 1/ PROVIDE AN EXPIANATION OF THOSE CHANGES CONSIDERED MATERIAL:

Depreciation charged to clearing account $65 Removal costs charged to reserve (25) )

$40 l 6

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

e t ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE IV - INVESIMENTS INSTRUCTIONS: Complete the following schedule concerning investments.

Under Account 124, "Other Investments," state each investment separately, with description, including the name of issuing company, number of shares or principal amount, etc.

Under Account 136, " Temporary Cash Investments," list each investment separately.

BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR ACCOUNT 123 - INVESTMENT IN ASSOCIATE COMPANIES NONE ACCOUNT 124 - OTHER INVESTMENTS NONE ACCOUNT 136 - TEMPORARY CASH INVESTMENTS NONE TOTAL $- $-

.g.

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE V - ACCOUETS RECEIVABLE FROM ASSOCIATE COMPANIES TNSTRUCTIONS: Complete the following schedule listing accounts receivable from each associate company. Where the service company has provided accommodation or convenience payments for associate companies, a separate listing of total payments for each associate company by subaccount should be provided.

BALANCE AT BALANCE AT

, BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars)

ACCOUNT 146 - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES Northeast Utilities System Money Pool $27,000 $75,000 The Connecticut Light and Power Company 34,628 28,344 I Castern Massachusetts Electric Company 8,106 6,686 l Cortheast Utilities Service Company 879 1,768 l North Atlantic Energy Service Corporation 174 -

l Northeast Utilities 2 -

Public Service Company of New Hampshire 6 (208)

TOTAL $70,795 $111,590 ANALYSIS OF CONVENIENCE OR ACCOMMODATION PAYMENTS:

See page 10A for details.

10-

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For tha Yr r End:d Dec;mber 31, 1996 SCHEDULE V - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES INSTRUCTIONS: Complete the following schedule listing accounts receivable from each associate company. Where the service company has provided accommodation or convenience payments for associate companies, a separate listing of total ,

payments for each associate company by subaceount should be provided.

TOTAL DESCRIPTION PAYMEITIS (Thousands of Dollars)

ANALYSIS OF CONVENIENCE OR ACCOMMODATION PAYMENTS:

The Connecticut Light and Power Company $244 Western Massachusetts Electric Company 36 Public Service Company of New Hampshire 5 North Atlantic Energy Service Corporation 5 Northeast Utilities Service Company 8,948 TOTAL $9,238 Convenience payments result primarily from the following items:

Engineering Services $3,381 Consulting Services 1,765 Computer Equipment & Supplies 463 Temporary Personnel Services 392 Miscellaneous (179 items) 3,237 )

............ l TOTAL $9,238 )

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-10A-

ANNUAL REPORT 07 NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE VI - FUEL S'M)CK EXPENSES UNDISTRIBUTED INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to fuel stock expenses during the year and indicate amount attributable to each associate company. Under the section headed " Summary" listed below, give an overall report of the fuel functions performed by the service company.

DESCRIPTION 1 ABOR EXPENSES TOTAL (Thousands of Dollars)

ACCCUNT 152 - FUEL STOCK FJPENSES ,

UNDISTRIBUTED $ -

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• 0 ANNUAL REPORT Of NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE VII . STORES EXPENSE UNDISTRIBUTED INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to stores expense during the year and indicate amount attributable to each associate company.

DESCRIPTION LABOR EXPENSES TOTAL (Thousands of Dollars)

ACCOUNT 163 - STORES EXPENSE UNDISTRIBUTED Beginning Balance as of January 1, 1996 $54 Activity for the year:

Stores expense undistributed $3,190 $4,424 7,614 The above stores expenses are billed back to each of the companies listed below:

The Connecticut Light & Power Company (2,296) (3,184) (5,480)

Western Massachusetts Electric Company (537) (745) (1,282)

Public Service Company of New Hampshire (30) (42) (72)

Nonassociate Companies (see page 22 for list of the companies) (342) (474) (816)

Stores expense distributed (3,205) (4,445) (7,650)

Net Activity for year ($15) ($21) (36)

Ending Balance as of December 31, 1996 $18 12-l

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE VIII MISCELLANEOUS CURRENT AND ACCRUED ASSETS INSTRUCTIONS: Provide detail of items in this account. Items less than $10,000 may be grouped, showir.g the number of items in each group.

BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars)  !

ACCOUNT 174 - MISCELLANEOUS CURRENT AND ACCRUED ASSETS NONE 4

1 TOTAL

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE IX MISCELLANEOUS DEFERRED DEBITS INSTRUCTIONS: Provide detail of items in this account. Items less than $10,000 may be grouped, showing the number of items in each group.

BALANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR

]

(Thousands of Dollars) l ACCOUNT 186 - MISCELLANEOUS DEFERRED DEBITS Financial system development costs $1,983 $3,090 RABBI Trust funding - 952 Contractual retainage - 800 Unissued non-inventory stock materials - 629 Connecticut sales tax under protest 99 99 Employee performance payments 81 92 External audit - Millstone Unit No. 3 58 53 Services billed to North Atlantic Energy Service Corporation 82 -

Other deferred debits (5 items in 1996 and 4 dtems in 1995) (17) 41 TOTAL $2,286 $5,756 1

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, _ - , w. ,%-- - - y% ..

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE X RESEARCH, DEVELOPMENT, OR DEMONSTRATION EXPENDITURES INSTRUCTIONS: Provide a description of each material research, development, or demonstration project which incurred costs by the service corporation during the year.

9 DESCRIPTION AMOUNT (Thousands of Dollars)

ACCOUNT 188 - RESEARCH, DEVELOPMENT OR DEMONSTRATION EXPENDITURES EPRI Assessment $53 Services billed from Northeast Utilities Service company (an associate company) 23 The above expenses are billed back to each of the associated companies listed belows i

The Connecticut Light and Power Company (16) western Massachusetts Electric Company (4)

Public Service Company of New Hampshire (4) j Nonassociate Companies (see page 22 for list 1 of the companies) (52)

TOTAL $0 e

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. . l ANNUAL REPORT OF NORTHEAST NUCLEAR ENER$Y COMPANY  !

1 1

For the Year Ended , December 31, 1996 S N5*nULE XI PROPRIETARY CAPITAL

• l a ,

NUMBER OF PAR OR STATED OUTSTANDING CLOSE OF PERIOD ACCOUNT SHARES VALUE ..------...................

NUMBER CLASS OF STOCK AUTHORIZED PER SHARE NO. OF SHARES TOTAL AMOUNT (Thousands 1

- of Dollars) I 201 COMMON STOCK ISSUED 60,000 $10.00 1,500 $15 l INSTRUCTIONS: Classify amounts in each account with brief explanation, disclosing the general nature of transactions which give rise to the reported amounts.

DESCRIPTION AMOUNT (Thousands of Dollars)

ACCOUNT 211 - MISCELLANEOUS PAID.IN-CAPITAL $15,350 ACCOUNT 215 - APPROPRIATED RETAINED EARNINGS -

TOTAL $15,350 INSTRUCTIONS: Give particulars concerning net income or (loss) during the year, distinguishing between compensation for the use of capital owed or net loss remaining from servicing nonassociated per the General Instructions of the Uniform Systems of Accounts. For dividends paid during the year in cash or otherwise, provide rate pecentage, amount of dividend, date declared and date paid.

BALANCE AT NET INCOME BALANCE AT ,

BEGINNING OR DIVIDENDS CLOSE l DESCRIPTION OF YEAR (LOSS) PAID OF YEAR I

.......................................................................................... l (Thousands of Dollars)

InCCOUNT 216. UNAPPROPRIATED RETAINED EARNINGS $933 $1,932 $1,998 $867 TOTAL $933 $1,932 $1,998 $667 l The not income is all compensation for use of capital.

The dividends are paid as follows:

Rate Percentage Amount of Per Share Dividend Date Declared Date Paid

$333.00 $499,500 03/11/96 03/29/96

$333.00 $499,500 06/10/96 06/28/96

$333.00 $499,500 09/16/96 09/30/96

$333.00 $499,500 12/09/96 01/15/97

a.

< Captions ANefUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 g SCHEDULE XII i

LONG-TERM DEBT INSTRUC"fIONS: Advances from associate companies should be reported separately for advances on notes, and advances on open account. Names of associate companies from which advances were received shall be shown under the class and series of obligation column. For Account i 224 -- Other long-tern debt provide the name of creditor company or organization, terms of obligation, date of maturity, interest rate, and the amount authorized and outstanding.

.' BALANCE BALANCE TERMS OF OBLIG. DATE AT AT CLASS & SERIES OF INTEREST AMOUNT BEGINNING DEDUCTIONS CLOSE ,

NAME OF CREDITDR OF OBLIGATION MATURITY RATE AITTHORIZED OF YEAR ADDITIONS (1) OF YEAR  !

1 ______________________________________________________________________________________________________

y (Thousands of Dollars)

<C) <C> <C) <C) <C)

ACCOUNT 223-ADVANCES FROM ASSOCIATE COMPANIES: NONE ACCOUNT 224-0THER LONG-TERM DEBT:

Prudential Insurance Senior Company of America Unsecured Note 8/2019 7.17% $25,000 $24,573 $0 $391 $24,192 TtyrAL OTHER LONG-TERM DEBT $25,000 $24,573 $0 $391 $24,182

</ Table >

(1) GIVE AN EXPLANATION OF DEDUCTIONS:

Principal payment 1

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 9

SCHEDULE XIII - CURRENT AND ACCRUED LIABILITIES INSTRUCTIONS: Provide balance of notes and accounts payable t<> each associate company.

Give description and amount of miscellaneous current and accrued liabilities. Items less than $10,000 may be grouped, showing the number of items in each group.

t BALANCE AT BALANCE AT ,

BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR I (Thousands of Dollars)

ACCOUNT 233 - NOTES PAYABLE TO ASSOCIATE COMPANIES TCTAL $- $.

' ACCOUNT 234 - ACCOUNTS PAYABLE TO ASSOCIATE COMPANIES The Connecticut Light and Power Company $1,185 $756 Westarn Massachusetts Electric Company 39 41 Northeast Utilities Service Company 7,724 17,534 Northeast Utilities 93 95 Public Service Company of New Hampshire 203 203 North Atlantic Energy Service Corporation 16 155 TOTAL $9,260 $18,784 l 1

ACCOUNT 242 MISCELLANEOUS CURRJENT AND ACCRUED LIABILITIES

.. Millstone 3 Funding Liability $38,271 $47,996 i 23,209 30,452 Pension Cost 544 Performance Reward Program 3, T,13 2,195 2,756 Payroll Accrual Severance Accrual 1,100 -

Miscallaneous (2 items) 36 (3)

TOTAL $68,624 $81,745 18-w.- ,, , ,~ - . - _ s . ., . .- - - - - - . , -

i ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31.1996 SCHEDULE XIV NOTES TO FINANCIAL STATEMENTS INSTRUCTIONS: The space below is provided for important notes regarding the financial statements or any account thereof. Fumish particulars as to any significant contingent assets or liabilities existing at the end of the year. Notes relating to financial statements shown elsewhere in this report may be indicated here by reference.

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SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES General Northeast Nuclear Energy Company (NNECO or the company) is a wholly owned subsidiary of Northeast Utilities (NU). The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Westem Massachusetts Electric Company (WMECO), Holyoke Water Power Company, and North Atlantic Energy Corporation are the operating subsidiaries of the Northeast Utilities system (the system) and are wholly owned by NU. NNECO acts as agent in operating the two nuclear generating facliities (Millstone 1 and 2) that are wholly owned by CL&P and WMECO. The cost of the two nuclear units is recorded on the books of the affiliated utility companies in their proportionate ownership shares. In addition, the company acts as agent in operating a third nuclear generating unit, Millstone 3, for CL&P, PSNH, WMECO, and other nonaffiliated utilities. The cost of Millstone 3 is recorded on the books of CL&P, PSNH, WMECO, and the nonaffiliated utilities based upon their proportionate ownership shares.

Other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company (NUSCO) supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies.

All transactions among affiliated companies are on a recovery of cost basis which may include amounts ,

representing a retum on equity, and are subject to approval of various federal and state regulatory j agencies.

Public Utility Regulation NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Hoiding Company Act of 1935 (the 1935 Act), and it and its subsidiaries, including the company, are subject to the provisions of the 1935 Act.

Revenues The company provides services to the affiliated utility companies on the basis of recovery of cost plus retum on capital, as defined under the terms of agreements, which have been approved by various federal and state regulatory commissions having jurisdiction over operations of the company and the affiliated utility companies.

Depreciation The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant in-service, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency. Except for major facilities, depreciation factors are applied to the average plant-in-service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal,less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of utility plant in-service are equivalent to a composite rate of 4.5 percent in 1996 and 1995.

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31.1996 SCHEDULE XIV PIOTES TO FINANCIAL STATEMENTS 1

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2. LEASES l f

The company has entered into lease agreements with two unaffiliated third parties for the use of nuclear control room simulators (simulators) for Millstone 1 and 2, and CL&P's and WMECO's share of the Millstone 3 simulutor. In addition, the company's affiliates have entered into lease agreements for the mse of data processing equipment, office equipment, vehicles, and office space. NNECO is billed for its proportionate share of these leases through the intercompany billing system. The provisions of these lease agreements generally provide for renewal options. For the purposes of this report, all leases are accounted for as operating leases. At December 31,1996, assuming those leases which would have been classified as capital leases were capitalized at the beginning of the lease terms, assets would have increased by approximately $14.2 million, current liabilities would have increased by approximately $2.8 million, and long. term obligations would have increased by approximately $11.4 million. There is no effect on NNECO's results of operations.

Rental payments char 9ed to operating expenses for 1996 and 1995 amounted to approximately $4.8, respectively, for capital lease rental payments and $6.8 million and $6.2 million, respedively, for operating lease rental payments.

Interest included in capital lease rental payments for 1996 and 1995 was approximately $1.8 million and

$2.0 million, respectively.

Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance and maintenance, under long-term noncancelable leases as of December 31,1996, are approximately:

Endgd caoital Leases Operatina Leases (Thousands of Dollars) 1997.................................................. $ 4,200 $400 ,

1998.................................................. 4,100 300 1999.................................................. 4,100 200 2000.................................................. 3,900 70 2001.................................................. 1,700 40 Afte r 2001................... ....................... -

__IQ Future minimum lease payments....... 18,000 11. DAD ,

Less amount representing interest...... 3.800 l 1

Present value of future minimum lease pa yme nis ................................ 11L2DD

3. SHORT TERM DEBT NNECO, NU, CL&P, WMECO, HWP, and The Rocky River Realty Company (RRR) have various revolving credit lines through separate bilateral credit agreements. Under this facility, four banks maintain commitments to the respective system companies totaling $56.25 million. NU, CL&P, and WMECO may borrow up to the aggregate of $56.25 million, whereas HWP, NNECO, and RRR may borrow up to their short. term debt limit of $5 million, $50 million, and $22 million, respectively. Under the terms of the agreement, the system companies may borrow funds on a short-term revolving basis under the agreement, using either hxxi-rate loans or standby loans. Fixed rates are set using competitive bidding. Standby loans ce based upon several attemative variable rates. Under the terms

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a ANNUAL REPORT OF hlORTHEAST NUCLEAR ENERGY COMPANY  !

i l Forthe Year Ended December 31.1996 l SCHEDULE XIV l

\

Y NOTES TO FINANCIAL STATEMENTS

of the agreement, tha system companies are obligated to pay a facility fee of.15 percent per annum of each bank's total commitment. These commitments will expire December 3,1998. At December 31, i 1996 and 1995, NNECO had no bormwings outstanding under the facility.

j Under the terms of its credit agreements, NU Parent may borrow and then lend the funds to NNECO

through the Northeast Utilities System Money Pool (Pool). The Pool provides a more efficient use of the

tash resources of the system, and reduces outside short-term bormwings. NUSCO administers the Pool

! as agent for the member companies. Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds bormwed by NU Parent. NU j Parent may lend to the Pool, but may not borrow, Funds rnay be withdrawn from or repaid to the Pool at

any time without prior notice. Investing and bormwing subsidiaries receive and pay interest based on the 1 average daily Federal Funds rate. Borrowings based on loans from NU Parent, however, bear interest at

NU Parent's cost and must be repaid based upon the terms of NU Parent's original borrowing. At i December 31,1996 and 1995, NNECO had no borrowings outstanding under the Pool.

! The amount of short-term borrowings that may be incurred by NNECO is subject to periodic approval by a the SEC under the 1935 Act. Under the SEC restrictions, NNECO was authorized to incur short. term borrowings up to the maximum of $50 million.

4 l 4. LONG-TERM DEBT Detail of long-term debt outstanding is:

l December 31. 1996 1995 (Thousands of Dollars) 7.17% Senior Notes, due 2019....................................... $24,182 $24,573 Less: Amounts due within one year ............................... 398 365 Long-term debt, not ............................................... ....... 1212M 32L205 Cash sinking-fund requirements on debt outstanding at December 31,1996 for the years 1997 through 2001 are approximately $398,000 for 1997, $427,000 for 1998, $460,000 for 1999, $489,000 for 2000, and $531,000 for2001.

5. PENSION BENEFITS 1 l

The company participates in a uniform noncontributory. defined benefit retirement plan covering all .

regular system employees (the plan). Benef'ts r are based on years of service and employees' highest eligible compensation during five consecutive years of employment. NNECO's direct portion of the system's pension cost, part of which was charged to plant, approximated $7.2 million in 1996 and $8.1 million in 1995.

Currently, the company funds annually an amount at least equal to that which will satisfy the l i

requirements of the Employee Retirement income Security Act and the Intemal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and intemational equity securities and bonds.

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ANNUAL REPORT OF NORTHEAST NyCLEAR ENERGY COMPANY t

For the Year Ended December 31.1996 e

i. SCHEDULE XIV b NOTES TO FINANCIAL STATEMENTS i

The components of net pension cost for NNECO are:

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At December 31. 1996 1995 (Thousands of Dollars)

)

l Service cost . ....... .... .. ... ... .... . .. ...... . .. ... .. .. ... . . . . . . .. . .. . . .. . .. . . .. . . 8 5.882 8 8,558 l Interest cost . . .. ... .... ..... .. . .. .. .. ... . . .. .... . . . ... ..... . .. . . ... ... .. .. . . . ... . . 7,486 5,711 i 4 Retum on pla n assets .......... ... ...................... .................... (12,461) (15,790) i

Net a mortization ............ ............................................... ... .. 6.335 9.668 Net pe nsion cost. . . . . . . . ... . . . .. ...... .. .. . . . ... . .. . . .... .. ... .. ..... .... .. . . . . . 1 1.242 LA,14Z l For calculating pension cost, the following assumptions were used:

i For the Years Ended December 31. 1996 1995 1 Disco u nt rate .. .. ... . . .... .... . . . . .... . .. .... . . ... . .. ... .. .. ..... .. .... .... . ...... 7.50 % 8.25%

Expected long-term rate of retum ...................................... 8.75 8.50 Compensation / progression rate ......................................... 4.75 5.00 l

The following table represents the plan's funded status reconciled to the Balance Sheets:

i

! At December 31. 1996 1995 (Thousands of Dollars) i Accumulated benefit obligation at December 31,1996 ,

j and 1995, including vested benefits of $49,379,000 l j and $40,605,000, respectively ......... ...... ......................... 1AL$d1 L12Z21 j a

, Projected benefit obligation (PBO) ................. .................. 107,001 93,968 )

Market value of plan assets .............................. ................ 89.828 77.731  !

i PBO in excess of market value of plan assets................... (17,173) (16,237) i Unrecognlzed transition amount ........................................ (1,729) (1,874) ,

Unrecognized prior service costs.................................. .... 4,062 295 Unrecog nlzed net gain ....................................................... (15.612) (5.393)  ;

Accrued pension liability .. ........................... ................... E2g,i22) 1(22,292) l The following actuarial assumptions were used in calculating the plan's year-end funded status:

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At December 31. 1996 1995 t

, Discount rate .. . .. . . .. .. .... . . . . .. . ... ... ......... . . ..... ...... . ....... .. ... ... . 7.75% 7.50 %

Compensation / progression rate ...................................... 4.75 4.75 i

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l1 - . ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY j

j Ftr the Ymr Ended December 31.1996  !

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SCHEDULE XIV l

' l NOTES TO FINANCIAL STATEMENTS  ;

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4. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS l The company provides certain health care benefits, primarily medical and dental, and life insurance i benefits through a benefit plan to retired employees (referred to as Statement of Accounting Standards I

- 106 (SFAS 106) benefits). These benefits are available for employees leaving the system who have met specified service requirements. Total health care and life insurance cost, part of which was deferred or

tlharged to utility plant, approximated $2.1 million in 1996 and $2.0 million in 1995.  ;

i The company funds SFAS 106 postretirement costs through extemal trusts. The company is funding annually amounts equal to the SFAS 106 costs for the year which also are tax-deductible under the I intamal Revenue Code. The trust assets are invested primarily in equity securities and bonds.

l The components of SFAS 106 benefit costs are:

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I At December 31. 1996 1995 l (Thousands of Dollars) i i Se rvice cost . . . . ... .. .. .. . . . . . . . . . .. .. .. .... .. . . . . . . . . . . . . . . . .. . . ... . . .. . . . .. . .. . . ... .. . . . . $1,009 $936 i interest cost. . ... ...... . ... .. . .. ... . . . . . . .. . . . . .. . .. ... . .. .. . . .. .. . . . . . . . . ... ... .. ...... . ... 1,204 966

) Retum on plan assets ........................... ....................................... (762) (642) <

Amortization of unrecognized transition obligation....................... 277 277 l

! Other a mortization, net . ............................................................... _11Q 595 i i Net health care and life insurance costs ...................................... 32.D58 &LS32 The following actuarial assumptions were used in calculating SFAS 106 benefit costs:

i At December 31. 1996 1995 j

i Discou nt rat e . . .... . . .. . . .. . .. .. . .. . . .. .. ... .. .. . . .. . . . . . . . . . . . . .. .. . . . .. . ... . . . .. . . ... ... . . 7.50 % 6.00 %

Long-term rate of retum - health assets, net of tax ...................... 5.25 5.00 l 6.75 6.50

Long-term rate of retum - life assets........... ................................

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ANNUAL REPORT 8F NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31.1996 i

! 3.QEDULE XIV 4

NOTES TO FINANCIAL STATEMENTS 1

The following table represents the plan's funded status reconciled to the Balance Sheets:

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i At December 31. 1996 1995 (Thousands of Dollars)

APBO:

Retirees.................................................................................. $ 7,500 $ 3,815 i Fully eligible active employees.................................................. - 27

Active employees not eligible to retire ....................................... 8.889 10.246 i TotalAPBO................................................................................ 16,389 14,088

, Market value of r!an assets ....................... ............................... . . 7.881 ).1M

! APBO in excess of plan assets ..... ............................................. (8,508) (8,558)

Unrecognized transition amount .................................................. 4,436 4,713 i Unrecognized net loss (gain) ... .......................... ....................... 4&I2 3.&di i

l Postratirement benefit obligation ............................... ................. W W j The following actuarial assumptions were used in calculating the plan's year end funded status:

i I'

At Dece , 5er 31. 1996 1995 i Discou nt rat e .. . ... .. . . . ... .. . .. . . . ... .... . ... . . . . . .. . . . . . .. ... .. .. .. ... .... .. .. . . ... . .. . 7.75% 7.50%

He alth care cost trend rate (a) ........ ........................ ................. . 7.23 8.40 i

I l (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.9 percent by 2001.

The effect of increasing the assumed health care cost trend rates by one percentage point in each year l ,

would increase the accumulated postretirement benefit obligation as of December 31,1998 by $701,000 j l -

and the aggregate of the service and interest cost components of net periodic postretirement benefit cost 4 for the year then ended by $102,000. The trust holding the plan assets is subject to federal income taxes at a 35-percent tax rate.

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31.1996 SCHEDULE XIV NOTES TO FINANCIAL STATEMENTS l

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7. NUCLEAR PERFORMANCE The three Millstone units are mane 9ed by NNECO. Millstone 1,2, and 3 have been out of service since November 4,1995, February 21, 1996, and March 30, 1996, respectively, and are on the Nuclear l Regulatory Commission's (NRC) Watch List. The company has restructured its nuclear organization and

,is currently implementing comprehensive plans to restart the units.

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. l ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY ,

l FOR THE YEAR ENDED DECEMBER 31, 1996 I l

SCHEDULE XV COMPARATIVE INCOME STATEMENT

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ACCOUNT DESCRIPTION 1996 1995 INCOME 457 Services rendered to associate companies $409,581 $368,726 458' Services rendered to nonassociate companies 62,279 48,890 421 Miscellaneous income or loss ............

2,505 1,394 Total Income 474,365 419,010 EXPENSE Nuclear Power Expenses 517 Operation Supervision and Engineering 57,959 50,492 519 Coolants and Water 3,931 5,697 520 Steam Expenses 27,3B5 32,450 f

523 Electric Expenses 11,729 17,191 524 Miscellaneous Nuclear Power Expenses 61,290 67,566 525 Rents 5,690 5,633 528 Maintenance Supervision and Engineering 41,362 20,443 529 Maintenance of Structures 9,429 21,131 ,

530 Maintenance of Reactor Plant Equipment 106,061 80,434 I 531 Maintenance of Electric Plant 61,703 29,663 1 532 Maintenance of Miscellaneous Nuclear Plant 1,553 790 Transmission Expenses 560 Operation Supervision and Engineering 0 0 i 562 Station Expenses 1,752 1,926 566 Miscellaneous Transmission Expenses 0 0 568 Maintenance Supervision and Engineering o 0 569 Maintenance of Structures 0 0 570 Maintenance of Station Equipment 31 567 Administrative and General Expenses 920 Salaries and wages 11,536 11,094 921 Office supplies and expenses 6,044 4,966 922 Administrative expense transferred. credit 0 0 923 Outside services employed 11,876 3,894 924 Property insurance 3,142 5,280 925 Injuries and damages 3,164 3,335 926 Employee pensions and benefits 23,571 25,142 4 328 Regulatory commission expense 30 23 930.1 General advertising expenses 0 0 930.2 Miscellaneous general expenses 1,699 672 931 Rents 3,573 3,648 932 Maintenance of structures and equipment 257 418 All other expenses 403 Depreciation and amortization expense 1,621 1,580 408 Taxes other than income taxes 10,716 10,144 409 Income taxes 6,882 7,768 410 Provision for deferred income taxes 1,218 718 (7,040) 411 Provision for deferred income taxes. credit (5,478)

(66) i 411.5 Investment tax credit (66) 426.1 Donations 19 53 426.5 Other deductions 490 936 Interest on long. term debt 1,788 1,808 427 2 430 Interest on debt to associate companies 0 431 Other interest expense 476 741 Total Expense 472,433 417,099 Net Income $1,932 $1.911 20-h

1 ANNUAL REPORT OF NO)THEAST NUCLEAR ENERGY COMPANY For the Yea.t Ended December 31, 1996 ANAL 1 SIS OF BILLING ASSOCI M COMPANIES ACCOUM 457 f

I DIRECT I1OIRFJT COMPENSATION TOTAL COSTS COSTS FOR USE AMOUNT NAME OF ASSOCIATE COMPANY CHARGED CHARGED OF CAPITAL BILLED (Thousands of Dollars)  !

r 457-1 457-2 457-3 I

I The Connecticut Light and Power Company $323,968 $3,627 $327,595 Western Massachusetts Electric Company 75,652 849 76,501 Public Service Company i of New Hampshire 5,453 32 5,485 l TOTAL $405,073 $0 $4,508 $409,581 1

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t ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY ,

i For the Year Ended December 31, 1996 f

l ANALYSIS OF BILLING  !

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! NONASSOCIATE COMPANIES i ACCOUNT 458 f l

DIRECT INDIRECT COMPENSATION EXCESS TOTAL .

COSTS COSTS FOR USE TOTAL OR AMOUNT  !

NAME OF NONASSOCIATE COMPANY' CHARGED CHARGED OF CAPITAL COSTS DEFICIENCY BILLED I i

(Thousands of Dollars) I 458-1 458-2 458-3 458-4 Connecticut Yankee Atomic Power Company $ 429 $ $ 0$ 429 $ $ 429 Central Maine Power Company 4,790 28 4,818 4,818 Central Vermont Public Service 3,322 19 3,341 3,341 Montaup Electric Co. 7,674 44 7,718 7,718 New England Power Co. 23,473 135 23,608 23,608 United Illuminating Company 7,056 40 7,096 7,096 Fitchburg Gas & Electric Co. 417 2 419 419 Chicopee Municipal Electric 2,616 15 2,631 2,631 Massachusetts Municipal Wholesale 9,285 53 9,338 9,338 Lyndonville Electric Department 94  ?. 95 95 Connecticut Municipal Electric Coop 2,094 12 2,106 2,106 Vermont Electric Gen & Trans. 676 4 680 680

$61,926 $ 0$ 353'$ 62,279 $ 0 $62,279 INSTRUCTIONS: Provide a brief description of the services rendered to each nonassociate company:

The company acts as agent in operating Millstone Unit 3 for the nonassociate companies.

