ML20133B145

Annual Rept 1995 for New England Power Company

ML20133B145
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Site:	Seabrook
Issue date:	12/31/1995
From:	NEW ENGLAND POWER CO.
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Annual R.eport 1995 New England Power Company A Subsidiary of New England Electric System 4

t O xe-8 8 Ama NEES re-er company 9701030010 961226 PDR ADOCK 05000443

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New England Power Company . ,.. i 25 Research Driva Westborough, Massachusetts 01582 Directors (As of December 31,1995)

Jioan T. Bok Cheryl A. LaFleur**

Chairman of the Board ofNew England Vice President and General Counsel of the Electric System Company and Vice President, General Counsel, and Secretary ofNew England Frederic E. Greenman* ElectricSystem Vice President, General Counsel, and Assistant Clerk of the Company and John W. Newsham*

Senior Vice President, General Counsel, Executive Vice President of the Company and Secntary ofNew Fngland Electric and Vice President ofNew England System Electric System Alfred D. Houston John W. Rowe Executive Vice President and Chief Chairman of the Company and President Financial Officer ofNew England and ChiefExecutive Officer ofNew Electric System England Electric System Jeffrey D. Tranen President of the Company and Vice President ofNew England Electric System Officers (As ofDecember31,1995)

John W. Rowe Jeffrey A.Donahue Chairman of the Company and President Vice President and ChiefExecutive Officer ofNew John F. Malley England Electric System Vice President Jeffrey D.Tranen Arnold H. Turner President of the Company and Vice Vice President President ofNew England Electric System Jeffrey W. Vansant John W. Newsham* Vice President Executive Vice President of the Company Michael E. Jesanis and Vice President of New England Reasurer of the Company and ofNew l Electric System England Electric System F:ederic E.Greenman* Robert King Wulff Vice President, Genemi Counsel, and Clerk of the Company and of certain Assistant Clerk of the Company and affiliates Senior Vice President, General Counsel, 3,y,g,g ,,g,,,,

and Secretary of New England Electric Assistant heasurer of the Company and Systern of cenain affiliates and Vice President of ,

Cheryl A. LaFleur** an affiliate '

I Vtce President and Genemi Counsel of the gg,y L y, ,,,,,,

Company and Vice Prestdent, Genemi Assistant Clerk of the Company and of an Counsel, and Secretary ofNew England 5gg,,,

Electric System Howard W. McDowell

'[,, g *" Contmlier of the Company and of certain affiliates i Lawrence L Bailey l Vice Prestdent

• retired December 31,1995 l

• • elected effective December 31,1995 Transfer Agent and Dividend Paying Agent ofPreferred Stock Bank of Boston, Boston, Massachusetts RegistrarofPreferred Stock State Street Bank and Trust Company, Boston, Massachusetts This report is not to be considemi an ofer to sell or buy or solicitation of an ofer to sell or buy any security.

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.., ,e New England Power Company New England Power Company, a whollyowned subsidiary of New England Electric System, is a Massachusetts corporation and is qualified to do business in Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine, and Vermont. The Company is subject, for cer-tain purposes, to the jurisdiction of the regulatory commissions of these six states, the Securities and Exchange Commission and the Federal Energy Regulatory Commission. The Company's business is principally that of generating, purchasing, transmitting, and selling electric energy in wholesale quantities to other electric utilities, principally its Mfilice Granite State Electric Company, Massachusetts Electric Company, and The Narragansett Electric Company. In 1995,95 percent of the Company's revenue from the sale of electricity wts derived from sales to affiliated companies and 5 percent from sales to municipal and other utilities. There are a number of proposals that would increase competition in the elec-

, tric utility industry and result in customers having a choice of power suppliers (see " Financial Review").

The Company, through its own generating units, entitlements and purchase power con-tracts, has a total capability of 5,704 megawatts. In 1995, the Company's energy mix was 38 percent coal,22 percent gas,14 percent nuclear,10 percent hydro,10 percent oil, and 6 percent renewable non-utility generadon.

The Company is a member of the New Engiand Power Pool, which coordinates the plan-

. ning and operation of the generation and transmission facilities in New England, and the region-wide central dispatch of generation.

Report ofIndependent Accountants New England Power Company, Westborough, Massachusetts:

We have audited the accompanying balance sheets of New England Power Company (the Company), a wholly-owned subsidiary of New England Electric System, as of December 31, 1995 and 1994 and the related statements of income, retained earmngs, and cash flows for each of the three years in the period ended December 31,1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit inclr. des examming, on a test basis, evidence supporting the amounts and disclosures in the Haancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presen-tation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1995 in conformity with generally accepted accounting principles.

Boston, Massachusetts COOPERS & LYBRAND LLP.

March 1,1996 i

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New England Power Company Financial Review Overview Net income increased by $2 million in 1995 cumpued with 1994. This increase reflects higher sales, lower depredadon and amoruzanon expense and lower maintmance expense. PamaDy offset-ting these increases to 1995 earnings were increased purchased power costs excluding fuel, increased costs related to pmuedicment benefits other than pensions (PBOPs), increased reimbursements to affihntes for senice extension diwuunis (SEDs) to customers and generanon and i.camhion costs incurred for the benefit of the Company hi addition, interest costs also inwa:,cdin 1995.

Netincome increased by $8 millionin 1994 reflecting decreased purchased power charges exdud-ing fuel, lower interest expense and increased aHowance for funds used dunng constmetion. In addi-tion, earningsin 1993 were reduced by a one4rme after-tax charge of $6 milhon ($10 nullionbefore4ax) assocrated with an earlyicih cment program. PamaHy offsetung theseincreases to 19% earnings were increased operation and rnaintenance expcs.cs and the reim'uuimient of certam power plant dis.

mantlement costs through revenue crmhts to The NW.~-tt Eectne Company (Narrag mett), an nm1inte Competitive The electric utility business is being subjected to rapidly increasmg competitive pressures, stem-Conditions ming from a combination of trends, induding the presence of surplus generanng capacity, a dispa:ity in e'ectric rates among regions of the country, improvements in generation efficiency, increasing demaad for customer choice, and new regulations and legtslation intended to foster competition. To l date, th's competition has ben most prominent in the bulk power market, in which non-utility gener-ators hwe significantly increased their market share. Hectric utilities have had exclusive franchises foruteretailsaleofelectricityinspec2fiedsenicetarritories. Asaresult,compentionintheretailmar-ket has been limited to 0) competition with alternanve fuel suppliers, primarily for heating and cool-ing, (ii) competition with customer. owned generation, and Oli) direct competition among electric util-ities to attractnudor new facilities to their senice temtories. These compentive pressures have led the New England Hectric System (NEES) companies and other utilities to offer, from time to time, special discounts or service packages to certam large customers.

In states across the counny, indudmg Maamachmetts, Rhode Island, and New Hampshire, there have been an increasmg number of proposals to aHow retail customers to choose their electricity sup-plier,withincumbentutilitiesrequiredtodehverthatelectridtyovertheirP m@ 'onand#stribution systems (also known as " retail wheehng"). If electne customers were aHowed to choose their elecnici-ty supplier, utilities across the country wouki face the risk that market prices may r.ot be sufficient to j recover the costs of the enmmitments incurred to supply customers under a regulated mdustry struc- j ture. %e amount by which costs exceed market prices is commonly referred to as " stranded costs."  !

he Company derives approxunately 72 percent,20 percent, and 3 percent ofits electric sales rev- l 4

enues from sales to Mn==achmatta Bectric Company (Mamchusetts Dectric), Narragansett, and i Granite State Eectric Company, respecovely These amhnted companies purchase electricity under l i

wholesale aH-requirements contracts with the Companyand resellitto their customers. legislative or utility initiatives, such as Choice New England, could ultimately result in changes in the relationship l betweentheCompanyanditsaH-requrrements ,*m 1

Choice:New England In October 1995,the NEES companies announced a plan to aHow au cus-2 tomers of electric utilities in Mnmehusetts, Rhode Ishmd, and New Hampshire to choose their power l supplier txr,budug in 1998. The plan, Gioice New England, was developed in response to 1995 deci-  !

sions by the Massachusetts Department of Public Utilities (MDPU) and the Rhode Island Public {

Utilitie Comnussion (RIPUC) that approved a set of principles for industrylu:>nuchuhg. These prin- l ciples indude aHowing utilities the oppuihuaiy to recover stranded costs. Omice New England was  !

formally filed by M=nchmart= Dectric with the MDPU in February 1996 Narragansett plans to file a sunilar version of Ounca New England with the RIPUC in April 1996 to comply with a RIPUC order to file restructurmgplans.

Under Omice New England, the pricing of generation would be deregulated. However, cus- i tomers would have the right to recerve service under a" standard offer" from the incumbent utility or  ;

its amhnte, the pricing of which would be approved in advance by legislators or regulators. Customers electing the standard offer would be eligible to choose an alternative power supplier at any time, but i i

would not be aHowed to retum to the standard offer. Under Omue New England, benbion and

> distribution rates would remam regulated. As described in the " Rate Activity" section, the Company has recently filed a proposed tariff rate with the Federal Energy Regulatory Commission (FERC) whereby its tmnsmission facilities would be operated by mother NEES subsidiary pursuant to a sup-portagreement.

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New England Power Company Financial Review (continued)

Competitive Under Ouncc New England, the Company's wholesale contract with its nffihMm would be ter-Conditions mmated. In retum, Omice New England proposes that the cost of the Company's past generadon (continued) commitments be recovered through a wires access or transition charge. Those commitments, which are currently acimntui at yr u-sely $4 billion on a present value basis, primarily consist of(i) gen-eranng plant commitments, (ii) regulatory assets, (iii) purchased power contracts, and (iv) the opemt-ing cost of nuclear plants which cannot be rrntignted by shutting down the plants (otherwise referred to as " nuclear costs independent of operadon"). Sunk costs associated with utility genemdng plants, such as past capital investments, and regulatory assets would be recovered over ten years . The retum on equity related to the unrecowred capital investments and regubtory assets would be reduced to one percentage point over t.he rate on long-tenn "BBB" rated utility bonds. Purchased power contract costs and nuclear costs independent of operanon would be recmtred as incur *ed mer the life of those obligations, a period expected to extend beyond ten years. The access charge would be set at three cents per kilowatt-hour (kWh) for the fust three years. Thereafter, the access charge would vary, but is expected to decline. The provisions of Choice New England, including the proposed access charge, are subject to state approval and FERC approml.

In March 1996, Massachusetts Elecnic filed a request with the MDPU to allow the implementation of two pilot programs to test the plan. The first would allow certam high technology customers in Mnmehusetts representing 1 percent of the NEES companies' retail sales to haw direct access to altemanve power suppliers beginning in July 1996. The second would allow residential and small busi-ness customers in Mnmehetts representmg 0.5 percent of the NEES companies' retaH sales to have direct access beginning September 1,1996.

Three other utilities and the Massachusetts Division of Energy Resources (DOER) also filed plans with the MDPU in February 1996. He DOER's plan also calls for directaccess for aH customers begin-ning in 1998 with a pilot program beginning in 1937. The DOER plan, howewr, proposes that, in i exclumge for stranded cost recovery, utilities divest their generadrg assets, either through sale or spin-ofL he NEES companies do not support the DOER mardatory diwstiture proposal. The MDPU is

.' expected to issue regubtions on industry restructunng in September 1996 and to issue orders on the 1 individualutility plans in 1997.

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i Rhode Island Legislation In February 1996, the Speaker and Majority leader of the House of Representatives of the Rhode Island bgk1*me announced the filing oflegisladon which would allow electric consumers in Rhode Island to choose their power supplien Under the proposed legisla-

, tion, large manufactming customers and new large non-manufactunng cusaxners would gain access to alternative power suppliers over a two-year period begmning in 1998. These customers represent approxunately 14 percent of N=g=att's retan kWh sales. The bahnce of Rhode Island customers would gain access over a two-year period begmnmg in the year 2000, or earlier if consumers of 50 per-cent of the electricity in New England gain sunilar rights to choose their power supplier. The hTES compardes have announced their support for the proposed legislation.

A key provision of the lerleion authorizes utilides to recover the cost of past generation com-mitments through a transition access charge on utility distribution wires The legisladon divides those past commitments in the same manner as Qunce New Eng?cnd. The legislation proposes a 12-year

• 3 recomry period for utility generadon commitments and regulatory assets. Consideration by the Rhode Ishnd legishture of the proposed legislation is expected to be completed by the summer of 1996.

Presiously,in 1995, the Rhode Island legishture passed legishdon that would have aHowed certain industrial customers to buy power from alternanve suppliets, rather than through rhe local electric util-ity. Narragansett urged the Gowmor of Rhode Island to veto the legislation because Narragansett believed it would result in piecemeal deregulanon that would not be fair to customers or shareholders.

The Govemor vetoed the proposed leckintinn, in part because of commaments by Narmgansett to pro-vide a two-year rate discount to manufactunng customers and to submit a specific and detailed pro-posal to the RIPUC addressmg the issues associated with providing large customers with access to Nnrrngmatt's distribution system for the purpose of choosing an altemarive power supplien A

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New England Power Cornpany Financial Review (continued)

Conspetitive Otherlegislative and Regulatory Initiatices In February 1996, the New Hamn= hie House of Conditions Rwm,adsbes passed a bill regmnng utilities in that state to file plans by June 1996 with the New (continued) Hampshne Public Utilities Cnmmiadon (NHPUC) to provide customers with access to altematzve sup-pliers. The bill allows the NHPUC significant disaetion in daarmining the appropriate level of strand-ed cost recowry. The bill would authorize the NHPUC to impose a plan on utilities if none is filed and approved by July 1997. The bill is pendmg in the state Senate.

In January 1996, Grarute State reached an agreement with the NHPUC staff to conduct a retail access pilot for 3 percent of Granite State's customers. If apprtud by the NHPUC and the FERC, par-ticipating customers in the pilot will pay access charges that are on average over 90 percent of the charges proposed under Cholm New England. The agreement was reached in response to 1995 leg-islation which directed the NHPUC to establish a pilot progmm for the state's utilities. %e agreement includes more favorable terms regarding stranded cost recovery than prehnunary pilot guidelines issued by the NHPUC. In February 1996, the NHPUC indicated that further review of certam assump-tions made in the agreementwas necessary. The Commi= ion also expanded the pilot to include new large commercal and industnal customers. Separately, in June 1995, the NHPUC issued a decision statmg that franchise temtories in New M*mp= hire are not exclusive as a matter oflaw. That decision is underappeal. l In February 1996, the MDPU denied the recovery of stranded power generation costs in the con- i, text of the town of Stow, Mwshusetts attempting to purchase the distribution assets in that towTt  !

owned by the neighboring Hudson Municipal Light Department. Although the MDPU reaffirmed its general position that utilities should have a reasonable opportunity to recomr net, non-mitigable, stranded costs,it refused to allow recowryin this case stating that Hudson had not sufficiently demon-  ;

stmted that stranded costs would be incurred and made no effortto rrungate any such costs. Both par- j i

ties have appealed the MDPU dem= inn and the MDPU has stayed its decision pendmg appeat  !

In August 1W5, the MDPU issued an order requmng a customer of another utility who installed cogenerating equipmentto pay 75 percent of that utihty's stranded costs attributable to sening the cus-tomer's load. The MDPU indaad the decision did not set a precedent for stranded cost recovery as part of industry restructunng. In March 1996, the FERC ruled that it would not review the MDPU's i) 1 decision. The customer is expected to appeal the decision to the courts.

In March 1995, the FERC issued a Notice of Proposed Rulemaking (NOPR)in which it stated that it is appropriate that legitimate and venfiable stranded costs be recovered from deparung customers as a result of wholesale competinon. The FERC also indicated that costs stmnded as a result of retail competition would be subject to state commission review if the necessary statutory authority exists and subject to FERC review if the state commission does not have such authonty. A final decision is expected dunng 1996. De NOPR also addressed open access transrmssion and indicated th::t those utilities ownmg >" Man facilities would be required to file a tariff to make awilable comparable L-rdssion sersice. (See " Rate Acdvity" secton for further discussion.)