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l ANNUAL REPORT OF WOR'rBSAST WUCLEAR RWSRST CONPANY ,

For the Toer Baded December 31 1996 BCBSDULE ITI ANALYSIS OF CEARSES FOR SSRTICE ASSOCIATE AND WOWASSOCIATE COWPAW1RS

......................................................................................................g...............................

ASSOCIATE COttFANT CRAROSS WOWASSOCIATE CONFANT CEARGES TOTAL CWARSSS FOR SERVICE ACCOUNT DIRECT INDIRECT DIRECT INDIRECT DIESCT TWDIRBCT DESCRIPTION OF ITEMS COST COST TOTAL COST COST TOTAL COST COST TOTAL NUMBER ............................. .............................. 4 (Thousands of Dollare) i Weeleer Power Bayeusee 9 517 OPERATION SUFRTVISION AND WWSINEERING 52.839 9 52.839 5.128 9 5,120 57.959 57.959 COOLANTS AND WATER 3,443 0 3.443 4SS 0 485 3,931 4 3.931 519 0 27.305 9 27,385 539 STEAM REFtWSBS 24.571 9 24.571 2.814 2.814 ,

19,702 0 10.792 1,027 9 1,927 11,729 9 11,729  !

523 ELECTRIC REPRWSBS 7,171 8 61,290 524 MISCELLAWBOUS NUCLEAR POWER 31755338 54.119 0 54.119 7.171 e 61.299 4.573 0 4,573 12 9 12 4.535 e 4.585 525 RENTS 5,558 41,362 e 41.362 528 MAINTEWANCE SUPERVISION AND BROINEERIWS 35.812 0 35.812 5.559 0

'4 AINTENANCE OF STRUCTURSS 7.992 0 7.892 1.537 9 1.537 9.429 9  ?.429 529 0 19 6 , e" ~. 9 106.061

• 539 NAINTRWANCE OF REACTOR PLANT EQUIPWRIT 92.150 0 92.150 13,911 13.919 i 49,434 0 48.434 13.269 0 13.269 .i.fd3 8 61,193 531 NAINTRWANCE OF ELSCTRIC PLANT 0 171 1.553 0 1.553 532 NAINTENANCE OF WISCELLANEOUS WUCLEAR PLANT 1,302 0 1.382 171  ;

Treesmission Empensee 9 8 9 569 OPERATION SUPERTISION AND SWOZWWERING S 5 9 9 9 9 562 STATION EXPEWSES 144 9 144 1,688 9 1.600 1.752 0 1.752 9 0 3 0 0 9 9 9 9 S$$ MISCEtLAWSOUS TRANSWISSION BIPBWSBS 0 9 9 9 568 MAINTEWANCE SUPERVISION AND BW91NBERING S S 9 0 9 8 0 e 9 9 9 8 569 NAINTENANCE OF STRUCTURES O O 31 8 31 579 NAINTEWANCE OF STATION EQUIPWWWT 27 0 27 4 0 4 Adataistrative and General Bayeesee .

930 SALARISS AND WAGES 19,170 0 18.179 1,36e 0 1,366 11,536 5 11.536  ;

921 OFFICE SUPPLIES AES BIPEWSES 5,371 0 5.371 673 4 673 6.044 5 6,944 922 ADMINISTRATIVE WIFENSE TRANSFSRRED. CREDIT 0 9 9 9 9 9 9 9 9 923 OUTSIDE SERVICES EMPLOYED 18.729 0 19,728 1.14e L 1,148 11.876 e 11.876 924 PROFERTT INSURANCE 2.402 0 2.492 749 9 749 3,142 8 3.142 I INJURIES AND DAMAGES 2.737 0 2.737 427 0 427 3.164 9 3.164 925 23,571 M 926 BNFLOTBE FENSIONS AND SRWWFITS 20,807 9 20,807 2.744 8 .l.164 23.571 9 i W 929 REGULATORY COWWISSION EXPENSE 28 0 28 2 0 2 38 9 30 t 9 0 9 0 0 9 9 939.1 GENERAL ADVERTISINS EIPRWSES S O e 139 1.699 e 1.699 939.2 NISCELLANSOUS e3WERAL BEFENSES 1,560 e 1.568 139 -

931 REWTS 3,151 0 3.151 422 0 422 3.573 0 3.573 l 932 MAINTEWANCE OF STRUCTURBS AND 30VIPNSWT 226 0 226 31 0 31 257 5 257 All other empenses S 9 403 DEPRECIATION AND ANORTIEATION BIPENSES 1.402 6 1,482 219 9 219 1.621 0 1,621 498 TAIES OTERR TRAN INCONE TAIES 9.391 0 9.391 1,335 9 1.335 19,716 0 19.716 6,787 0 95 9 95 6,833 9 6,082 409 INCONE TAIES 6.787 e 1,21e 9 1.21s 4to PROVISION FOR DEFsRanD IwCOWs TAIRS tests e 1.21s o o 411 FRov!SIOw FOR DEFERRnD INCONE TAIES.CRsDIT (5.47s) e (5,47s) e o e (5.47e) 0 (5.47e) t 411.5 IWvsSTNRKT TAE CRsDIT (66) e (66) e e 9 (66) e (66) t 426.1 DONATIowB 17 e 17 2 9 2 to e 19 r 426.5 OTHER DRDUCTIONS 447 0 447 43 9 43 490 9 499 427 INTRAMST ON LONG.TRRW DSSTS S 9 9 0 0 9 8 8 e 439 INTEREST ON DEST TO ASSOCIATE CONPANIES 9 0 0 9 9 9 9 9 9 431 OTERR INTERBST EIPEWSE 440 9 449 9 0 9 449 9 449 SUBTOTAL SIPRWSSS . 407.416 5 487.416 62.008 e 62,080 469.594 9 469.584 CONPSWSATION FOR USE OF CAPITAL.

427 INTEREST ON LONG TERN DSSTS 1.700 9 1.700 430 INTEREST ON DEBT TO ASSOCIATE COMPANISS 9 8 9 431 OTBER INTEREST EIFEWSE 36 0 36 525 RENTS 752 353 1.185 i TOTAL SIPENSES . 409,992 62,441 472.433 [

421 NISCELLAWaOUS INCONE . CRsDIT (2,343) e (2,343) (162) 0 (162) (2,505) 8 (2,5e5) ,

1.932 0 1,932 NET INCOME TOTAL COST OF SSRTICE . 405.073 8 409 61 926 0 62.279 466.999 8 471,860 i

..................... 581....... ........................................................

INSTRUCTIOWs Total cost of servlee will equel for associate end nomesseetate  ;

commentes the total emoemt billed under ,

their separate emelysis of billiet schedules. r

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i AsEIchL REPORT OF BIORTERAST IIUCLEAR SIERST CCBIPhlf?

l Per the Year meded P-- * - 31, 1996 smEpots Erzz 4 s mEpoLa oF REPas8s assTRzsDTzGN sT ssPAR3sEErr ok sEnv2Cs PuMCrzcBr l

aEP&a Marr om sEnvzcEt PuNeszGN l Accourr total arrumTCEE alzLIATous alzt&sTONs NBBER D88C32PTICII 0F 3T318 AIIDlurr 6FFERERhD Iur!T 91 WIT 03 lut!T 63 (sliousands of se11are)

Shnelear Pouer Empensee i S17 OPERATICII SUPERVISION AIID gIIgyirmmaraIG $57,959 40 $35,435 $16,515 416,009 339 000LhlrTS ABID SIk?ER 3,931 0 1,069 1,336 1,536 B30 5T5430 SEPasSB8 37,385 0 0,309 10,382 8,798 333 WLaerRIC REPetSB8 11,739 0 4.385 4,331 3,313 834 IE18 N " umm8 IfUCLEAR PONER EEPWr$38 61,390 0 19,188 30,753 31,350 535 Raff8 5,690 1,105 1,536 1,600 1,369 838 Ilh23rTElthWCB SUPERV18100t AllD WIS23rEERING 41,362 0 8,321 15,690 17,351 839 alh3NTasharCB 0F STRUCTURSS 9,439 0 1,891 3,733 4,805 530 alh2NTa nNCE OF REACTOR FIAlff 390ZPRIElfr 106,061 0 36,334 36,338 43,499 531 $Eh2NTBEhNCE OF ELECTRIC PLhNT 51,703 0 5.793 14,418 41,492 i 533 IshENTREhlICE OP IIISCELLABIBOUS afDCLEAR PLhlff 1,553 0 541 478 534 Tremesissian empensee 560 SPEAT300t SUPERVIS30st AIID WIGmmuttuG 0 0 0 0 0  ;

tu sTATICII EEPar8BS 1,752 0 0 0 1,752 l 866 SEISCELLhilB008 TRANSIE18810It BEPmISB8 0 0 0 0 0 568 alh23rfmshasCE SUPRRVISIOlt AIID ENG13rRERING 0 0 0 0 0 869 II&ZNTEIEnalCE OF STRUC1 TIRES O O O O O

$70 3Bh2NTENANCE OF STATICIt BOUIPMulrr 31 0 11 9 11 Adudaistrative and General Empenses 920 SALhR258 AltD SEh0BS 11,$35 0 3,686 3,652 4,198 921 OFFICE SUPPLISS ABID EEPWISBS 6,044 0 1,985 1,962 2,097 923 ADIEINISTRATIVB EIFBISE TRANSFERRED. CREDIT C 0 0 0 0 923 OUTSIDE SERVICES BIPLOTED 11,876 0 3,748 3,836 S,302 934 PROPERTY 23BSURANCE 3,142 0 395 430 3,417 935 INJURISS AIED Dhish088 3.164 0 871 959 1,334 936 EMPLorBE PRt810Bf8 AND BENEFITS 23,571 0 7,419 7,531 4,621 928 RBOULhTORY ColeEIS$100f EEPull8E 30 0 14 9 7 930.1 SarERAL hDVERT18Zaf0 EIPWr$38 0 0 0 0 0 I 930.3 IE18CELLhlrB008 GarERAL REPatS58 1,699 0 664 686 349 j 931 RarTS 3,573 0 1,121 1,132 1,320 l 933 Ish3NTWEhNCE OF STRUCTURES AIED 30U171831T 357 0 79 43 96 All other empenses 403 DSPRBCIATICII AND AIBORTIEAT20st EXPatSB8 1,621 0 669 496 456 404 TAIBS CrrHER TNhat 23rCOME ThE58 10,T16 0 3,315 3,358 4,143 409 INCCIEE TA338 6.082 0 3,305 3,381 296 410 PROVIS!QN PCR DEFERRED INCCIIB TAIm8 1,318 0 SOS 609 0 411 790V181018 POR DEFERRED 28tCCBER TAEBS. CREDIT (5,478) 0 (2,739) (2,739) 0 l 411.5 33rVB813EENT TAE CREDIT (66) 0 (33) (33) 0 436.1 DOIIATICIAS 19 0 6 6 1 436.5 OTERE DEDUCT 20st8 490 0 1G0 161 169 437 INTEREST CII IANG TWet 2E378 1,788 1,788 0 0 0 430 23rTEREST 018 DEST TO ASSOCIATE CEREPANIBS 0 0 0 0 0 431 UTIER 33rTER38T EEPatSE 476 36 330 230 0 TOTAL EEPWIS38 e $472,433 $2,939 $137,793 $139,190 $193,531 eeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeoeooooooooooooooooooe.

INSTRUCTICIISs Zadieete each departammt er service fumetion. (See Emetruction 01 3 esmeral Stmeture of Accounting systems timiform system of Accounts) i 1

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 SCHEDULE XVII KEYS FOR SERVICE FUNCTIONS KEYS SERVICE FUNCTION The individual generating units for which NNECO provides service are listed separately on Page 24.

ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For ths Yccr End

d Dec mber 31, 1996 DEPARTMENTAL ANALYSIS OF RALARIES DEPARTMENTAL SALARY EXPENSE NAME OF DEPARTMENT INCLUDED IN AMOUNTS BILLED TO NUMBER OF

---

--------------------------------------- PERSONNEL Indicate each dept. TOTAL PARENT OTHER NON END l or service function. AMOUNT COMPANY ASSOCIATES ASSOCIATES OF YEAR 1

l (Thousands of Lollars)  :

MILLSTONE UNIT #1 $25,307 $0 $25,307 $0 374 i

1 MILLSTONE UNIT #2 26,557 0 26,557 0 387 MILLSTONE UNIT #3 34,453 C 23,435 11,018 513

$86,317 $0 $75,299 $11,018 1,274 I

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l l ANIMAL REPORT OF NORTEAST IUCLEAR DERGY COMPANY l

l l For the Year Ended Decoder 31,1996 1

! OUTSIDE SERVICES ENPLOYED ,

1 INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the l aggregate amounts paid to any one payee and included within one subaccount l 1s less than $100.000, only the aggregate number and amount of all )

such payments included within the subaccount need be shown. Provide a i subtotal for each type of service. l RELATIONSHIP

• A*. ASSOCIATE m*.NON FROM IMOM PURCHASED ADDRESS ASSOCIATE AMOUNT l (Thousands of Dollars)

ENGINEERING SERVICES CATARACT INC E $3.202 GEERAL ELECTRIC NA 1.525 10 CON NA 1.058 NARIER ENGIEERING INC E 912 RAYTE 0N QUALITY PROGRAMS O!V E 843 CONTRACT SOLUTIONS NA 703 STONE & WEBSTER ENGINEERING E 658 YANKEE ATOMIC ELECTRIC C0 m 365 AERICAN SCIENTIFIC INC NA 240 ABB COPEUSTION ENGINEERING NA 220 DUKE ENGINEERING & SERVICG E 215 ALTRAN CORP NA 145 GENERAL PHYSICS CORP NA 135 10M ENGINEERING CORP NA 130 ONSITE E 129 FRAMATOME TECHNOLOGIES ESP NA 105 j STONE & WEBSTER CONST CO INC NA 103 ,

NISCELLANE005 (18 PAYEES) NA 504 TOTAL ENGINEERING SERVICES $11.192 LEGAL SERVICES NORGAN LEWIS & BOCKIUS LLP NA $2.064 WINSTON & STRAWN E 715 DAY BERRY & HOWARD NA 419 UPOIKE KELLY & SPELLACY NA 166 i NISCELLANEOUS (3 PAYEES) NA 124 i TUTAL LEGAL SERVICES $3.488

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AINAL REP (RT OF NORTEAST MJCLIAR EERGY COMPANY For the Year Ended December 31, 1996 OllTSIDE SERVICES EMPLOYED l INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the aggregate amounts paid to arty one payee and included within one subaccount is less than $100.000, only the aggregate number and amount of all such payments included within the subaccount need be shown. Provide a subtotal for each type of service.