Risk Factors De major risk factors affecting recovery of at-risk assets are: (i) regulatory and l legal decisions, 0i) the market prict of power, and (iii) the amount of market share retained by the l Company. 15rst, there am be no assurance that a final mstrm.Luing plan ordered by regulatory bod-  ;

4 les, or the courts, or through le@nnn will include an access charge that would fully recover strand- i ed costs. Iflaws are enacted or regulatory decisions are made that do not offeran oppornnuty to recov-  !

er stranded costs, the Company believes it has strong legal awunos to challenge suchlaws or deci-sions. Such a challenge would be based, in part, on the assertion that subjecting utility generanng 1 assets to competition without compensation for stranded costs while requinng utilities to open access l to their wires at historic cost-based rates, would cocstitute an unconstitudonal taking of property with-  !

outjust compensation. Second, the access charge proposed under Choice NeroEngland recovers only sunk costs, such as plant expenditures and contractual commitments. Because of a regional surplus of electric generation capacity, current wholesale power prices in the short-term market are based on the short-run fuel costs of generatmg units. Such wholesale prices are not currently prosiding a sig-nificant contnbution toward other margmal costs, such as operation and maintenance expenses, De Company expects this situation to continue in a retail market. Third, revenues will also be affected by the Company's ability to retain ensung customers and auract new customers in a competitive emi-ronment. As a result of the pressure on market prices and market share, it is likely that, even if Chowe-Netc England is implemented, the Company would experience losses in revenue for an indetermmate period and increased revenue volatihty

.., ..s New England Power Company Financial Review (continued)

Competitive IhimHy, eleenic utility ntes have been based on a udlit/s costs. As a result, eleenic utilities Conditions are subject to certain accounung standards thatare not applicable to other business enterprisesin gen-(continued) eral. Financial Accounung Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate A-sances, to establish regulato:y assets and liabilities, and thereby defer the income statement impact of censin costs that are expected to be recovered in future rates. He effects of regulatory, legishtive, or utility initiatves, such as the pro-posed Rhode Island leP lation or Chace: New England, could, in the near future, cause all or a por-i tion of the Company's operations to cease meeting the entena of FAS 7L In that event, the application of FAS 71 to such operations wouldbe discontinued and a non< ash wnte-off ofpreviously established reguhtory assets and liabilities related to such operations would be required. At December 31,1995, the Company had pretax regulatory assets (net of regulatory liabilities) of approxunately $300 million.

In addition, the Company's amhnte, New England Energy Incorporated (NEEI), has a regulatory asset of approxunately $200 million, which is recoverable in its entirety from the Company. If competitin or reguhtory change should cause asubstantialrevenue loss orlead to the permanentshutdown of any generanng facilities, a write-down of plant assets could be required pursuant to Mrancial Accounting Standards No.121, Accounting for the Impairment ofIong-Lived Assets and forlong-Lived Assets to Be Disposed Of (FAS 121). In adf lition, FAS 121 requires that all regulatory assets, which must have a high probability ofrecovery to beinitially established, must continue to meet that high probability stan-dard to avoid being written oft FAS 121, which is effectie for the Company in January 1996, is not expected to haw a matenal adverse impact on the financial condition or results of operadons upon adoption, based on the current regubtory envuonment in which the Company operates. Howestr, the impact in the future may change as competitive factors and potential restructuring influence the elec-tric utility indusay For further discussion, see Note B.

Rate Activity In February 1995, the FERC approved a rate agreement filed by the Company. Under the agree-ment, which became effective January 1995, the Company's base rates are frozen through 1996. Before this rate agreement, the Companfs rate structure contained two surcharges that were recovering the costs of a coal conversion project and a portion of the Company's investmentin the Seabrook 1 nuclear unit (Seabrook 1). These two surcharges fully recowred their related costs by mid-1995. However, under the rate agreement, the rewnues continue to be collected as part of base rates. The agreement also provides for (i) full recovery of costs associated with the Manchester Street Station repowering project, which began commercial operation in the second half of 1995, (ii) the recovery of approxi-rnately $50 million of deferred costs associated with termmated purchased power contracts and PBOPs over seven years, (iii) full recosery of currently incurred PBOP costs, (r.r) the recovery over three years of $27 millica of costs related to the dismantling of a retired gene @tation in Rhode Ishnd and the replaceunt of a tmbine rotor at one of the Company's generating u:'its, and (v) increased recovery of depreciation expense by approximately $8 million annually to recog tiu costs that will be incurred upon the eventual demantling ofits Drayton Point and Salem Harbor genentirg plants. Under the agreement, approx:mately $15 million of the $38 million in Seabrook I costs sched-uled for recovery in 1995 pursuant to a 1988 settlement agreement were deferred for recovery in 1996.

Mnally, the agreement prosided that the Company would reimburse its wholesale customers for dis-counts provided by those wholesale customers to their retail customers under SED programs. Under these programs, retail customers are entitled to such discounts orJy if they have signed an agreement not to purchase power from another supplier or generate any additional power themsehts for a three to five year period Reimbursements in 1995 totaled $12 million.

he FERC's approval of this rate agreement applies to all of the Company's customers except the Milford Power limited Partnership (MPLP). MPLP, owner of a gas-fired power phnt in Milford, Massachuseus, has protested the rate agreement based on issues related to the Manchester Street Station repowering project. (See " Purchased Power Contmet D.spute'section.)

In response to the FERC NOPR discussed above, the Company and NEES Transnussion Senices, Inc. (NEES 'Itans), a proposed new subsidiary of NEES, filed transnussion tarifTs in March 1996 at the FERC that will become applicable for all wholesale transmission transactions, including those of the NEES retail distribution m mhntes Under the proposed tariffs and accompanying support agreements, NEES Trans will provide all wholesale nr-idon services invohing the NEES companies' facilities under compamble, nondisciminatory transmission rates. The edsting NEES companies, including the Company, would turn operational control of their transmission facilities over to NEES 'Itans in exchange for support payments from NEES 'Irans for these fm,wes. De Company may, at a later

New England Power Company Financial Review (continued)

Rate Activity date, transfer hs b + Mon assets to NEES'1hms. The netbook value of the Company's transmis-sion system is appmnately $340 million. The Companyis requesting that its filing become elrective (continued) by June 1,1996 or upon approval by the Secundes and Exchange Commission, for the establishment of this new company If approved as filed, the implementation of the tariffs would not have a signi5-cant impact on the Company's revenues.

Operating ne following table summanzes the changes in operatmg revenue:

Revenue Increase (Decrease) in Operadng Revenue 1995 1991 (InMillions)

Fuu recovery $27 $(6) 4 (7)

AccruedNEEIfuelrevenues Narragansetti%M facihtiescredit (10) (6)

SEDreimbursements (12) 15 10 Sales growth Other 6 1

$30 $(8)

Accrued NEEI fuel revenues and accrued NEEI fuel costs (see "Operatmg Expenses" section) reflectlosses incurredby NEEI, an asbra of the Company, onits rate-regulated oil and gas operadons.

These revenues are accrued in the year of the loss but are billed to the Company's customers through its fueladjustment clause in the following year. Changes in accrued NEEI fuel revenues and fuel costs are principally due to fluctuations in NEEI production (see " Fuel Supply'section).

The entire output of N-W~tts generadng capacity is rnade available to the Company Narragansett receiws a credit on its purchased power bill from the Company for its fuel costs and other genemdon and transmission-related costs. The increased credits in 1995 reflect costs associat-ed with a newtransmissionline thatwentinto service in September 1994 andwith Luai,4 en's por-tion of the repowered Manchester Street generstmg station that wentinto service in the second halfof 1995. In addition, the credits increased in both 1995 and 1994 due to !ncreased costs associated with the dismantlement of the previously ret 2 red South Street generatmg facihty. However, a portion of the 1995 credits had been deferred for reconry from ratepayers in 1996 and 1997.

See the " Rate Activity" section for a discussion of SED reimbursements.

Operating %e following table summanzes the changes in operatmg expenses :

hpenses Increase (Decrease) in Operating Expenses 1995 1991 (InMillions)

Fuelcosts $27 $(7) 4 G)

AccruedNEEIfuelcosts Purthased energyexcluding fuel 22 (11) s (2) 18 Other operationandmaintenance (35) 6 Depreciation andamortization (1) 5 Taxes

$15 $4 Total fuel costs represent fuel for generation and the portion of purchased electric enegy permite ted to be recovered through the Company's fuel achustment clause. The increase in fuel costs in 1995 reflects decreased nuclear generation due to overhauls and decreased hydro production resuhing from low waterlevels.

Purchased energy excluding fuel represents purchased electric energy costs not recowred through the fuel clause. The increase in these costs in 1995 and the decrease in 1991 reflects costs asso.

ciated with scheduled plant overhauls and refueling shutdowns at partally. owned nuclear power facil-ities. he 1995 incease includes the amortization of previously deferred purchased power contract ter-mination costs and costs to repair the steam generator tubes at Maine Yankee, in which the Company has a 20 percent interest. Maine Yankee retumed to service at 90 percent capacity in January 1996.

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Neh England Power Company Financial Review (continued)

Operating he decrease in other operation and maintenance expenses in 1995 reflects lower overhaul costs Expenses at whnDyewned generating units, primarily in the fourth quarter of 1995, partaDy offset by the recog-(continued) nition of cmendy incurred and previously incurred deferred PBOP costs in accordance with the Company's 1995 rate agreement, increased henhion system related costs and general and admin-istrative costs.

The increase in othr operanon and mamtenance expenses in 1994 reflects increases in generat-ing plant rnaintenance costs associated with overhauls of whollyewned generating units in part to achieve compliance with the Clean Air Act. The increase also reflects cost increases in computer sys-

[ tem development, irmsed demandside management program expenses, and general increases in other areas. These increases were partially offset by a on6dme charge in 1993 of $10 million associ-ated with an early retirement program.

Depreciadon and amort:zation expense decreased in 1995 due to reduced amortzzation of Seabrook I and the completion, in the second quarter of 1995, of the amortization of certain coal conversion facihties, partsaDy offset by the effects of increased depreciation rates approwd in the Company's 1995 rate agreement and depreciadon ofnew plant expenditures, including the Manchester Street Stadon, which began commercial operadon in the second half of 1991 The increase in depreciation and amortization expense in 19M primarily reflects increased amortizadon of '

Seabrook 1 as part of a 1988 rate setdement and increased depreciation on new plant expenditures.

De increase in taxes in 1994 primanly reflects increased income taxes and municipal property taxes.

Under the existmg terms of certam purchased power contracts with other utilities, the Company will reduce its power pah by $19 million in 199i ne Company is a 15 pexent stockholder in Connecdcut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 megawatt (MW) nuclear generanng unit. The Company also has an apprtnamately 12 percent ownership interestin Millstone 3, a 1,150 MW nuclear unit. In March 1996, the Nuclear Regulatory Commission (NRC) issued aletter requumg Millstone 3 and Connecticut Yankee to demonstrate to the NRC withm 30 days a plan and schedule to ensure that the future oper-

, ationofthoseunitswillbeconductedinsm dancewiththeiroperatinglicensesandsafetyprovisions or face license suspension. Millstone 3 was also added to the NRC's problem plantlistin January 1996.

It is unknown what efrect the increased NRC scrutiny wiH have en the operations and cost of MIDstone 3 and Connecticut Yankee. Other non-nmhnted rnemMes which have been on the problem plant list have incurred s*tanHal aMmnnal capital and operaung expenditures before the NRC designation was changed. l Interest Expense The increase in interest expense in 1995 was primarily due to an increase in combined long-term and short-term debt balances and higherinterest rates earlierin 1991 The decrease ininterest expense in 19M is primanly due to significant refinancings of corporate debt atlowerinterest rates during 1993.

In addition, the decrease in 19M aho reflects reduced interest on rate refunds and taxes primanly in the fourth quarter, partially offset by increased interest on short-teun debt.

AHowance for AFDC increased in 1995 and 19% due to increased construction work in progress assoc:sted with 7 ;

Funds Used During the repowering of the Manchester Street Station. The accrual of AFDC ended for this projec:when the l Construction units began commercial operadon in the second half of 199i (See " Utility Plant Expendztures and (AFDC) Financing"section.)

Hazardous %e Federal Comprehensive Environmental Response, Compensation and Liability Act, more Waste commonly known as the "Superfund' law, imposes st-ict, joint and severalliability, regardless of fault, for remediation of property contanunated with hazardous substances. A number of states, including Massachusetts, have enacted sunDar laws.

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New England Power Company  :

Financial Review (continued)

Hazardous The electric utility indusay typically unhm and/or generates a range of potentially hazardous Waste products and by-products in its operanons. NEES subsidianes cunently have an environmental audit (continued) program in place intended to enhance compliance with exisung fedem1, state, and local reqmrements regarding the handhng of potennally hazardous products and by-products.

The Company has been named as a potentidy responsible party (PRP) by either the U.S.

Environmental Protecnon Agency or the Manachusetts Department of Environmental Protection for sixsites atwhich hazardoos wasteis alleged to have been disposed. Private pardes have also contacted orinitiatedlegalproceedirgs agamstthe Company regarding hazardous waste deanup. The Company is currently aware of othersites, and may in the future become aware of additional sites, that it may be heldresponsible forremediatmg.

Predicting the potennal costs to investgate and remediate hazardous waste sites continues to be difficult. Here are also significant uncertamties as to the portion,if any, of the investigation and reme-diation costs of any particularliazardous waste site that rnay ultimately be borne by the Company.

Where appropriate,the Cmpany intends to seek recovery from its insurers and from other PRPs, but itis uncertain whether; and to what extent, such efforts willbe successful. He Company believes that hazardous waste liabilities for all sites of which it is aware are not matenal to its financial posidon.

Electric and Concerns have been raised about whether DF, which occur near transmission and distribution ,

Magnetic Fields lines as well as near household wiring and apphances, cause or contribute to adstrse health effects.

Numerous studies on the effects of these fields, some of them sponsored by electric utilities (induding (EMF)

NEES companies),havebeen conducted and are continuing. Some of the studies have suggested asso-cianons between certam DIF and health effects, including various types of cancer; while other stud-les have not MA2-3 such assodatinn% It is impossible to predict the ulumate impact on the Company and the electric utilityindustryif further investgations were to demonstrate that the present electnoty delhery system is contributing to increased risk of cancer or other hecith problems.

Many utihnes, induding the NEES comparues, have been contC Oy customers regardmg a potential relationship between DIF and adverse health effects. To date, no court in the United States has ruled that DIF from electrical facMes cause adverse health efrects and no utility has been found .

liable for persona!iriuries alleged to luwe been caused by DIF. In any event, the Company beliests that it dly has adequate insurance coverage for personal irgury clauns.

Several state courts have recognized a cause of action for damage to property values in transmis-sion line condemnation cases based on the fear that powerlines caiu cancer. Itis difficult to predict whatthe impact on the Company would be if this cause of action is recophd in the states in which the Company operates and in contexts other than condemnation cases.

Purchased Power In October 19M, the Company was sued by MPLP, a er tare of Enron Corporation and Jones Contract Dispute Capital that owns a 149 MW gas-fired power plant in Milford, Mn==achmetts. The Company purchas-es 56 percent of the power output of the facility under along-term contract with MPLP. The sui: alleges that the Company has engagedin a scheme to canse MPLP andits power plant to fail and has prevented q MPIP from findmg along-term buyer for the remamder of the facility's output. The complaint indudes La sn? amthattheCompanyhasnolatedtheFederalRacketeerInfluencedandCorruptOrganizations H

Act, er: gaged in unfair or deceptive acts in trade or commerce, and breached contracts. MPLP also asserts that the Company dehbemtely misled regulatory bodies conceming the Manchester Street Stra repowering prqject. MPLP seeks compensatory damages in an unspecfied amount, as well as treb'e damages. The Company believes that the allegations of wTongdoing are without merit. The Co npany has filed counterclauns and crmetaima agamst MPLP, Enron Corporadon, and Jones Cr.pital, seeking monerary damages and tmninadan of the purchased power contract.

MPLP also intervened in the Company's cunent rate filing before the FERC, making similar alle-gotions to those asserted in MPLPs lawsuit. Hearings on this claim concluded in October 1995. An  :

Aduab. dive law Judge initial decision is expected by mid-1996.

4

1 New England PowCr Company '

Financial Review (co dnued)

Utility Plant Expenditures and Cash expenditures for utility planttotaled $163 million for 1995, including $85 million re Financing Manchester Street Station repowering project discussed below. We funds necessar expenditures during the period were provided by net cash from operatmg activities, afte of dhidends, and proceeds oflong term debt issues. Cash expendnures for utility plant fo estunatedtobe$85million. IntemallygeneratedfundsareatimatM t ofullycovertheCompany's19 capital expenditure requaements for utility plant.

In 1995, the Company issued $50 million of mortgage bonds at rates ranging from 6.

7.M percent. In addition, the CompanyrefinancM $10 million ofvariable rate mortgage bond

%e Company has issued $40 million ofvariable rate moitgage bonds to date in 1996 to refm amountof outstanding debt.

In the second half of 1995, the Company and NarraganW completed the 489 MWl '

the Manchester Street Station. The Company owas a 90 percent interest and Narmgan*tt ow percent interest in the Manchester Street Station. %e total cost for the generatmg station will be I

apprhy $450 million, including AFDC. In addition, related "" Aion improvements, which were principally the responsibility of Nanagansett, were placed in senice in September 1994 at a c ofapproxunatebr$60 million.

At IWember 31,1995, the Company had $125 million of short-term debt on= Ming inc

$124 r. con of commercial paper borrowmgs and $1 million of borrowings fromAtamhnts )

Decer ber 31,1995, the Company had Les of credit and bond purchase fadities with b

$510 millionwhichareavailabletopc dliquiditysupportforcommercialpaperborrowingsandfor

$342 million of the Company's outo ading variable rate mortgage bonc in tax exempt conune paper mode and for other comonte purposes. here were no borrowings under these lines of credit at December 31,1995.