RELATIONSHIP

'A*. ASSOCIATE

• m*.NON FROM WJM PLRCHASED ADDRESS ASSOCIATE AMOUKT (Thousands of Dollars)

SECLRITY SERVICES BURNS INTERNATIONAL SECLRITY SERVICES NA $8.551 C & G VIDEO SYSTEMS INC NA 125 MISCELLANEOUS (1 PAYEE) M 1 TOTAL SECLRITY SERVICES $8.677 TELECOMMUNICATION SERVICES

$ NET NA $294 AT&T NA 243 MISCELLANEOUS (5 PAYEES) NA 13 TOTAL TELECO M JNICATION SERVICES $550 TEMPORARY EMPLOYMENT SERVICES HANPOWER INC NA $576 INST OF NUCLEAR POWER OPERATORS NA 146 TUTAL CONSULTING SERVICES $722 WASTE DISPOSAL SERVICES CEM NUCLEAR SYSTEMS INC NA $861 ,

SCIENTIFIC ECOLOGY GROUP INC NA 377 PH REFUSE REMOVAL SERVICE INC NA 149 I TOTAL E STE DISPOSAL SERVICES $1.387 ETER TREATMENT SERVICES ECOLOCEM NA $1.010 TOTAL WATER 1REATHENT SERVICES $1.010 27A-i

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1. NJAL REPORT OF NORTEAST MJCLIAR DOGY COWANY For the Year Ended December 31,1996 OLTTSIDE SERVICES EMPl.0YED INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the

( aggregate amounts paid to any one payee and included within one subaccount is less than $100.000 only the aggregate tamber and amount of all such payments included within the subaccount need be shown. Provide a subtotal for each type of service.

l RELATIONSHIP l 'A*. ASSOCIATE m*.NON FROM WHOM PURCHASED ADDRESS ASSOCIATE AMOUNT (Thousands of Dollars)

OTER SERVICES BLRSON MARSTELLIR NA $1.897 JANUS MANAGEMENT ASSOCIATES NA 120 TERMO NLfrECH E 120 ADEPT,INC E 113 MISCELLANEOUS (355 PAYEES) M 3.293 TUTAL OTER SERVICES $5.543 NORTEAST UTILIITES SERVICE COMPANY (Supplies centralized accounting, seeinistrative, data processing.

engineering. financial legal, operational. planning, purchasing and other services) A $12.486 GRAND TOTAL 545.055 1

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AfstlAL REPORT OF NORTEAST lilCLf.AR EIERGY COWANY For the Year Ended Decenter 31,1996 l l

OLITSIDE SERVICES EMPLOYED FOR PAYEES WEATER TieN $100.000 PAYEE NAE DESCRIPTION OF SERVICES RE10ERED  !

I Engineering Services f Cataract Inc Provide Millstone Technical Support in Design Basis Resolution And l Other Work Required For Startup.

General Electric Furnish Low Voltage Switchgear And Transformers tilCON Audit Performance Of QA Activities Associated With lilPOC Facilities and Engineering Services Mariner Engineering Inc Provide Knowledgeable Staff Assistant To support Millstone Instrument

& Control l Raytheon Quality Programs Div Provide Services To Support Mp3 Fsar [ Design) Review Effort Contract Solutions Provide Services To Support The Restart Activities Assessment i Stone & Webster Engineering Provide Engineering Services Vankee Atomic Electric Co Furnish Engineering Services As Required To support The Independent i Assessment Team American Scientific Inc Furnish The Engineering Services To Support The 50.54(F) Response And Restart ABB Combustion Engineering Provide Engineering Services Duke Engineering & Services Furnish Engineering Services As Required To Provide Small Bore Piping Qualifications For Millstone Unit 1 Altran Corp Provide Engineering Services To Assist With: Motor Operated Valves.

Erosion / Corrosion General Physics Corp Provide Consulting Services To Support Independant Assessment For Restart Activities For The Nuclear Units J Men Engineering Corp Furnish Engineering Services For A Revision To The Emergency j Operating Procedure Setpoint Calculation j onsite Furnish Engineering Support For The 10 Cfr 50.54 (F) Configuration ]

Management Reviews At Millstone  !

Frematome Technologies Esp Furnish The Engineering Services Of Task Coordinators For Planning I and Outage Management ..

Stone & Webster Const Co Inc Provide Labor And Supervision For NUSOER 92 02 Non Crd Support Modification Legal Services Morgan Lewis & Bockius L1p Furnish Legal Services On An As Requested Basis Winston & Strewn Furnish Legal Services On An As Requested Basis Day Berry & Howard Furnish Legal Services On An As Requested Basis Updike Kelly & Spellacy Furnish Legal Services On An As Requested Basis i Security Services Burns Inti Security Services Furnish Security Services And Equipment For Ikseline Security Support C & G Video Systems Inc Provide Close Circuit T.V. Camera And Monitoring Support As Needed j Telecommunication Services SIET Provide Telephone Services AT&T Provide Telephone Services i

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N8RAL REPORT OF NORT) EAST WCLEAR DERGY COMPANY For the Year Ended December 31.1996 0UTSIDE SERVICES EMPLOYED FOR PAYEES IREATER T)MN 8100.000 PAYEE IME DESCRIPTION OF SERVICES RDOERED Temporary Employment Services f Manpower Inc Furnish Tauporary Labor Services Inst of Nuclear Power Oper Provide The Services Of Esployees Loaned To Hesber Companies i

Weste Disposal Services j Chem Nuclear Systems Inc Provide Radioactive Material Transportation Services And Equipment Scientific Ecology Group Inc Furnish Super Compaction. Incineration And/Or Other Volume Reduction i Services  !

PM Refuse Removal Service Inc Furriish Rubbish / Recyclable Services At Millstone l

Water Treatment Services Ecolochen Provide Water Treatment Purification Services Other Services Burson Marsteller Provide Consulting Services For Capacity Comunication And Other Nuclear Issues Janus Management Associates Furnish Consulting Services In Connection With Watch List Matters Thermo Nutech Furnish Weste Stream Analysis With Per1 odic Sampling / Support Current 10cfr. Part 61 Compliance Program Adept Inc Provide Programing Support / Services 1

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ANNUAL REPORT CF NORTHEAST NUCLEAR ENERGY COMPANUY Far the Ystr Ended Dec;mber 31, 1996 EMPLOYEE PENSIONS AND BENEFITS ACCOUNT 926 l

i INSTRUCTIONS: Provide a listing of each pension plan and benefi) program provided by the service company. Such listing should be limited to $25,000.

DESCRIPTION AMOUNT (Thousands of Dollars)

Pension Plan $8,105 Supplemental Retirement and Savings Plan 3,220 Post Retirement Medical Benefit - FAS 106 3,638 Early Retirement Program 213 i Group Life, Long-term Disability, Hospital and Medical Insurance Expenses 8,313 l

System Newspaper 50 ,

Other Employee Benefits Expenses 32 l l

TOTAL $23,571 I

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 GENERAL ADVERTISING EXPENSES ACCOUNT 930.1 INSTRUCTIONS: Provide a listing of the amount included in Account 930.1,

" General Advertising Expenses," classifying the items according to the nature of the advertising and as defined in the account definition. If a particular class includes an amount in excess of $3,000 applicable to a single payee, show separately the name of the payee and the aggregate amount applicable thereto. ,

DESCRIPTION NAME OF PAYEE AMOUNT (Thousands of Dollars)

......... i TOTAL $ -

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996  :

MISCELLANEOUS GENERAL EXPENSES ACCOUNT 930.2 INSTRUCTIONS: Provide a listing of the amount included in Account 930.2,  :

" Miscellaneous General Expenses," classifying such expenses according to their nature. Payments and expenses permitted by Sections 321(b) (2) of the Federal Election Campaign Act, as amended by Public Law 94-283 in 1976 (2 U.S.C.

5441 (b) (2) ) shall be separately classified.

DESCRIPTION AMOUNT (Thousands of Dollars)

Services billed from Northeast Utilities Service $1,693 Company (an associate company) ,

r other miscellaneous expenses 6  !

TOTAL $1,699 I

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ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 RENTS INSTRUCTIONS: Provide a listing of the amount included in Account 931,

" Rents," classifying such expenses by major groupings of property, as defined in the account definition of the Uniform System of Accounts.

TYPE OF PROPERTY AMOUNT (Thousands of Dollars)

Buildings / office space $99 Computer / office equipment 119 i Vehicles' 870 l simulator 5,490 services billed from Northeast Utilities Service Company (an associate company) 5,301 TOTAL $11,879 I

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l ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY For the Year Ended December 31, 1996 TAXES OTHER THAN INCOME TAXES ,

ACCOUNT 408 I

f INSTRUCTIONS: Provide an analysis of Account 408, " Taxes Other Than Income Taxes." Separate the analysis into two groups:

(1)Other than U.S. Government taxes, and (2) U.S.  ;

Government taxes. Specify each of the various kinds of l taxes and show the amounts thereof. Provide a subtotal i for each class of tax.

F.IND OF TAX AMOUNT (Thousands of Dollars) ]

I (1) Other Than U.S. Government Taxes:

Connecticut Unemployment $602 l Massachusetts Unemployment 16 l Massachusetts Universal Health Tax 1 j Local property 1,148 Connecticut Sales Tax 5 Connecticut Hazardous Waste Transportation Tax 1 l

Sub-Total 1,773 (2) U.S. Government Taxes:

Federal Insurance Contribution Act 6,720 Medicare Tax 1,835 J Federal Unemployment 145 Federal Excise 243 l Sub-Total 8,943 TOTAL 10,716

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A16KEL REPCRT OF NORDIEMrr NUCulAR ElNERGY 034PANY Por the Year Ended Decenber 31, 1996 DCNETIOG ACCXNT 426.1 ZNB'lltDCTICNS: Provide a listing of the anount included in Account 426.1, 'Danations,"

classifying such expenses by its purpose. 2he aggregate runber and amount of all items of less than $3,000 may be shcun in lieu of details.

l@ME OF RECIPIEWT PURPOSE OF DCNNTICH AMINT (7%=_im. a of Dollars) services billed from Northeast Utilities $16 Service Canpany (an associate aanpany)

Miscellaneous (28 payees) 3 1

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• IUIAL $19 l

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"Other Deductions," classifying such expenses according to their nature.

DESCRIPTION NAME OF PAYEE AMOUNT l (Thousands of Dollars)

. I Executive incentive compensation plan various officers $27 services billed from Northeast Utilities Service company  !

(an associate company) 362 Civil Penalties United States Nuclear Regulatory Commission 100 Miscellaneous (2 items) 1 TOTAL $490 i

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o 3 ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY l

For the Year Ended December *31, 1996 SCHEDULE XVIII NOTES TO STATEMENTS OF INCOME l INSTRUCTIONS: The space below is provided for important notes regarding the

! statement of income or any account thereof. Furnish particulars as to any significant increases in services rendered or expenses incurred during the year. Notes relating to financial statements shown elsewhere in this report may be indicated here by reference.

See Notes to Financial Statements on pages 19 through 19F.

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I Annual Report of Northeast Nuclear Energy Company Organization Chart (as of December 31,1996) l President

and Chief Executive

! Officer- Nuclear i

l senior

Vice President and Chief Nuclear i Officer- Millstone I I I Unit Officer Unit Officer Unit Officer I Millstone Unit #1 Millstone Unit #2 Millstone Unit #3 a

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NORTMEAST NUCLEAR ENERGY COMPANY ,

................................ j METHODS OF ALf4 CATION i For the year ended December 31, 1996 l  !

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The costs associated with the three Millstone units are billed directly or allocated using one of three methods. The allocation t methods are as follows:

(

1. One-third to each units  !

2. Number of employees; .

3. Net capacity of each unit.

If Millstone Unit 3 is not part of the allocation, then the allocated costs to Millstone 1 and 2 are on the basis of one-half to each of the two units.

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. *. o ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED <

P 4

The following annual statement was supplied to each associate company in aupport of the amount of compensation for use of capital billed during 1996:  ;

In accordance with Instruction 01-12 of the Securities and Exchange Commission's Uniform system of Accounts for Mutual Service Companies and Subsidiary Service Companies, Northeast Nuclear Energy Company submits the following information on the billing of interest on borrowed funds and a return on equity capital to associated companies for the year 1996:

(A) Amount of compensation for use of capital billed to (See Note)

(B) The basis for billing of interest and return on equity capital to the associated companies is based on the percentage ownership of the individual units.

NOTE: For the associate companies and amounts, see " Analysis of Billing - ,

, Associate companies" on page 21.

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o *. e ANNUAL REPORT OF NORTHEAST NUCLEAR ENERGY COMPANY SIGNATURE CLAUSE Pursuant to the requirements of the Public Utility Holding Company Act of 1935 and the rules and regulations of the Securities and Exchange Commission issued thereunder, the undersigned company has duly caused this report to be signed on its behalf by the undersigned officer thereunto duly authorized.

NORTHEAST NUCLEAR ENERGY COMPANY (Name of Reporting Company)

By:/s/ John J. Roman (Signature of Signing Officer)

John J. Roman - Vice President and Controller I (Printed Name and Title of Signing Officer) I 1

Date: April 25,1997 i

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. Form U-13-60 l Mutual and Subsidiary Service Companies i Revised February 7,1980 l

l ANNUAL REPORT '

FOR THE PERIOD .

l Beginning Januarv 1,1996 and ending December 31,1996 TO THE U.S. SECURITIES AND EXCHANGE COMMISSION OF l North Atlantic Enerav Service Corooration A Subsidiarv Service Company Date of incorporation: April 1.1992 l

l State or Sovereign Power under which incorporated or Organized: New Hemoshire Location of Principal Execubve Offices of Reporting Company:

Route 1. Lefevette Rd.. Seabrook, NH,03874 l

Name, title and address of officer to whom correspondence concerning this report should be addressed:

John J. Roman V.P. & Controller P.O. Box 270. Hertford, Ct. 06141 0270 Name of Principal Holding Company Whose Subsidiaries are served by Reporting Company:

Northeast Utilities

INSTRUCTIONS FOR USE OF FORM U-13-60

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

2. Numt'er of Cooies. Each annual report shall be filed in duplicate. The company should prepare and retain at least one extra copy for itself in case correspondence with reference to the report become's ncessary.

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

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

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

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

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

8. Definitions. Definitions contained in Instruction 01-8 to the Uniform System of Accounts for {

i Mutual Service Companies and Subsidiary Service Companies, Public Utility Holding Company Act of I 1935, as amended February 2,1979 shall be applicable to words or terms used specifically within this Form U-13-60.