March 25,1996 l

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New England Power Company statements of income 1995 1994 1993 Year Ended December 31, (In Thotends)

$1,570,539 $1,540,757 $1,549,014 Operating revenue, principally from affiliates Operating expenses: i 279,849 260,540 273,347 Fuelfor generation 547,926 513,583 525,985 Purchased electric energy 211,872 196,610 186,087 Other operation 92,954 110,528 103,261

• Maintenance 102,758 137,979 131,932 Depreciation and amortization 58,716 54,400 51,931 Taxes, other than income taxes 91,051 96,596 93,997 Income taxes 1,370,236 1,366,540 1,385,126 Totaloperating expenses 185,413 170,521 182,474 Operating income Otherincome: 7,746 9,142 3,252 Allowance for equity funds used during construction 4,816 5,646 5,721 Equity in income of nuclear power companies (1,610) (293) (566)

Other income (expense), net 190,806 197,270 184,186 Operating and otherincome Interest: 46,797 38,711 45,837 Interest onlong-term debt 10,525 1,956 5,427 Other interest Allowance for borrowed funds used during (5,054) (1,926)

(11,479) construction - credit 34,813 49,338 45,843 Totalinterest

$ 151,427 $ 149,373 $ 141,468 Net income l

1 l

Sbtements of Retained Earnings 1995 1994 1993 18 Year Ended December 31, (In Thousands) '

$ 372,763 $ 346,153 $ 321,699 Retained earnmgs atbegmmng of year 151,427 149,373 141,468 l Netincome (3,433) (3,440) (4,883) i Divide .ds declared on cumulative preferred stock I Dividends declared on common stock, $21.00, $18.50, (135,448) (119,323) (111,261) and $17.25 per share, respectively (870) ]

Premium on redemption of preferred stock ]

$ 385,309 8 372,763 J 346,153 Retained eardngs at end of year The accompanying notes are an integral part of these financial statements.  !

)

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h, . . .

• New England Pow :r Company l Balance Sheets b'

h p At December 31,(In Thousands) 1995 1994 <

N;, Assets Utility plant, at original cost $2,941,469 $2,524,544 1

i f- Less accumulated provisions for depreciadon and amortization 1,047,982 '

) 4 1,001,393 1,893,487 1,523,151 l

' Net investment in Seabrook 1 under rate settlement (Note D-2) 15,210 38,283 i

Construction workin progress 41,566 314,777 fj l Net utility plant 1,950,263 1,876,211 Investments

'I) Nuclear power companies, at equity (Note D-1) 47,055 46,349 A Non-utility property and other investments 26,627 22,980

,j Totalinvestments 73,682 69,329 I 5 Current assets:

f ,. Cash 2,607 377

[ Acccunts receivable:

7 Affiliated companies 204,314 197,655 Accrued NEEI revenues (Note E-1) 43,731 l)3! Others 17,821 39,794 29,738 Fuel, materials, and supplies, at average cost 54,664 73,361 i Prepaid and other current assets 27,986 33,729 j Total current assets 351,123 374,654

..i'

, Deferred charges and other assets (Not. , 273,275 292,644

$2,648,343 $2,612,838 fa Capitalization and Capitalization:

41 Liabilities Common stock, par value $20 per share, authorized and (lj outstanding 6,449,896 shares 8 128,998 $ 128,998

f. ' Premiums on capital stocks 86,829 86,829 Q Other paid-in capital 288,0r; 288,000 3

..< J Retained earnings 385,3 19 372,763

c. Total common equity 889,136 876,590

}] Cumulative preferred stock, par value $100 per share (Note H) 60,516 60,516

• long-terTn debt 735,440 695,466

-? Total capitalization 1,685,092 1,632,572

~A h Current liabilities:

b Long-term debt due in one year 10,000 j Short-term debt (including $1,025 and $16,575 to affiliates) 125,150 145,575 b Accounts payable (inchiding $50,760 and $69,089 to affiliates) 163,791 179,761 9 Accrued liabilities:

D Taxes 3,447 6,133 9N Interest 10,482 9,914 Other accrued expenses (Note G) 10,834 10,866 E"

Dividends payable 32,249

.:, Total currentliabilities 355,953 352,249 T

• Deferred federal and state income taxes 350,197 364,073

, Unamortized investment tax credits 57,509 59,014

!{V Other reserves and deferred credits 159,592 204,930 g Commitments and contingencies (Note E) yg $2,648,343 $2,612,838 iM

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

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• l New England Pow;r Company Ctatesments of Cash Flows l

1995 1994 1993 Year Ended December 31, (In Thousands)

$ 151,427 $ 149,373 $ 141,468 l operating activities: Netincome Adjustments to reconcile net income to net cash providedby operating activities: 135,746 l 108,384 142,7fA Depreciation and amortization i Deferredincome taxes and - 25,683 23,051 20,665 investment tax credits, net (5,178)

(19,225) (14,996) ,

Allowance for funds used during construction 2,967 l Early retirementprogram 1,321 (6,932) 31,323  ;

Decrease (increase) in accounts receivable 18,697 (17,406) 16,902 l Decrease (increase) in fuel, materials, and tupplies  ;

Decrease (increase)in prepaid and (4,908) 5,743 (7,275) other current assets (15,970) 35,661 (35,913)

Increase (decrease) in accounts payable 25,205 f (2,150) (30,823) '

increase (decrease) in other current liabilities (28,244) (26,845) (46,559)

Other, net

$ 245,666 $ 246,572 $ 281,718 Net cash provided by operating activities Investing activities: Plant expenditures, excluding a%wance for $(162,766) $(229,015) $(156,614) funds used during construction (3,053) (2,402)

(3,614)

Otherinvesting activities

$(166,380) $(232,068) $(159,016)

Net cash used in investing activities

$(103,198) $(133,835) $(120,936)

Financing activities: Dividends paid on commoa stock (3,433) (3,440) (4,883)

Dividends paid on preferred stock 95,050 32,200 (20,425) thanges in short-term debt 60,000 2S,000 224,000 Long-term debt-Issues (10,000) (224,000) long-term debt- retirements (512) (25,000)

Preferred stock-retirements (3,255)

Premium on reacquisition of long-term debt (870)

Premium on redemption of preferred stock

$ (77,056) $ (14,737) $(122,744)

Net cash used in financing activities Net increase (decrease) in cash and cash $ 2,230 $ (233) $ (42) equivalents 377 610 652 Cash and cash equivalents at beginning of year

$ 2,607 $ 377 $ 610 Cash and cash equivalents at end of year

$ 41.557 $ 32.510 $ 42,390 Supplenientary Interest paidless amounts capitalized 4 57,948 $ $3.455 $ 78,300 Inksnation: Federal and state income taxes paid

$ 5,014 $ 4.809 $ 5,103 i Dividends received from investments at equity t

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

i New England Pow;r Company

! Notes to Financial State.nents Note A 1. Nature of Operations:

! Significant The Company, a wholly-owned subsidiary of New England Electric System (NEES), is a

' Accounting Policies Massachusetts corporation and is quahfied to do business in Massachusetts, New IIampshire, Rhode Island, Connecticut, Maine, and Vermont. The Company is subject, for certain purpos-es, to the jurisdiction of the regulatory commissions of these six states, the Securities and Exchange Commission and the Federal Energy Regulatory Commission. The Company's busi-ness is principally that of generating, purchasing, transmitting, and selling electric energy in  !

wholesale quantities to other electric utilities, principally its amHntes Granite State Electric '

Company, Massachusetts Electric Company (Massachssetts Electric), and The Narragansett Electric Company (Narragansett).

2. System of Accounts:

4 The accounts of the Comparry are maintained in accordance with the Uniform System of Accounts prescribed by regulatory bodies havingjunsdiction.

In preparing the financial statements, management is required to make estunates that affect the reported amounts of assets and liabilities and disclosures of asset recovery and contingent liabilities as of the date of the balance sheets and revenues and expenses for the period. These estimates may differ from actual amounts if future circumstances cause a change in the assumptions used to calculate these estimates.

3. Allowance for Funds Used During Construction (AFDC):

The Company capitalizes AFDC as part of construction costs. AFDC represents the composite tnterest and equity costs of capital funds used to finance that portion of construction costs not eligible for inclusion in rate base. In 1995, an average of $21 million of construction work in l l progress was included in rate base, all of which was attributable to the Manchester Street

• l Station repowering project. AFDC is capitalized in " Utility plant" with offsetting non-cash cred- i Its to "Other income" and " Interest." This method is in accordance with an established rate-making practice under which a utility is permitted a return on, and the recovery of, pnidently d

incurred capital costs through their ultimate inclusion in rate base and in the provision for depreciation. The composite AFDC rates were 7.5 percent, 7.8 percent, and 8.1 percent, in 1995,1994, and 1993, respectively.

4. Depreciation and Amortization: '

l 'Ihe depreciation and amortization expense included in the statements of income is composed of the following:

Year Ended December 31, (In Thousands) 1995 1994 1993 Depreciation $ 66,309 $ 52,834 $ 53,128 Nuclear decommissioning costs (Note E-5) 2,629 1,951 1,951 gg Amortization: M Investment in Seabrook 1 under rate settlement (Note D-2) 23,074 65,061 58,437 OilConservation AWustment 4,467 11,8M 12,137 Propertylosses 6,279 6,279 6,279 Total depreciation and amortization expense $ 102,758 $ 137,979 8131,932 Depreciation is provided annually on a straight-line basis. The provision for depreciation as a percentage of weighted average depreciable property was 2.7 percent in 1995,2.4 percent in 1994, and 2.5 percent in 1993. The Oil Conservation AQustment was designed to recover expenditures for coal conversion facilities at the Company's Salem Harbor Station.These costs were fully amortized at December 31,1995.

5. Cash:

'Ihe Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash.

• ~

New England Power Cosnpany ,.' ]

Notes to Financi .3 Statements (continued) l l

l Note B The electric utility business is being subjected to rapidly increasing competitive pressures and l increasing demands for customer choice. Accordingly, in February 1996, Massachusetts l Electric, an nmliare, filed a plan, Choice: New England, with Massachusetts regulators, which  !

would allow all customers of electric utilities in Massachusetts to choose their power suppli- )

er beguuung in 1998. Another nmhnte, Narragansett, will file a sumlar version of Choice: New England with the Rhode Island Public Utilities Commission in April 1996. Under Choice: New l England, pricing of generation would be deregulated while transmission and distribution rates I l

would remain regulated, although subject to greater rewards and penalties based on perfor-mance. Choice: New England proposes that the cost of past commitments to serve customers be recovered through a wires access or transition charge. Those past commitments of the Company include generating plant commitments, regulatory assets, purchased power con-tracts, and nuclear costs independent of operation-l l

Historically, electric utility rates have been based on a utility's costs. As a result, electric utili- '

ties are subject to certain accounting standards that are not applicable to other business enter-prises in general. Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstamces, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. 'Ihc effects of regula'ory, leg-islative, or utility initiatives, such as proposed legislation in Rhode Island or Choice: New j England, could, in the near future, cause all or a portion of the Company's operations to cease l meeting the crite$ of FAS 71. In that event, the application of FAS 71 to s ch operations l would be discoabd and a non-cash write-off of previously established reg 'atory assets )

- and liabilities related to such operations would be required. In March 1995, the Financial I Accounting Standards Board issued Statement of Mnancial Accounting Standards No.121, ,

i Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). This standard clarifies when and how to recognize an impairment of long-lived assets. If competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a write-down of plant assets could be i

required pursuant to FAS 121. At December 31,1995, the Company had net plant investments totaling approximately $2 billion, of which approximately $1.6 billion is generation related. In ,

addition, FAS 121 requires that all regulatory assets, which must have a high probability of  ;

recovery to be initially established, must continue to meet that high probability standard to l

- avoid being written off. However, if written off, a regulatory asset can be restored if it again ]

has a high probability of recovery. FAS 121, which is effective for the Company in January 1996,is not expected to have a material adverse impact on the financial condition or results of i operations upon adoption, based on the current regulatory environment in which the l I

Company operates. However, the impact in the future may change as competitive factors and potential restructuring influence the electric utility industry.

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1 Aew England Pow:r Company Notes to Financial Statements (continued)

Note B The components of regulatory assets are as follows:

At December 31,(In Thousands)

{* 1995 1994 (continued) Regulatory assets included in current assets and liabilities:

Accrued NEEllosses (see Note E-1) $ 43,731 $ 39,794 Regulatory assets included in deferred charges:

Accrued Yankee Atomic costs (see Note D-1) 67,566 122,452 Unamortized losses on reacquired debt 32,571 34,862 Deferred SFAS No.106 costs (see Note F-2) 16,416 19,149 Deferred SFAS No.109 costs (see Note C) 30,059 34,482 -

Purchased power cs w termination costs 23,494 29,012 Deferred gas pipeline charges (see Note E-4) 62,873 37,562 i Unamortized propertylosses 12,044 7,373 I Other 22,049 2,542 l 267,072 287,434

$310,803 $327,228 l

l i

In addition to the regulatory assets recorded on its books, the Company is obligated to reim- I burse an affihate, New England Encrgy Incorporated (NEEl), for losses which NEEI has been incurrb.3 n i connaction with its fuel exploration, development and production program (see Note E-1). The Company's ability to pass such losses on to customers was favorably resolved in the Company's 1986 rate settlement. NEEI has a regulatory asset of approximately $200 mil-lion, which is recoverable m it: entirety from the Company. Approximately $300 to $350 mil-lion of wid egulatory assets, including MFEI's regulatory asset, are expected to be recovered 1 withir. *he next five years. Amounts included in " Deferred charges and other assets" on the baltnce sheets that do not represent regulatory assets totaled $6,203,000 and $5,210,000 at .

I December 31,1995 and 1994, respectively.

N:te C The Company and other subsidiaries participate with NEES in filing consolidated federal income tax returns. The Company's income tax provision is calculated on a separate return me Taxes basis. Federal income tax returns have been exammed and reported on by the Internal Revenue Service (IRS) through 1991. The returns for 1992 and 1993 are currently under exam- l

'ination by the IRS. l I

Total income taxes in the statements of income are as follows:

l ts .

Year Ended December 31, (In Thousands) 1995 1994 1993 l Income taxes charged to operations $ 91,051 $96,596 $93,997 Income taxes charged (cre dited) to "Other income' 353 (994) 838 l

Totalincome tsxes 891,404 $95,602 $94,835 i l

Total income taxes, as shown above, consist of the following components:

Year Ended December 31, (In Thousands) 1995 1994 1993 Currentincome taxes 4 65,721 $72,551 $74,171 )

Deferredincome taxes 27,188 26,628 23,270 i Investment tax credits, net (1,505) (3,577) (2,606)

Totalincome tx:es . $ 91,404 $95,602 $94,835 1

Il B

. i New England Power 9empany Notes to Financial Statessents (continued)

Investment tax credits have been deferred and are being amortized o Note C the property giving rise to the credits.

inconne Taxes ,

(continued)

Total income taxes, as shown above, consist of lederal and state comp 1994 1993 1995 Year Ended December 31, On Thousands) $ 77,593 8 74,590 $78,274 17,328 17,242 Federalincome taxes 16,814 Stateincome taxes $95,602 $ 94,835 8 91,404 Totalincome taxes With regulatory approval from the Federal Energy Regulatory  ? empo- Conm Company has adopted comprehensive interper'.A tax allocation (norma rary book / tax differences.

Totalincome taxes differ from the amounts computed by applying the fed rates to income before taxes. The reasons for the differences 1993 a

1995 1994 Year Ended December 31, On Thousands) $82,706

$ 84,991 $85,741 Computed tax at statutory rate Increases (reductions) in tax resulting from: (3,045) (2,511)

(2,227) 11,263 10,770 Amortization ofinvestment tax credits 10,929 3,870 State income taxes, net of federal income tax benefit(2,289) 1,643 Allother differences $95,602 $94,835

_$ 91,404 Totalincome taxes The following table identifies the major components of total deferred income t 1995 1994 At December 31, On Milliens)

Deferredtax asset: $ 92 8 96 Plant related 24 25 Investment tax credits 43 29 Allother 159 150 Deferredtaxliability: (397) (384)

Plantrelated (47) (47)

Equity AFDC (105) (83)

Allother (514)

(549)

" $(364)

$(390)

Net deferred taxliability There were no valuation allowances for deferred tax assets deemed necessary.

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1 New England Power Company 1

Notes to Financial Statements (continued) i l

Note D 1. Yankee Nuclear Power Companies (Yankees): '

l Noclear Povfer The Company has minority interests in four Yankee Nuclear Power Companies. These owner- .

Invectmeds ship interests are accounted for on the equity method. The Company's share of the expenses l of the Yankees is accounted for in " Purchased electric energy" on the statements of income.

l A summary of combined results of operations, assets, and liabilities of the four Yankees is as follows:

(In Thousands) 1995 1994 1993 Operating revenue $ 695,781 $ 631,940 $ 700,148 l

Netincome 4 31,657 $ 30,345 8 30,061 l Company's equity in netincome $ 5,721 $ 4,816 $ 5,646 Net plant 443,967 537,103 591,650 Other assets 1,418,681 1,458,186 1,286,923 Liabilities and debt (1,612,843) (1,748,960) (1.633,139)

Net assets $ 249,805 $ 246,329 $ 245,434 Company's equityin net assets 8 47.055 8 46.349 $ 46.342 Company's purchased electric energy 8 115,647 $ 106,404 $ 118,362 At December 31,1995, $13 million of undistributed earnings of the Yankees were included in i the Company's retained earnmgs.