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

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

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

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i LISTING OF SCHEDULES AND ANALYSIS OF ACCOUNTS Schedule or Page Descriotion of Schedules and Accounts Acet. No. No.

Comparative Balance Sheet Schedule 1 4-5 Service Company Property Schedule 11 6-7 Accumulated Provision for Depreciation and Amortization of Service Company Property Schedule ill 8 Investments Schedule IV 9 Accounts Receivable from Associate Companies Schedule V 10 Fuel Stock Expenses Undistributed Schedule VI 11 Stores Expense Undistributed Schedule Vil 12 Miscellaneous Current and Accrued Assets Schedule Vill 13 l l

Miscellaneous Deferred Debits Schedule IX 14 Research, Development, or Demonstration Expenditures Schedule X 15 l Proprietary Capital Schedule XI 16 Long Term Debt Schedule Xll 17 Current and Accrued Liabilities Schedule Xill 18 Notes to Financial Statements Schedule XIV 19 Comparative income Statement Schedule XV 20 Analysis of Billing - Associate Companies Account 457 21 Analysis of Billing - Non-Associate Companies Account 458 22 Analysis of Charges for Service - Associate and Non-Associate Companies Schedule XVI 23 Schedule of Expense by Department or Service Function Schedule XVil 24 - 25 Departmental Analysis of Salaries Account 920 26 l

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s I Schedule or Page

. Descriotion of Schedules and Accounts (cont.) Acet. No. _Ng.,,

Outside Services Employed Account 923 27 Employee Pensions and Benefits Account 926 28 l General Advertising Expenses Account 930.1 29 a

Miscellaneous General Expenses Account 930.2 30 Rents Account 931 31 Taxes Other Than income Taxes Account 408 32  ;

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Donations Account 426.1 33 j 4 Other Deductions Account 426.5 34 Notes to Statement of Income Schedule XVill 35 l

Descriotion of Reoorts or Statements l Organization Chart 36 i Methods of Allocation 37 Annual Statement of Compensation for Use of Capital Billed 38 Signature Page 39 l

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION l

SCHEDULE I - COMPARATIVE BALANCE SHEET

)

l Give balance sheet of the Company as of December 31 of the current and prior year.

l Acct Assets Amo oTsER ozsITs As or DECEMBER 31 l

}

i 1996 1995 j SERVICE COMPANY PROPERTY < m .. 4. .: nonu.)

i 101 Service company property (Schedule ll) $ 0 $- 0 107 Construction work in progress (Schedule 11) 0 0

] Total Service Company Property 8 0 $ 0 i -

, 108 Less accumulated provision for depreciation and amortization of service company property (Schedule lii) $ 0 $ 0 3

Not Service Company Property $ 0 $ 0 i

INVESTMENTS i 123 investments in associate companies (Schedule IV) $ 0 $ 0 124 Other investments (Schedule IV) 0 37 3

i Total investments $ 0 $ 37 CURRENT AND ACCRUED ASSETS j 131 Cash $ 725 $ 740

134 Special deposits 0 0 i 135 Working funds 0 21 j 136 Temporary cash investments (Schedule IV) 14 11 i 141 Notes receivable 0 0 j 143 Accounts receivable 51,111 25,430

144 Accumulated provision of uncollectible accounts 0 0 1 146 Accounts receivable from associate companies (Schedule V) 523 147 j 152 Fuel stock expenses undistributed (Schedule VI) 0 0 154 Materials and supplies 0 0 ,

163 Stores expense undistributed (Schedule Vil) 298 0  !

3 165 Prepayments 3,024 2,900 l l 174 Miscellaneous current and accrued assets (Schedule Vill) 0 0 Tch! Current and Accrued Assets $ 55,695 $ 29,329 pjfgRRED DEBITS f 181 Unamortized Debt Expense $ 0 $ 0 '

' 0 0 184 Clearing accounts

- 186 Miscellaneous deferred debits (Schedule IX) 20,348 19,292  ;

i 188 Research, development, or demonstration l expenditures (Schedule X) 0 0 ,

. 190 Accumulated deferred income taxes 313 0 Total Deferred Debits $ 20,661 $ 19,292 TOTAL ASSETS AND OTHER DEBITS $ 76.356 $ 48.658 f

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION i

SCHEDULE i - COMPARATIVE BALANCE SHEET j Give balance sheet of the Company as of December 31 of the current and prior year.

l ACCT LIABILITIES AND PROPRIETARY CAPITAL As oF DECEMBER 31 l 1996 1995 i PROPRIETARY CAPITAL cn u 4. er penar.: i 201 Common stock issued (Schedule XI) $ 1 $- 1 .

i 211 Miscellaneous pald-in-capital (Schedule XI) 9 9 215 Appropriated retained earnings (Schedule XI) 0 0

. 216 Unappropriated retained earnings (Schedule XI) 1 1 i

1 Total Proprietary Capital $ 11 $ 11 l

, LONG-TERM DEBT

223 Advances from associate companies (ScheduleXil) $ 0 $ 0 224 Other long-term debt (Schedule XII) 0 0 225 Unamortized premium on long-term debt 0 0 226 Unamortized discount on long-term debt 0 0 Total Long-Term Debt $ 0 $ 0 CURRENT AND ACCRUED LIABILITIES 231 Notes payable $ 0 $ 0 232 Accounts payable 41,425 14,192 233 Notes payable to associate companies (Schedule Xill) 0 0 234 Accounts payable to associate companies (Schedule XIll) 1,994 2,623 236 Taxes accrued 376 662 237 Interest accrued 0 0 238 Dividends declared 0 0 241 Tax collections payable (56) 53 242 Miscellaneous current and accrued liabilities (Schedule XIll) 29,483 27,438 Total Current and Accrued Liabilities $ 73,222 $ 44,968 DEFERRED CREDITS 253 Other deferred credits $ 3,123 $ 3,679 255 Accumulated deferred investment tax credits 0 0 Total Deferred Credits $ 3,123 $ 3,679 282 ACCUMULATED DEFERRED INCOME TAXES $ 0 $ 0 TOTAL LIABILITIES AND PROPRIETARY CAPITAL $ 76,356 $ 48,658 e

3 t ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION Forthe Year Ended December 31,1996 SCHEDUE 11 - SERVICE COMPANY PROPERTY BAIANCE AT RETIREMENTS BALANCE BEGINNING OR OTHER AT CLOSE ACCT DESCRIPTION OF YEAR- ADDITIONS SAI.E S CHANCES (1) OF YEAR (thouesnes of Doests)

SERVICE COMPANY PROPERW 301 ORGANIZATION 303 MISCELLANEOUSINTANGIBE PLANT 304 LAfC AND LAND RIGHTS 305 STRUCTURES AND IMPROVEMENTS 306 LEASEHOLD IMPROVEMENTS 307 EQUIPMENT (2) NONE 308 OFFICE FURNITURE AND EQUIPMENT 309 AUTOMOBIES, OTHER VEHICES AND RELATED GARAGE EQUIPMENT 310 AIRCRAFT AND AIRPORT EQUIPMENT 311 OTHER SERVICE COMPANY PROPERTY (3)

(t) PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL:

NONE SCHEDULE II - CONTINUED l

(2) SUBACCOUNTS ARE REQUIRED FOR EACH CLASS OF EQUIPMENT OWNED.THE SERVICE COMPANY SHALL PROVIDE A LISTING BY SUBACCOUNT OF EQUIPMENT ADDITIONS DURING THE l YEAR AND THE BALANCE AT THE CLOSE OF THE YEAR-I BALANCE )

AT CLOSE j SUBACCOUNT DESCRIPTION ADDmONS OFYEAR (Thousands of Dollars) )

l NONE  ;

(3) DESCRIBE OTHER GERV!,E COMPANY PROPERTY:

NONE i

ANNUAL REPORT OF NORTH ATLANTIC ENER3Y SERVICE CORPORATION For the Year Ended December 31,1996 SCHEDULE lil ACCUMULATED PROVISION FOR DEPRECIATION AND AMORTIZATION OF SERVICE COMPANY PROPERTY ADDITIONS OTHER

, , RAIANCE AT CEARGED CEANGES BAIANCE

BEGINNING TO ADD / AT CLOSE

DESCRIPTION OF YEAR ACCT 403 RETIREMENTS (DEDUCT)(1) OF YEAR l

(Thousands of Dollars) )

Account -

301 ORGANIZATION

303 MISCELLANEOUS INTANGIBLE PLANT 4 304 LAND AND LAND RIGHTS 305 STRUCTURES AND IMPROVEMENTS 306 LEASEHOLD IMPROVEMENTS l

307 EQUIPMENT NONE l

308 OFFICE FURNITURE AND FlXTURES )

309 AUTOMOBILES, OTHER VEHICLES j AND RELATED GARAGE EQUIPMENT

! 310 AIRCRAFT AND AIRPORT EQUIPMENT J

} 311 OTHER SERVICE COMPANY PROPERTY

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AMORTIZATION OF SERVICE COMPANY PROPERTY i

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] (1) PROVIDE AN EXPLANATION OF THOSE CHANGES CONSIDERED MATERIAL:

NONE t

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 SCHEDULE IV - INVESTMENTS INSTRUCTIONS: Complete the following schedule conceming investments.

l Under Account 124, "Other Investments," state each investment separately, with description, including the name of issuing company, number of shares or principal amount, etc.

Under Account 136, " Temporary Cash investments," list each investment separately.

BALANCE AT BALANCE AT BEGINNING CLOSE l DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars)

ACCOUNT 123 - INVESTMENT IN ASSOCIATE COMPANIES $ 0$ 0 ACCOUNT 124 - OTHER INVESTMENTS Fleet Bank - RabbiTrust Fund 37 0 i

ACCOUNT 136 - TEMPORARY CASH INVESTMENTS I l

Fidelity Institute Tax Exempt Cash Portfolio 11 11 Citizens Bank Certificate of Deposit 0 3 i

l TOTAL $ 48 $ 14 l

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 SCHEDULE V -- ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES INSTRUCTIONS: Complete the following schedule listing accounts receivable from each associate company. Where the service company has provided accommoda-tion or convenience payments for associate companies, a separate listing of total payments for each associate company by subaccount should be provided.

BAIANCE AT BAIANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars)

ACCOUNT 146 - ACCOUNTS RECEIVABLE FROM ASSOCIATE COMPANIES Northeast Utilities Service Company $ 109 $ 364 Northeast Nuclear Energy Company 16 155 North Atlantic Energy Corporation B 3 Public Service Company of New Hampshire 14 1 TOTAL $ 147 $ 523 ANALYSIS OF CONVENIENCE OR ACCOMMODATION PAYMENTS:

NONE 1

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 SCHEDULE VI - FUEL STOCK EXPENSES UNDISTRIBUTED INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to fuel stock expenses during the year and indicate amount attributable to each associate company. Under the section headed " Summary" listed below, give an overall report of the fuel functions performed by the service company.

l DESCRIPTION IABOR EXPENSES TOTAL l (Thousands of Dollars)

ACCOUNT 152 - FUEL STOCK EXPENSES NONE UNDISTRIBUTED

O b ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 SCHEDULE Vil - STORES EXPENSE UNDISTRIBUTED INSTRUCTIONS: Report the amount of labor and expenses incurred with respect to stores expense during the year and indicate amount attributable to each associate company.

l DESCRIPTION IABOR EXPENSES TOTAL]

(Thousands of Dollars)

ACCOUNT 163 - STORES EXPENSE UNDISTRIBUTED Balance at prior year end $ 0$ 0$ 0 Amount incurred during the year 1,794 126 1,920 The above stores expenses are billed back to each of the companies listed below:

1 Associate Companies:

The Connecticut Light and Power Company (61) (5) (66)

North Atlantic Energy Corporation (543) (41) (584) l Non-Associate Companies (904) (68) (972) l l

j TOTAL $ 286 $ 12 $ 298 l

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION Forthe Year Ended December 31,1996 SCHEDULE Vill MISCEU ANEOUS CURRENT AND ACCRUED ASSETS .

INSTRUCTIONS: Provide detail of items in this account. Items less than $10,000 may be a grouped, showing the number of items in each group.

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BAIANCE AT BALANCE AT BEGINNING CLOSE DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars) l i

l ACCOUNT 174 - MISCELLANEOUS CURRENT NONE  ;

AND ACCRUED ASSETS l l

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4 ANNUAL REPORT OF NORTH ATI. ANTIC ENERGY SERVICE CORPORATION i 1

$ For the Year Ended December 31,1996 l

) SCHEDULE IX

! MISCELLANEOUS DEFERRED DEBITS 2

INSTRUCTIONS: Provide d'etail of items in this account. Items less than $10,000 may be '

grouped, showing the number of items in each group.

BALANCE AT BAIANCE AT l BEGINNING CLOSE l

1 DESCRIPTION OF YEAR OF YEAR (Thousands of Dollars)

ACCOUNT 186 - MISCELLANEOUS DEFERRED DEBITS l

i l Noncurrent receivable from Joint Owner funding $ 15,161 $ 19,075 Accrued construction period Worker's Compensation claims 2,022 0 i Westinghouse Reactor Coolant Pump Settlement 1,434 987

. North Atlantic Energy Service Corporation Organization Cost 56 19 Accounting Treatment Change for Payroll 388 358 4

Required bank deposit 3 0 Miscellaneous (>100 items) 0 (251)

{ Preliminary Engineering for:

Equipment hatch barrier 36 0

Telephone switch replacement 16 0 l Secondary control system modifications 17 0 i Security system replacement 0 10 l Administration building addition 0 11 Spent fuel pool upgrades 86 0 Hotwelllevel control 58 0 Service water improvements 0 59

+

Integrated reactor vessel head 0 40 Steam generator blowdown 0 30 I Miscellaneous (4 items 1995,4 items 1996) 15 10 1

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TOTAL $ 19,292 $ 20,348 i

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 4

SCHEDULE X RESEARCH, DEVELOPMENT, OR DEMONSTRATION EXPENDITURES INSTRUCTIONS: Provide a description of each material research, development, or demonstration project which incurred costs by the service corporation during the year.

l DESCRIPTION AMOUNT l (Thousands of Dollars)

ACCOUNT 188 - RESEARCH, DEVELOPMENT OR NONE DEMONSTRATION EXPENDITURES l

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 SCHEDULE XI PROPRIETARY CAPITAL NUMBER OF PAR OR STATED ACCOUNT SHARES VALUE OUTSTANDING CIDGE OF PTRIOD NUMBER CLASS OF STOCK AUTHORIEED PER SHARE NO. OF SHARES TOTAL AMOUNT (Thousands of Dollars) 201 COMMON STOCK ISSUED 1,000 $ 1.00 1,000 $ 1 INSTRUCTIONS: Classify amounts in each account with brief explanation, disclosing the general nature of transactions which give rise to the reported amounts.

l DESCRIPTION AMOUNT l w . w D a m>

ACCOUNT 211 - MISCELLANEOUS PAID-IN-CAPITAL $ 9 ACCOUNT 215 - APPROPRIATED RETAINED EARNINGS 0 TOTAL $ 9 INSTRUCTIONS: Give particulars concerning net income or (loss) during the year, distinguishing between compensation for the use of capital owed or net loss remaining from servicing nonassociated per the GeneralInstructions of the Uniform Systems of Accounts. For dividends paid during the year in cash or otherwise, provide rate percentage, amount of dividend, date declared and date paid.

BALANCE AT NET INCOME BALANCE BEGINNING OR DIVIDENDS AT CLOSE DESCRIPTION OF YEAR (LOSS) PAID OF YEAR (Thousands of Dollars)

ACCOUNT 216-UNAPPROPRIATED RETAINED EARNINGS

$ 1$ 0* $ 0 $ 1

• Miscellaneous adjustment to retained earnings offset net income which resulted in a net zero dollar.

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 '

SCHEDULE X11 i

i LONG-TERM DEBT i t

INSTRUCTIONS: Advances from associate companies should be reported separately for advances on notes, and j

advances on open account. Names of associate companies from which advances were received shall be

,' shown under the class and series of obligation column. For Account 224 -- Other long-term debt provide the name of creditor company or organization, terms of obligation, date of meurity, interest rate, and the amount authorized and outstanding.

TERMS OF OBLIG. DATE BALANCE AT BAIARCE AT j CLASS & SERIES OF INTEREST AMOUNT BEGINNING DEDUCTIONS CLOSE ,

j I NAME OF CREDITOR OF OBLIGATION MATURITY RATE AUTHORIEED OF YEAR ADDITIONS (1) OF YEAR  !

[ (Thousands of Dollars) w i ACCOUNT 223-ADVANCES FROM ASSOCIATE COMPANIES 1

TOTAL ADVANCES FROM ASSOCIATES NONE ACCOUNT 224-OTHER  !

LONG-TERM DEBT l TOTALOTHER LONG-TERM DEBT NONE e

E (1) GIVE AN EXPLANATION OF DEDUCTIONS:

NONE

_- _ _ _:.s._ _ _ _ _ _ . ____-..__m____.2____.-____-.m._ _ _ - _ _ _ _ _ _ _ _ _ _ _ - _ ---__-_m-_ -. _ . _ _ _ _

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION l

Forthe Year Ended December 31,1996

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SCHEDULE XIll - CURRENT AND ACCRUED UABluTIES I

, i INSTRUCTIONS: Provide balance of notes and accounts payable to each associate company.

l Give description and amount of miscellaneous current and accrued i liabilities. Items less than $10,000 may be grouped, showing the number of items in each group.

BAIANCE AT BALANCE AT )

BEGINNING CLOSE )

l DESCRIPTION OF YEAR OF YEAR -

(Thousands of Dollars) .

ACCOUNT 233 - NOTES PAYABLE TO ASSOCIATE COMPANIES t~

NONE 4

i i ACCOUNT 234 - ACCOUNTS PAYABLE TO ASSOCIAT E COMPANIES j Northeast Utilities Service Company $ 1,773 $ 1,588

Northeast Nuclear Electric Company 174 0 i Public Service Company of New Hampshire 675 173 li The Connecticut Ught & Power Company 0 233 Miscellaneous (1 item) 1 O

l TOTAL $ 2,623 $ 1,994 ACCOUNT 242 - MISCELLANEOUS CURRENT AND ACCRUED UABluTIES Accrued payroll and other employee payables $ 7,455 $ 6,714 Accrued Pension Cost 13,390 17,028 i On-hand operations funding from associate companies:

North Atlantic Energy Corporation 2,372 2,066 The Connecticut Ught & Power Company 268 233 On-hand operations funding from non-associate companies 3,953 3,442 i

i l TOTAL $ 27,438 $ 29,483 i

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NORTH ATLANTIC ENERGY SERVICE CORPORATION i

. NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1996 4

j INSTRUCIlONS: 'Ibe space below is provided for Loyod-4 notes ipm.g the E==ncini statements

or any account thereof Fumish particulars as to any significant contmgent assets j or liabilities existing at the end of the year. Notes relatmg to Anancini statements j ahown elsewhere in this report may be indicated here by reference.

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES l

! General: North Atlantic Energy Service Corporation (the company or NAESCO) is a wholly owned a subsidiary of Northeast Utilitian (NU). The Cannactient Light and Power Company (CL&P), Public i Service Company of New Hampshire (PSNH), Western Maenachusetts Electric C-aaay (WMECO),

i North Atlantic Energy Corporation (NAEC), and Holyoke Water Power C=amay (HWP) are wn-g ,

subsidiaries comprising the Northeast Utilities System (the system) and are wholly owned by NU. -

j l 1he system furnishes retail electric service in C-a~+ient. New H=.T-pake, and western Massachusetts

! through CL&P, PSNH, WMECO, and HWP. NAEC sells all ofits capacity to PSNH. In addition to its

! estail service, the system fumishes firm and other wholesale electric services to various municipalities and l cther utilities. "Ihe system serves about 30 percent of New England's electric needs and is one of the 20 largest electric utthty systems in the country as measured by revenues.

The company acts as agent in operatmg the Seabrook Nuclear Power Project (the Project or Seabrook)

y..ged to the Seabrook Project Managmg Agent Operatmg Asis. cat (the Managmg Agent Apw. cat).

The Project is owned jointly by NAEC and CL&P, both wholly owned subsidiaries of NU and nine nnnanihatarl New Fag 1=ad utility E- ;=!es as tenants in common with undivided interests (the Seabrook j

i Joint Owners). The cost of the Project is recorded on the books of the Joint Owners based upon their

! proportionate ownership share of the Project. 'Ihe company does not have an vs. Lip interest in the l Pmject. The company is only liable for payroll related expenditures and liabilities.1he Seabrook Joint  !

I

! Owners are severally responsible for their respective share of the costs of operstmg and asmia+=ining the Project.

l Ownership percentages of the Project as of December 31,19% were as follows:

) OWNERSHIP I

PARTICIPANTS SHARE i

! Canal Electric Company 3.52317 %

1he Connecticut Light and Power Company 4.05985 l

Great Bay Power Corporation 12.13240

Hudson Light & Power Department .07737

Massachusetts Municipal Wholesale Electric Company 11.59340 Montaup Electric Cenany 2.89989 i

New England Power Company 9.95766 i New Hampshire Electric Cooperative, Inc. 2.17391 j North Atlantic Energy Corporation 35.98201 Taunton Municipal Lighting Plant .10034 1 The UnitedIlluminating Company 17.50000 100.00000 %

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. NORTH ATLANTIC ENERGY SERVICE CORPORATION f I NOTES TO FINANCIAL STATEMENTS i DECEMBER 31,1996 i

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Contmuod)

Other wholly owned subsidiaries of NU provide support services to the company. Northeast Utilities Service Company (NUSCO) provides certain =' ""+ eve support to the company, pursuant to the Service A,-.cs: between NUSCO and NAESCO actung as agent for the Joint Owners of Seabrook, as

===h4 and to other system companies. Bilhngs from NUSCO recorded by the company approximated 38,937,000 and 54,389,000 in 1996 and 1995, respectively. PSNH provides certain services to the company pursuant to the Service Agreement between PSNH and NAESCO actmg as agent for the Joint Owners of Seabrook, as ==W Bilhngs from PSNH recorded by the company were appravi==*1y

$369,000 and $409,000 in 1996 and 1995, respectively.

Yankee Atomic Electric Company (YAEC) provides services to the company pursuant to the Nuclear '

Support Services Agreement between YAEC and NAESCO acting as agent for the Joint Owners of Seabrook, as amended Billings from YAEC recorded by the company approximated $5,029,000 and

$5,664,000 in 1996 and 1995, respectively.

l All transactions among affiliated companies, and between YAEC and the company, are on a recovery of  !

cost basis which may include amounts representing a return on equity, and are subject to approval of I various federal and state regulatory agencies. )

Method Of Accounting: 'Ihe accompanying fmancial statements were prepared in accordance with the Uniform System of Accounts for Mutual and Subsidiary Service Companies, promulgated pursuant to the Public Utility Holding Cn=pey Act of 1935, as modified (1935 Act). This system of accounts follows, with modifications, the Federal Energy Rqmlawy Commission's (the FERC) Uniform System of Accounts and the Managmg Agent Agreement The financial statements reflect expenses associated with managing,

w. Lug, and maintammg the Project, excluding c'+:+. .1: sic"ca costs, property taxes, amortization of nuclear fuel, reserves, and book depreciation. Pursuant to the Managing Agent A,wr,est, NAESCO does not earn a return on capital and therefore, revenues represent the sum of the company's operating expenses The preparation of financial statements requires management to make estunates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estunates also affect the reported amounts of revenues and expenses during the reportmg period. Actual results could differ from those estunates.

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NORTH ATLANTIC ENERGY SERVICE CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1996 -

I.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (rnanma)

Adlic Utility Regulation: NU is i@.4 with the Securities and Fv4=? Comminaion as a holding company under the 1935 Act, and it and its subsidiaries, includmg the company, are subject to the primsions of the 1935 Act. "Ihe company is a registered utility company in the state of New H=i34 and,is subject to appropriate regulation by the New H r.fishire Public Utilities Commission (NHPUC).

'Ihe Joint Owners, whom the company represents as agent, are subject to further regulation by the FERC.

"Ibc company therefore follows the accounting policies prescribed by the FERC.

2. PENSION AND POSTRETIREMENT BENEFITS -

pensionr: Employees of NAESCO are covered by the NU system's uniform wwnatributorydefined benefit plan coverms all of its regular employees Benefits are based on years of service and employees' )

highest w- r=== don during five consecutive years ofemployment 'Ihe company's allocated portion of the l system's pension cost for 1996 and 1995, part of which was capitalized and billed as utility plant,  !

.yy -_..:-- =W $3,638,000 and $2,596 000, respectively. l I

Currently, the system funds annually an amount at least equal to that which will satisfy the requirements of l the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are l determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds

'Ibe w.yes.s ofnet pension cost for the company (in thousands) are: i For theYears Ended December 31, M M Service cost $ 3,749 $3,597 Interest cost 3,567 2,759 Return on plan assets (6,708) (8,703)

Net amortization 3.030 4.943 Net pension cost 13.fi31 $22!fi For calculating pension cost, the following actuarial assumptions were used:

For theYears Ended December 31, M M Discount rate 7.50 % 8.25 %

Expected long-term rate of return 8.75 8.50 Cu r.ycssetion/ progression rate 4.75 5.00

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NORTH ATLANTIC ENERGY SERVICE CORPORATION f NOTES TO FINANCIAL STATEMENTS j DECEMBER 31,1996

2. PENSION AND POSTRETIREMENT BENEFITS (crinemiva)

Tbc followmg table represents the plan's 6mded status for the woy.oy at December 31 (in thousande):

1996 1995 Accumulated bene 6t obligation, including vested benefits at December 31,19% and j 1995 of $23,047,000 and $20,213,000, respectively 1 29 877 $ 26.084 ,

i Projected benefit obligation (PBO) $ 52,049 5 45,334 1.ess: Market value of plan assets 48.656 42.904 l

PBO in excess ofmarket value (3,393) (2,430)

Unrecognized transition amount 819 882 l

Unreei=i prior service costs 6,146 3,184 l Unr~ei-t net gain (20.600) (15.026) l Accrued pensionliability S (17.028) M J

The followmg actuanal assumptions were used in calculating the plan's year end funded status i IPE 1221 l Discount Rate 7.75 % 7.50 %

Con.ys.nr.ation/ progression rate 4.75 4.75 l Postretirement Benefts: The company provides certain health care bene 6ts, primarily medical and dental, and life insurance bene 6ts through a benefit plan to retired employees. "Ihese benefits are available for i employees leaving the company who are otherwise eligible to retire and have met specified service

. requirements. The w~1 cost of postretirement benefits, primarily health and life insurance benefits are i charged to expense during the years that eligible employees render service. Actuanally determmed total

,i health care and life insurance costs, part of which were capitahred and billed as utility plant, approximated

$1,036,000 in 1996 and $1,144,000 in 1995.

l The accumulated postretirement benefit obligation (APBO) represents the company's prior service obligation upon the adoption of Statement of Financial Accounting Standards 106 (SFAS 106) on

! January 1,1993. As allowed by SFAS 106, the company is amoitizmg its APBO of approximately $3

) nulhon over a 20-year period. For current employees and certain retirees, the total postretirement benefit is linuted to two times the 1993 per-retiree health care costs. The postretirement benefit obligation has been

! calculated based on this assumption.

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NORTH ATLANTIC ENERGY SERVICE CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1996 i

2. PENSION AND POSTRETIREMENT BENEFITS (Contmuod) i i

He company funds its poshs .wa bene 6t costs thrr agh investments in external trusts. The trust assets I are invested primarily in equity securities and bonds l l

De following table represents the plan's fundad status at D-har 31 (in thousands):

l M M Accumniatad po.bs- se bene 6t obligation of:

Retirees S 2,836 $ 2,360 Active employees fully eligible to retire 28 0 '

Active employees not eligible to retire _ 4.788 R Total accumulated postretirement benefit obligation 7,652 7,809 Ims: Market value ofplan assets .5.143 3.690 Accumulated po Lso.s.1 bene 6t obligation in excess ofplan assets (2,509) (4,119)

U-m ,.f i M ransition t amount 2,525 2,682 Ume:-:ci M netloss 233 . 1.437 W

Prepaid postretirement benefit $__D The followmg actuanal assumptions were used in calculating the plan's year end funded status:

M M l 7.75 % 7.50 % i Discount Rate Health Care Cost Trend RateN 7.23 8.40 W He per capita cost of covered health care benefits was assumed to decrease to 4.9 percent by 2001. l The s-- ;==ts of health care and life insurance costs for the years ended December 31 (in thousands) are:

M M Service cost S 588 5 605  ;

laterest cost 561 545 Retum on plan assets (500) (566)

Net amortization 387 560 Net health care and life insurance cost L121f S 1144

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NORTH ATLANTIC ENERGY SERVICE CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1996

2. PENSION AND POSTRETIREMENT BENEFITS (Contmued) 1

'Ibc followmg actuanal assumptions were used in calculating SFAS 106 benefit costs:

1996 1995 Dumunt rate 7.50 % 8.00 %

j , long term rate of retum -Health assets, net of tax 5.25 5.00

' Imag term rate of retum -1ife assets 8.75 8.50 l

i *Ibe effect ofincreasing the assumed health care cost trend rates by one percentage point in each year 1 would increase the accumulated postretirement bene 6t obligation as of December 31,1996 by $295,000 and the aggregate of the service and interest cost components of net periodic postretirement bene 6t cost for the year then ended by $43,000. He trust holding the plan assets is subject to federal income taxes at a 35-percent tax rate. )

3. LEASES l

De company, on behalf of the Seabrook Joint Owners, has entered into operatmg lease agreements for certain data processing equipment, office equipment, vehicles and offsite facilities. He company does not enter into capital leases. Operating lease costs charged to expense approximated $1,392,000 and

$2,049,000 in 1996 and 1995, respectively.