The Company has a 30 percent ownership interest in Yankee Atomic Electric Company (Yankee Atomic), which owns a 185 megawatt (MW) nuclear generating station in Rowe, '

i Massachusetts. In 1992, the Yankee Atomic bo.ard of directors d&;ded to permanently cease

power operation of the facility and to proceed with decomraissioning. The Company has q recorded an estimate ofits total future payment obligations for post operating costs to Yankee j Atomic as a liability and an offsetting regulatory asset of $68 million each at December 31, 1995, reflecting its expected future rate recovery of such costs (see Note B).

2. Jointly-Owned Nuclear Generating Units:

The Company is also a 12 percent and 10 percent joint owner, respectively, of the Millstone 3 and Seabmok 1 nuclear generating units, each 1,150 MW. The Company's net investment in Millstone 3, included in " Net utility plant" is approximately $392 million. 'Ihe Company's unamortized pre-1988 investment in Seabrook 1, is approximately $15 million and is shown sep-arately on the Company's balance sheet. It will be fully amortized in 1996, pursuant to a settle-ment agreement. The Company's net investment in Seabrook 1 since January 1,1988, which is approxunately $54 million, is included in " Net utility plant" on the Company's balance sheet and is being depreciated over the term of Seabrook l's operating license. The Company's share of 17 expenses for these units is included in " Operating expenses."

Note E 1. Oil and Gas Operations:

Commitments and NEEl, a subsidiary of NEES, is engaged in domestic oil and gas exploration, development, and Contingencies production. NEEI operates under an intercompany pricing policy (Pricing Policy) with the Company which has been approved by the Securities and Exchange Commission (SEC). The Pricing Policy requires the Company to purchase all fuel meeting its specifications offered to it by NEEl.

Under the Pricing Policy, NEEI's oil and gas exploration program is composed of prospects entered into through December 31,1983 under a rate-regulated program. NEEI has incurred operating losses since 1986, due to low oil and gas prices, and expects to incur substantial additional losses in the future. These losses are passed on to the Company in the year after they are incurred by NEEI and, in turn, are being recovered from customers through the Company's fuel clause. The Company's ability to pass these losses on to its customers was I

u

New England Pow:r Company Notes to Financial Statenients (continued) favorably resolved in the Company's 1988 FERC rate settlement. This settlement covered all Note E costs incurred by or resalting from commitments made by NEEI through March 1,1988.

Other subsequent costs incurred by NEEI are subject to normal regulatory review. In 1995, f* ',*"

1994, and 1993, the Company recorded accrued fuel expenses and accrued revenues of $44 (continued) million, $40 million, and $46 million, respectively, representing losses incurred by NEEI in each year.

In the absence of the Pricing Policy,the SEC's cost center " ceiling test" rule requires non-rate-regulated companies to write down capitalized costs to a level which approximates the pre-sentvalue of their proved oil and gas reserves. Based on NEEl's 1995 average oil and gas sell-ing prices, application of the ceiling test would have resulted in a write-down of approxi-mately $112 million after tax ($178 million before tax) at December 31,1995.

2. Plant Expenditures: At The Company's utility plant expenditures are estimated to be $85 million in 1996.

December 31,1995, substantial commitments had been made relative to future planned expenditures.

3. Hydro-Quebec Interconnection:

The Company is a participant in both the Hydro-Quebec Phase I and Phase II projects. The Company's participation percentage in both projects is approxunately 18 percent. The Hydro-Quebec Phase I and Phase II projects were established to transmit power from Hydro-Quebec to New England.Three affiliates of the Company were created to construct and operate trans-mission facilities related to these projects. The participants, including the Company, have entered into support agreements that end in 2020, to pay monthly their proportionate share of the total cost of constructing, owning, and operating the transnussion facilities. The Company accounts for these support agreements as capitalleases and accordingly recorded approximately $73 million in utility plant at December 31,1995. Under the support agree-ments, the Company has agreed, in corijunction with any Hydro-Quebec Phase II project debt financing, to guarantee its share of project debt. At December 31,1995, the Company had

. guaranteed approxunately $30 million of project debt.

4. Natural Gas Pipeline Capacity:

In connection with serving the Company's gas-burning electric generation facilities, the Company has entered into several contracts for natural gas pipeline capacity and gas supply.

These agreements require nummum fixed payments that are currently estunated to be approximately $60 million to $65 million per year from 1996 to 2000. Remaining fixed pay-ments from 2001 through 2014 total approxunately $625 million.

As par 6 of a rate settlement, the Company was recovering 50 percent of the fixed pipelire capacity payments through its current fuel clause and deferring the recovery of the retr an-

" ing 50 percent until the Manchester Street repowering project was completed. These <.tefer-rals ended in November 1995, at which time the Company had deferred payments of approx-imately $63 million which will be amortized over 25 years in accordance with rate settlements (see Note B).

In connection with managmg its fuel supply, the Company uses a pordon of this pipeline capacity to sell natural gas. Proceeds from the sale of natural gas and pipeline capacity of $71 million, $55 million, and $21 million, in 1995,1994, and 1993, respectively, have been passed on to customers through the Company's fuel clause. These proceeds have been included in

" Fuel for generation" in the Company's statements of income as an offset to the related fuel expense. Natural gas sales are expected to decrease as a result of the Manchester Street Station entering commercial operation in the second half of 1995.

5. Hazardous Waste:

The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws.

• New England Pow r Company Notes to Financial Statements (continued)

Note E The electric utility industry typically utilizes and'or generates a range of potentially hazardous Commitments and pr ducts and by-products in its operations. NEES subsidiaries currently have an environmen-Contingencies tal audit program in place intended to enhance compliance with extstmg federal, state, and I cal requirements regarding the handling of potentially hazardous products and by-products.

(continued)

The Company has been named as a potentially responsible party (PRP) by either the U.S.

Environmental Protection Agency or the Massachusetts Department of Environmental Protection for six sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against the Company regarding haz-ardous waste cleanup. The Company is currently aware of other sites, and may in the future become aware of additional sites, that it may be held responsible for remediating.

Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncenainties as to the pordon, if any, of the investiga-tion and remediadon costs of any pardcular hazardous waste site that may ultimately be borne by the Company. Where appropriate, the Company intends to seek recovery from its insurers and from other PRPs, but it is uncenain whether, and to what extent, such efforts will be successful. The Company believes that hazardous waste liabilides for all sites of which it is aware are not material to its financial position.

6. Nuclear Plant Decommissioning and Nuclear Fuel Disposal:

The Company is recovering its share of projected decommissioning costs for Millstone 3 and Seabrook 1 through depreciation expense. Projected decommissioning costs include es'imat-ed costs to decontaminate the units as required by the Nuclear Regulatory Commission (NRC), as well as costs to dismantle the non-contamiwad portion of the units. The Company records decommissioning cost expense on its books consistent with its rate recovery. In addi-tion, the Company is paying its portion of projected decommissioning costs for all of the Yankees through purchased power expense. Such costs reflect estunates of total decommis-sioning costs approved by the FERC.

Each of the operating nuclear units in which the Company has an ownership interest has .'

established decommissioning trust funds or escrow funds into which payments are being made to meet the projected costs of deconmussioning each plant. Listed below is information on each operating nuclear plant in which the Company has an ownership interest.

The Company's share of Un millions of dollard Estimated Ownership Decommissioning Cost Fund IJcense Unit Interest (in 1995 $) Balances ** Expiradon  !

is l ConnecdcutYankee 15 % 58 27 2007  !

Maine Yankee = 20% 71 28 2008 Vermont Yankee 20% 71 27 2012 1 Millstone 3

• 12% 58 14 2025 l Seabrook 1* 10% 43 6 2026 l

• Fund balances are included in "Non-utility property and other investments' on the balance i sheets and approximate market value.

• • Certain additional amounts are andcipated to be available through tax deductions.

• • • A Maine statute provides that if both Maine Yankee and its decomnussioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall.

New England Power Company .

Notes to Financial Statessents (continued)

There is no assurance that decommissioning costs actually incurred by the Yankees, Note E Millstone 3, or Seabrook I will not substantially exceed these amounts. For example, decom-Commu.tments and missioning cost estimates assume the availability of permanent repositories for both low-level ConMencies and high-level nuclear waste that do not currently exist. If any of the units were shut down (continued) prior to the end of their operating licenses, the funds collected for decommissioning to that point would be insufficient.