De provisions of these lease agreements generally pros , for renewal options. De company has no nancaneAnhle leases.

4. FINANCING Each of the Seabrook Joint Owners is responsible for financing its cost of participation in the Project in proportion to its respective ownership share. Such financing is provided to the Project in advance of such costs being incurred. Herefore, the company has no long-term or short-term debt obligations.

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5. INCOMETAX EXPENSE  :

The components of the federal and state income tax provisions for the year ended Daremnher 31,1996 (in i dwmaanda) are:

l Current income taxes:

Federal $325 State ._(21) l Total current _2K Deferred income taxes, net:

Federal (284) i State ._f22) l Total deferred . fill) i j Totalincome tax expense 132) -

j The w- ;==.ts of total income tax expense for the year ended December 31, 1996 are classified as i foll0W5 i

f Income taxes charged to operating expenses $(83) i Otherincome taxes -

Totalincome tax expense 132) l t

Deferred mcome taxes at December 31,1996 are comprised of the tax effects of temporary differences as i follows  :

Software amortization $(596) i Workforce reduction (138) hsuries and damages reserve 351 Accrued vacation 51

Other ___12

- Deferred income taxes, net E212) i

! A reconciliation between income tax expense and the WM tax expense at the applicable statutory rate

in the year ended December 31,1996 (in thousands) is as follows:

a j F-;+3M federal income tax at 35 percent of pretax income $ (29) l Tax effect ofdifferences:

j State income taxes, net of federal benefit (81)

Other, net _ 22

Totalincometax expense gla)

(

) The company, as a wholly owned subsidiary of NU is included in NU's consolidated return income tax i expense is determined on a separate company basis. On January 1,1996, a retroactive adjustment was i made to accrue income taxes from inception to December 31,1995 and is included in the 1996 tax j provision " Ibis retroactive adjustment did not have a material impact on NAESCO's financial position or j sesults ofoperations.

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6. NRC ACTIVITIES l Northeast Nuclear Energy Cana=ay, another NU subsidiary, acts as agent for CIAP, PSNH and i

WMECO in managing and eg.. dug the three Mdistone generating facilities in C-icut. Mdistone 1, I 2, and 3 have been out of service since November 4,1995, February 21,1996 and March 30, 1996, respectively, and are on the NRC's watch list. NU has restructured its nuclear orpniratian and is currently

imp'. . og comprekneive plans to restart the units.

On October 9,1996, the NRC issued a request for information concerning all nuclear plants in the Umted

{ States, excluding the three Mdistone units which had previously received such requests. Such information 1 will be used to verify that these facdstics are being operated and ==i*=i=~i in accordance with NRC i segulatiane and the unit's specific licenses *Ibe NRC has indicated that the inforrnatian will be used to determine whether future inspection or enforcement activities are warranted for any plant. NAESCO has i submitted its response to the NRC's request with respect to Seabrook. Seabrook's operations have not 3 been restricted by the request. 'Ibe NRC's April 1996 comprenensive review found Seabrook to be a well-operated facility without any major safety issues or waakaa==ae and noted that it would reduce its future -

l j inspections in a number of areas as a result ofits findmgs

7. SUBSEQUENT EVENT On February 28,1997, the NHPUC issued its decision related to restructurmg the state's electric utility industry and settmg interim stranded cost charges for PSNH pursuant to legislation enacted in New I' .. ;.n in e 1996.

In the decision, the NHPUC announced a departure from cost-based r='ammking and instead adopted a market-priced approach to ratemaking and stranded cost recovery as advocated by the NHPUC's

== ult ==t= Accordingly, unless the litigation described below results in a stay, or necessary modifications to the final plan are made, that leads management to conclude that the rates in the NHPUC's restructurmg deieian will not go into effect, PSNH will be required to discontinue accating under SFAS 71. 'Ihat would result in PSNH writing off from its balance sheet, as early as the quarter endmg March 31,1997, substantially all ofits regulatory assets. 'Ihe amount of the potential write-off which is trigg ~4 by the order is currently aerim=+~4 at over S400 million, after taxes.

The decisica also cantaine rulings on numerous other issues that may have a substantial effect on the operations of PSNH. Included among these rulings are assertions that the Rate Agreement by and bere PSNH's parent company, NU and the state of New Hampshire, which was an integral part of NU's acquisition of PSNH in 1992, is not bindmg on the state and the requirement that PSNH divest within two years from the inception of competition all ofits owned-generation and all ofits wholesale power contracts (including its contracts with NAEC for Seabrook output).

On March 3,1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraming order, preliminary and p,oM injunctive relief, and for declaratory judgment in the Federal District Court for New I's..ysie. The case was subsequently transferred to Rhode Island. On March 10,1997, the Chief Judge of the Rhode Island federal court issued a temporary restraming order which stayed the NHPUC's February 28,1997, decision to the extent it established a rate setting methodology that is not designed to recover PSNH's costs of providing service and would require PSNH to write off any regulatory assets. A hearing regarding the system plaintiffs' request for a prelimmary injunction will be held in the same court on March 20,1997.

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PSNH and NAEC are parties to a variety of'= + - agreements providing that the credit thereunder can

be aarminated or accelerated if they do not maintam specified minimum ratios of common equity to j mpenli=tian (as defined in each agmmet). In =dd% PSNH and NAEC are parties to a variety of i Saancing agreemmes providmg in effect that the cmht thereunder can be terminated or accelerated if there

are actions taken, either by PSNH or NAEC or by the state of New Hampshire, that deprive PSNH and/or -

NAEC of abe lunante of the Rate A w r and/or the Seabrook Power Contracts.

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! If the NHPUC's February 28,1997 decision becomes effective, it would result in (i) write-offs that would i cause PSNH's common equity to fall below the contractual mmunums, (ii) reductions in income that would l cause PSNH's income to fall below the contractual nummums, (iii) pa**ial violation of the contractual l provisions with respect to actions depriving PSNH and NAEC of the benefits of the Rate Agreement, and 1

anness waived by the respective lenders, (iv) the potential for cross defaults to other PSNH and NAEC

! finances documents. Substantially all of PSNH's and NAEC's debt obligations ($686 million of PSNH I debt and $515 million of NAEC debt) would be affected. For these actions to be avoided, ir r.e.a..siit 1 i beheves that it is eseantal that the March 10,1997, temporary restraming order issued by a federal court judge be entandad and made applicable to the foregoing issues. ,

If these events transpired and the requested court relief is not forthcoming, acd if the creditors holding l l PSNH and NAEC debt obligations decide to exercise their rights to demand payment and not to forebear i while the litigation is paading. then either creditors or PSNH and NAEC could initiate prMiage under Chapter 11 of the bankruptcy laws.

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! As a result of the NHPUC decision and the pn**ial consequences diaW above, the reports of the j auditors on the individual financial statements of PSNH and NAEC contain explanntary paragraphs.

i *Ihose explanatory paragraphs indicate that a substantial doubt exists currently about the ability of PSNH and NAEC to continue as going concerns. 'Ibe accounts of PSNH and NAEC are included in the i aaanahdatad financial statements of NU on the basis of a going concern. While the effect of the j implematation of that decision would have a matenal adverse impact on NU's financial position, results of i operations and cash flows, it would not result in defaults under borrowmg or other financialsa iw. wits of i NU orits other subsidiaries.

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION ,

I FOR THE YEAR ENDED DECEMBER 31,1996 SCHEDULE XV COMPARATIVE INCOME STATEMENT l ACCT DEScRIPTIoM 1996 1995 l 4 (Thousands of Dollars)

! INCOME l 457 Services Rendered to Associate Companies S 51,541 $ 58,755 j 1 458 Services Rendered to Nonassociate Companies 77,177 87,980 )

421 Miscellaneous income or (Loss) 35 3 Total income $ 128,753 $ 146,738

)

EXPENSE l 4

Nuclear Power Expenses i 517 Operation Supervision and Engineering $ 19,547 $ 20,262 l 518 Nuclear Fuel Expense 9,297 7,904 l 519 Coolants and Water 906 671 l 520 Steam Expenses 9,007 11,367 i 523 Electric Expenses 1,872 160 524 Miscellaneous Nuclear Power Expenses 23,009 28,634 l

i 528 Maintenance Supervision and Engineering 11,508 11,096

{ 529 Maintenance of Structures 4,181 3,648 j 530 Maintenance of Reactor Plant Equipment 3,867 11,231 531 Maintenance of Electric Plant 4,605 5,421 532 Maintenance of Miscellaneous Nuclear Plant 3,899 7,564 Transmission Expenses 570 Maintenance of Station Equipment 25 91 Administrative and General Expenses 920 Salaries and Wages 3,175 4,654 921 Office Supplies and Expenses 1,560 2,375 922 Administrative Expense Transferred-Credit (280) (278) 923 Outside Services Employed 5,250 4,208 924 Property insurance 3,663 4,250 925 Injuries and Damages 1,817 629 926 Employee Pensions and Benefits 14,897 13,663 1 928 Regulatory Commission Expense 2,422 3,595 930.1 General Advertising Expenses 182 269 i 930.2 Miscellaneous General Expenses 626 888 935 Maintenance of General Plant 8 0 All Other Expenses 408 Taxes Other Than income Taxes 3,656 ' 4,298 409 income Taxes 230 (22) 410 Provision for Deferred income Taxes 41 0 411 Provision for Deferred Income Taxes (354) 0 426.1 - Donations 74 84 426.5 Other Deductions 10 74 431 Other Interest Expense 52 1 Total Expense $ 128,752 $ 146,737 Not income or (Loss) $ 1 $ 1 1

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 ANALYSIS OF BILLING ASSOCIATE COMPANIES ACCOUNT 457 DIRECT INDIRECT COMPENSATION TOTAL COSTS COSTS FOR USE AMOUNT

! NAME OF ASSOCIATE COMPANY CHARGED CHARGED OF CAPITAL BILLED (Thousands of Dollars)

457-1 457- 2 457- 3 l 8

The Connecticut Ught and Power $ 5,226 $ $ $ 5,226 l l Company I

l North Atlantic Energy Corporation 46,315 46,315  !

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i l TOTAL $ 51,541 $ 0 $ 0 $ 51,541 4

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! ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION

! For the Year Ended December 31,1996 1 ANALYSIS OF BILLING NONASSOCIATE COMPANIES l i

ACCOUNT 458 i

DIRECT IuDzRacT c0MPIssAfzom RacEss TOTAz, NAME OF COSTS COSTS FOR USE TOTAL OR AMOUNT NOWASSOCIATE COMPANY CEARGED CEARGED OF CAPITAL COSTS DEFICIENCY BILLED l (Thousands of Dollars)

458-1 458-2 458-3 _

458-4

C:nal Electric Company $ 4,535 $ $ $ 4,535 $ $ 4,535 i Great Bay Power Corporation 15,617 15,617 15,617 .

< - Hudson Light & Power Dept. 100 100 100

M ssachusetts Municipal Wholesale 1

Electric Company 14,923 14,923 14,923 M:ntaup Electric Company 3,733 3,733 3,733 l

N::w England Power Company 12,817 12,817 12,817  !

Nsw Hampshire Electric Coop. 2.798 2,798 2,798 4 Taunton Municipal Lighting Plant 129 129 129 1 United illuminating Company 22,525 22,525 22,525 i

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$ 77,177 $ 0 $ 0 $ 77,177 $ 0 $ 77.177 i

1 INSTRUCTIONS: Provide a brief description of the services rendered to each nonassociate company:

The Company acts as agent in operating Seabrook Station for the nonassociate companies.

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE COfPORATION For the Year F. ruled December St.1996 SCHEDULE XVI ANALYSIS OF CHARGES FOR SERVICE ASSOCIATE AND NONASSOCIATE COMPANIES ASSOCIATE CoMPmY CHARGES WoNASSoCIATE COMPMtY CHAhoEs TOTAL **EARGEs Foe SERVICE ACCOUNT DIRECT INDIRECT DIREFT INDIRECT DIREW IL' DIRECT WUMMR DRScRIFTIon oF ITEMS COST COST TOTAL COST COST TOTAL Cos? CPST TOTAL in .ee.u ,

Nucieer Power Expenses 517 Operasen Supervialon and Engineering $ 7.827 $ $ 7.827 $ 11.720 $ $ 11.720 $ 19.547 $ $ 19.547 518 Nuclear Fuel Disposal 3.723 3.723 5.574 5.574 9.297 9.297 519 Coolants and Water 363 363 543 543 906 906 520 Stoani Expenses 3.607 3.607 5.400 5.400 9.007 9.007 523 Electric Expenses 750 750 1.122 1.122 1.872 1.872 524 Miscellaneous Nuclear Power Expenses 9.212 9.212 13.797 13.797 23.000 23.009 528 Maintenance Supervision and Engineering 4.608 4.608 6.900 6.900 11.508 11.508 529 Maintenance of Structuies 1.674 1.674 2.507 2.507 4.181 4.181 530 Maintenance of Reector Plant Equipment 1.548 1.548 2.319 2.319 3.867 3.887 531 Maintononce of Bectric Plant 1.844 1.844 2.761 2.761 4.605 4.605 532 Maintonence of Misce 4eneous Nuclear Plant 1.561 1.561 2.338 2.538 3.899 3.899 Trenomission Expenses 570 Maintenance of Station Equipment 10 10 15 15 25 25 Administrative end General Expenses 920 Saleries and Weges 1.271 1.271 1.904 1,904 3.175 3.175 921 Of5ce Supplies and Expenses 625 625 935 335 1.560 1.580 b 922 Administratin Expense Transfoned-Credit (112) (112) (168) (168) (280) (280) y 923 924 Outside Servius Employed Property insurance 2.102 1.467 2.102 1.467 3.148 2.196 3.148 2.196 5.250 3.863 5.250 3.663 925 Injuries and Damages 728 728 1.089 1.089 1.817 1.817 926 Employee Pensions and Benetts 5.965 5.965 8.932 8.932 14.897 14.897 928 Regulatory Commission Expense 970 970 1.452 1.452 2.422 2.422 930.1 General Advertising Expenses 73 73 109 109 182 182 930.2 Miscellaneous General Expenses 251 251 375 375 626 626 935 Maintenance of General Plant 3 3 5 5 8 8 All Other Expenses 408 Taxes Other Then income Taxes 1,464 1.464 2.192 2.192 3.656 3.656 409 income Taxes 92 92 138 138 230 230 410 Prowleian for Deferre1 Income Tax 16 16 25 25 41 41 411 Provision for Deferred Incomo Tax (142) (142) (212) (212) (354) (354) >

426.1 Donstmns 30 30 44 44 74 74 426.5 Other Deductions 4 4 6 6 to to 431 Other interest Expense 21 21 31 31 52 52 TOTAL EXPENSES = $ 51.555 $ $ 51.555 $ 77.197 $ $ 77.197 $ 128.752 $ $ 128.752 421 Miscellaneous Non-Opwating income (15) (15) (20) (20) (35) (35)

Not Income 1 1 0 0 1 1 TOTAL COST OF SERVICE = $ 51.541 $ $ 51.541 $ 77.177 $ $ 77.177 $ 128.718 $ $ 128.718 INSTRUCTION: Total cost of service wiB equel for essociate end i v. . :_'^---- companies the total amount billed under their separate analysis of bliling schedulee.

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AMNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION

, For the Year Ended December 31,1996 SCHEDULE XVil i SCHEDULE OF EXPENSE DISTRIBUTION BY DEPARTMENT OR SERVICE FUNCTION

, account SERVICE FUNCTION i TOTAL SEABRooK NUMBER DESCRIPTION oF ITEMS AMOUNT OVERHEAD STATION (Thousands of Dollars)

Nuclear Power Expenses 517 Operation Supervision and Engineering $ 19,547 $ $ 19,547 518 Nuclear Fuel Disposal 9,297 9,297 519 Coolants and Water 906 906 4

520 Steam Expenses 9,007 9,007 523 Electric Expenses 1,872 1,872 524 Miscellaneous Nuclear Power Expenses 23,009 23,009 528 Maintenance Supervision and Engineering 11,508 11,508 529 Maintenance of Structures 4,181 4,181

! 530 Maintenance of Reactor Plant Equipment 3,867 3,867 l 531 Maintenance of Electric Plant 4,605 4,605 1 532 Maintenance of Miscellaneous Nuclear Plant 3,899 3,899 Transmission Expenses 570 Maintenance of Station Equipment 25 25 Administrative and General Expensec

! 920 Salaries and Wages 3,175 3,175 921 Office Supplies and Expenses 1,560 1,560 l 922 Administrative Expense Transferred-Credit (280) (280) 923 Outside Services Employed 5,250 5,250 s 924 Property Insurance 3,663 3,663 925 injuries and Damages 1,817 1,817

. 926 Employee Pensions and Benefits 14,897 14,897 928 Regulatory Commission Expense 2,422 2,422 I

930.1 General Advertising Expenses 182 182 930.2 Miscellaneouc General Expenses 626 626

) 935 Maintenance of General Plant 8 8

) All Other Expenses 408 Taxes Other Than income Taxes 3,656 3,666 409 income Taxes 230 ,

230 410 Provision for Deferred Taxes 41 41 411 Provision for Deferred Taxes (354) (354) 426.1 Donations 74 74 426.5 Other Deductions 10 10 431 Other Interest Expense 52 52 TOTAL EXPENSES $ 128,752 $ 0 $ 128.752 INSTRUCTIONS: Indicate each department or service function. (See Instruction 01-3, General Structure of Accounting System: Uniform System of Accounts)

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ANNUAL REPORT OF NORTH ATI. ANTIC ENERGY SERVICE CORPORATION j 1

For the Year Ended December 31,1996 l SCHEDULE XVil )

l KEYS FOR SERVICE FUNCTIONS I

KEYS SERVICE FUNCTION  ;

l The individual unit for which NAESCO provides service is listed separately I on Page 24. i l

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 DEPARTMENTAL ANALYSIS OF SALARIES l

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l NAME OF DEPARTMENT DEPARTMENTAL SALARY EXPENSE NUMBER OF INCLUDED IN AMOUNTS BILLED TO PERSONNEL Indicate each department TOTAL PARENT OTHER NON END or service function. AMOUNT COMPANY ASSOCIATES ASSOCIATES OF YEAR l (Thousands of Dollars) l Seabrook Station $ 48,581 $ $ 19,453 $ 29,128 814

$ 48,581 $ 0 $ 19,453 $ 29,128 814 l

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 OUTSIDE SERVICES EMPLOYED INSTRUCTIONS: Provide a breakdown by subaccount of outside services employed. If the aggregate amounts paid to any one payee and included within one subaccount is less than $100,000, only the aggregate number and amount of all such payments included within the subaccount need be shown. Provide a subtotal for each type of service.

RELATIONSHIP "A"-ASSOCIATE ,

"NA"-NON l FROM WHOM PURCHAS[D ASSOCIATE AMOUNT l (Thousands of Dollars) i COMPUTER AND COMMUNICATION SERVICES IBM NA $ 114 The INDUS Group NA 221 Northeast Utilities Service Company A 3,019 Miscellaneous (17 payees) NA 204 TOTAL COMPUTER SERVICES $ 3,558 ENGINEERING SERVICES Ncrmandeau Associates NA $ 1,091 Northeast Utilities Service Company A 2,188 Raytheon Engineers & Constructors NA 1,371 Yankee Atomic Electric Co. NA 4,029 Miscellaneous (20 payees) NA 96 TOTAL ENGINEERING SERVICES $ 8,775 ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 OUTSIDE SERVICES EMPLOYED REIATIONSHIP "A"-ASSOCIATE "NA"-NON FROM WHOM PURCHASED ASSOCIATE AMOUNT l LEGAL SERVICES Miscellaneous (15 payees) NA $ 145 TOTAL LEGAL SERVICES $ 145 SECURITY SERVICES Green Mountain Security Service of NH NA $ 2,084 Miscellaneous (1 payee) NA 7 TOTAL SECURITY SERVICES $ 2,091 OTHER SERVICES

. Business Health Management NA $ 133

' Massachussetts Emergency Management Agency NA 447 Northeast Utilities Service Company A 3,252 Public Service Company of New Hampshire A 369 RGpublic Management NA 109

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State of New Hampshire NA 1,374 Miscellaneous (448 payees) NA 1,102 TOTAL OTHER SERVICES $ 6,806 GRAND TOTAL OUTSIDE SERVICES EMPLOYED $ 21,375

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996  ;

OUTSIDE SERVICES EMPLOYED t

FROM WHOM PURCHASED DESCRIPTION OF SERVICES i

! COMPUTER AND COMMUNICATION SERVICES IBM Provide maintenance and operations support for mainframe and i personal computers and systems. l 1

i The INDUS Group Provide integrated software application solutions.

l Northeast Utilities See note Page 27c Service Company ENGINEERING SERVICES Normandeau Associates Provides environmental monitoring services as requested.

Northeast Utilities See note Page 27c Service Company '

Raytheon Engineers & Constructors Provides engineering and administrative services as requested.

Yankee Atomic Electric Co. Provides engineering, emergency planning, environmental monitoring, and other services.

SECURITY SERVICES Green Mountain Security Service of NH Provides security services for baseline security support. ,

OTHER SERVICES Business Health Management Provides site medical officer and review of site medical records and issues.

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. ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996

] OUTSIDE SERVICES EMPLOYED d

1 j FROM WHOM PURCHASED DESCRIPTION OF SERVICES l

OTHER SERVICES i ,

2 Massachussetts Emergency Management Agency Provides administration of state emergency management -

agency.  ;

i Northeast Utilities See note below

Service Company Public Service Company of New Hampshire i Provides worker's compensation administration, facilities and

} miscellaneous service.  ;

l i R:public Management Provides food service for site.

i j State of New Hampshire Provides administration of state emergency management '

i agency.

i l NOTE: Provides centralized accounting, administrative, data processing, engineering financial, legal, operational, planning, purchasing and other services.

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 EMPLOYEE PENSIONS AND BENEFITS ACCOUNT 926 INSTRUCTIONS: Provide a listing of each pension plan and benefit program provided by the service company. Such listing should be limited to $25,000, i

l DESCRIPTION AMOUNT l (Thousands of Dollws) i Pension Plan $ 3,881 incentive Goals Plan 4,059 Group Life, Long-term Disability, Hospital and MedicalInsurance Expenses 3,985 FAS 106 VEBA Funding 1,241 Supplemental and Early Retirement Plans 1,112 Employee Stock Option Plan 416 Employee Assistance Program 87 Educational Activities 74 Other Employee Benefits Expenses 42 TOTAL $ 14,897 I

4 ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION

, For the Year Ended December 31,1996 l

GENERAL ADVERTISING EXPENSES ACCOUNT 930.1 INSTRUCTIONS: Provide a listing of the amount included in Account 930.1,

" General Advertising Expenses," classifying the items according to the nature of the advertising and as defined in 1 the account definition. If a particular class includes an amount in excess of $3,000 applicable to a single payee, show separately the nan.e of the payee and the aggregate  ;

amount applicable thereto.

l DESCRIPTION AMOUNT l (Thousands of Dollars)

Advertising Associated Press $ 9 Yankee Printer 5 Science & Nature Center Barker Specialty 5 Exeter Land Contractor 10 l NUCON Engineering 14 Walrnart 3 Various (22 items) 136 i

a TOTAL $ 182 l

ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 MISCELLANEOUS GENERAL EXPENSES ACCOUNT 930.2 INSTRUCTIONS: Provide a listing of the amount included in Account 930.2,

' Miscellaneous General Expenses," classifying such expenses according to their nature. Payments and expenses permitted by Sections 321(b)(2) of the Federal Election Campaign Act, as amended by Public Law 94-283 in 1976 (2 U.S.C.

441(b)(2)) shall be separately classified.

l DESCRIPTION AMot'NT l (Thousands of Dollars)

Industry association dues $ 355 Miscellaneous Payroll Expense 136 Employee Functions 35 Various 100 TOTAL $ 626

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i ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996

{

RENTS 1

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. INSTRUCTIONS: Provide a listing of the amount included in accounts entitled " Rents,"

classifying such expenses by major groupings of property, as defined in the account definition of the Uniform System of Accounts.

j l l T1ff OF PROPERTY AMOUNT i (Thousands i of Dollars)

Computers / Data processing equipment $ 731 l Communications equipment 310 Vahicles 117 i Buildings 78 l Equipment and other 147 i

TOTAL $ 1,392 i \

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.. a ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 TAXES OTHER THAN INCOME TAXES ACCOUNT 408 INSTRUCTIONS: Provide an analysis of Account 408, " Taxes Other Than income Taxes." Separate the analysis into two groups: (1)Other than U.S. Government taxes, and (2) U.S. Government taxes. Specify each of the various kinds of taxes and show the amounts thereof. Provide a subtotal for each class of tax.

l T.IND OF TAX AMOUNT l (Thousands of Dol (1) Other Than U.S. Government Taxes: l State Unemployment Tax $ 115 State Business Tax 140 Sub-Total $ 255 1

(2) U.S. Government Taxes:

Federal Unemployment Tax $ 63 FederalInsurance Contribution Act 3,338 Sub-Total $ 3,401 TOTAL $ 3,656 ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31,1996 DONATIONS j ACCOUNT 426.1 i

INSTRUCTIONS: Provide a listing of the amount included in Account 426.1, " Donations,"

classifying such expenses by its purpose. The aggregate number and amount of all items of less than $3,000 may be shown in lieu of details.

l NAME OF RECIPIENT PURPOSE OF DONATION AMOUNT l (Thousands of Dollare)

New Hampshire Seacoast United Way Charitable Contributions $ 27 Seacoast Repertory Theater Charitable Contributions 11 Seabrook Employee Fund Charitable Contributions 6 Portsmouth Chamber of Commerce Charitable Contributions 4 Miscellaneous (57 items) Charitable Cont ibutions 26 TOTAL $ 74 1

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. . . o l ANNUAL REPORT OF NORTH ATI. ANTIC ENERGY SERVICE CORPORATION

, For the Year Ended December 31,1996 i

OTHER DEDUCTIONS ACCOUNT 426.5 1

INSTRIJCTIONS: Provide a listing of the amount included in Account 426.5, "Other Deductions,"

classifying such expenses according to their nature.

] l DESCRIPTION NAME OF PAYEI AMOUNT (Thousands of Dollars) l 5

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Advertising Various $ 5 4

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Political activities Murphy, S&H 40 i Luka's Greenhouse Restaurant 9  !

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f Executive incentive Compensation Adjustments to long term plan (45) 4 1

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TOTAL $ 10 j .  !

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, e e ANNUAL REPORT OF NORTH ATIANTIC ENERGY SERVICE CORPORATION For the Year Ended December 31, 1996 SCHEDULE XVIII NOTES TO STATEMENTS OF INCOME INSTRUCTIONS: The space below is provided for important notes regarding the financial statements of income or any account thereof. Furnish particulars as to any significant increases in services rendered or expenses incurred during the year. Notes relating to financial statements shown elsewhere in this report may be indicated here by reference.

See Notes to Financial Statements on pages 19 through 19H. j i

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1 ANf4JAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION ORGANIZATION CHART AS OF DECEMBER 31,1998 E.V P. & Chief Nuclear omeer Seabroc*

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t Executive Staton Director, Director, 3'

Director, Director Nuclear Support Services Engineering Services l:

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l ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION l I

For the Year Ended December 31,1996

.1 Methods of Allocation I

1 All costs are specific to Seabrook Station and are direct charged. l 3 i 4 l 0 l 1

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION

, ANNUAL STATEMENT OF COMPENSATION FOR USE OF CAPITAL BILLED

For the Year Ended December 31,1996 l l

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Expenses of Seabrook Station are funded in advance therefore there are no I charges for use of capital, l 4

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ANNUAL REPORT OF NORTH ATLANTIC ENERGY SERVICE CORPORATION SIGNATURE CLAUSE Pursuant to the requirements of the Public Utility Holding Company Act of 1935 and the rules and regulations of the Securities and Exchange Commission issued thereunder, the undersigned company has duly caused this report to be signed on its behalf by the undersigned officer thereunto duly authorized.

NORTH ATLANTIC ENERGY SERVICE CORPORATION (Name of Reporting Company) l By:/s/ John J. Roman (Signature of Signing Officer) ,

John J. Roman - Vice President and Controller (Printed Name and Title of Signing Officer) l l

1 Date: April 25.1997  !

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