The Nuclear Waste Policy Act of 1982 establishes that the federal government is responsible for the disposal of spent nuclear fuel. The federal government requires the Company to pay a fee based on its share of the net generation from Millstone 3 and Seabrook 1. The Company is recovering this fee through its fuel clause. Sinular costs are incurred by Comtecticut Yankee, Maine Yankee, and Vennont Yankee. These costs are billed to the Company and also recovered from customers through the Company's fuel clause.

7. Nuclear Insurance:

The Pdce-Anderson Act limits the amount ofliability clauns that would have to be paid in the  ;

event of a single incident at a nuclear plant to $8.9 billion (based upon 110 licensed reactors). l The maximum amount of commercially available insurance coverage to pay such claims is $200 million. The remainmg $8.7 billion would be provided by an assessment of up to $79.3 million per incident levied on each of the participating nuclear units in the United States, subject to a )

maxunum assessment of $10 million per incident per nuclear unit in any year. The maximum j assessment, which was most recent'y aQusted in 1993,is a$usted for inflation at least every 1 l

five years.The Company's current interest in the Yankees (excluding Yankee Atomic), Millstone 3, and Seabrook 1 would subject the Company to a $58 million maxunum assessment per inci- l dent. The Company's payment of any such assessment would be limited to a maxunum of $7.3 l million per incident per year. As a result of the permanent cessation of power operation of the l Yankee Atomic plant, Yankee Atomic has received from the NRC a partial exemption from oblig-ations under the Price-Anderson Act. However, Yankee Atomic must continue to maintain $100 million of commercially available nuclear insurance coverage.

Each of the nuclear units in which the Company has an ownership interest also carries nuclear property insurance to cover the costs of property damage, decontammation or premature decommissioning, and workers' claims resulting from a nuclear incident. Rese policies may j require additional premium assessments if losses relating to nuclear incidents at units covered l by this insurance occurring in a prior six-year period exceed the accumulated funds available.

The Company's maxunum potential exposure for these assessments, either directly, or indirect- ,

- ly through purchased power payments to the Yankees, is approximately $18 million per year. l l

8. Long-term Contracts for the Parchase of Electricity:

The Company purchases a portion of its electricity requirements pursuant to long-term con-tmets that expire in various years from 1996 to 2029, with owners of various generating units.

" Certain of these contracts require the Company to make muumum fixed payments, even when the supplier is unable to deliver power, to cover the Company's proportionate share of the cap-ital and fixed operating costs of these generating units. He rixed portion of payrnents under these contracts totaled $215 million in 1995, $190 million in 1994, and $220 million in 1993.

Rese contracts have nummum fixed pannent requirements of $190 million in 1996, $185 mil-lion in 1997, $190 million in 1998, $180 million in 1999 and 2000, and approximately $1.8 billion thereafter. Approximately 97 percent of the payments under these contracts are to the Yankees (excluding Yankee Atomic - see Note D-1) and Ocean State Power, entities in which the  ;

Company or its affiliates hold ownership interests.

De Company's other contracts, principally with non-utility generators, require the Company to make payments only if power supply capacity and energy are deliverable from such suppliers.

The Company's payments under these contracts amounted to $245 million in 1995, and $210 mil-lion in 1994 and 1993, respectively.

. .= . _ _ . . .-

" New England Pow:r Company Notes to Financial Statements (continued) 4 Note E 9. Purchased Power Contract Dispute: 1

" "*" 8 *"d In October 1994, the Company was sued by Milford Power Limited Partnership (MPLP), a ven- l

, ture of Enron Corporation and Jones Capital that owns a 149 MW gas-fired power plant in (conu.nued) Milford, Massachusetts. The Company purchases 56 percent of the power output of the facility

] under a long-term contract with MPLP. The suit alleges that the Company has engaged in a  ;

scheme to cause MPLP and its power plant to fail and has prevented MPLP from finding a long- i term buyer for the remainder of the facility's output. The complaint includes allegations that the l Company has violated the Federal Racketeer Influenced and Corrupt Organizations Act, l

, engaged in unfair or deceptive acts in trade or commeice, and breached contracts MPLP also asserts that the Company deliberately mislea regulatory bodies concerning the Manchester Street Station repowering project. MPLP seeks compensatory damages in an unspecified amount, as well as treble damages. 'Ihe Company believes that the allegations of wrongdoing are without merit. The Company has filed counterclaims and crosselaims against MPLP, Enron Corporation, and Jones Capital, seeking monetary damages and termination of the purchased power contract.

MPLP also intervened in the Company's current rate filing before the FERC, making sinular allegations to those asserted in MPLP's lawsuit. Hearings on this claim concluded in October 1995. An Admmistrative Law Judge initial decision is expected by mid-1996. l Note F 1. Pension Plans:

Employee Benefits The Company participates with other subsidiaries of NEES in noncontributory, defined-bene-fit plans covering substantially all employees of the Company. The plans provide pension ben-efits based on the employee's compensation during the five years prior to retirement. The Company's funding policy is to contribute each year the net periodic pension cost for that year.

However, the contribution for any year will not be less than the minimum contribution

required by federallaw or greater than the maxunum tax deductible amount.

Net pension cost for 1995,1994, and 1993 included the following components:

Year Ended December 31, (In Thousands) 1995 1994 1993 Service cost -benefits earned during the period $ 2,231 $ 2,202 $1,953 Plus (less):

Interest cost on projected benefit obligation 6,406 6,403 6,070 Return on plan assets at expected long-term rate (6,488) (6,554) (5,850)

Amortization 131 557 47 Net pension cost 8 2,280 $ 2,608 $2,220 Actual return on plan assets $17,108 5 608 $8,949 1996 1995 1994 1993 Assumptions used to determine pension cost Discount rate 7.25% 8.25% 7.25 % 8.25 %

Average rate ofincrease in future compensation levels 4.13 % 4.63% 4.35% 5.35%

Expected long-term rate of return on assets 8.50 % 8.75% 8.75 % 8.75 %

Service cost for 1993 does not reflect $10 million of costs incurred in connection with an early retirement and special severance program offered by the Company in that year.

1

New England Pow;r Company Notes to Financial Statesments (continued)

The funded status of the plans cannot be presented separately for the Co Note F Company participates in the plans with other NEES subsidiaries. The foll Employee Benefits f rth the funded mtm of the NEES companies' plans at December 31:

(continued) 1995 1994 Retirement Plans,(In Millions)

Union Non-Union Union Non-Union Employee Employee Employee Employee Plans Plans Plans ' Plans Benefits earned -

Actuanalpresentvalue of accumulated benefitliability: $343 $251 $308

$293 9 Vested 10 8 8

Non-vested $259 $317

$301 $353 Total Reconciliation of funded status Actuanalpresentvalue of projected $402 $303 $355

$346 benefitliability (8) (4)

(7) (4)

Unrecognized prior service costs - (1)

- (1)

Unrecognizedtransitionliability (13) (33)

(1) (23)

Unrecognizednetloss 2'32 317 338 ~374 293 323 349 392 -

Pension fund assets at fair value - (13)

Unrecognized transition asset (11) 280 323 338 392 Accrued pension /(prepaid)

$(18) $2 $ (6) payments recorded on books The plans' funded status at December 31,1995 and 1994 were cal rates from 1996 and 1995, respectively, and the 1983 Group Annuity Mortali Plan assets are composed primarily of corporate equity, guaranteed invest debt securities, and cash equh alents.

1

2. Postretirement Benefit Plans Other Than Pensions (PBOPs):

The Company provides health care and life insurance coverage to eligib l Eligibility is based on certain age and length of service requirements an retirees must contribute to the cost of their coverage.

l The total cost of PBOPs for 1995,1994, and 1993 included the following compo( -

1995 1994 1993 _ l Year Ended December 31, (In Thousands) l

$1,628 $1,632

$1,344 Service cost - benefits earned during the period l 3,954 4,275 ,

Plus (less): 4,013 Interest cost on accumulated benefit obligation (1,111) (725) l (1,374)

Return on plan assets at expected long-term rate 2,079 2,591 2,558 _ l Amortization $7,740 I

$6,062 $7,062 Net postretirement benefit cost

$4,137 8 54 $ 746 _

Actualreturn on plan assets t

5'

New England Pow:r Company Notes to Financial Statements (continued)

Note F 1996 1995 1994 1993 Employee Benefits Assumptions used to determine postretirement (continued) benefit cost:

Discount rate 7.25% 8.25 % 7.25% 8.25%

Expected long-term rate of return on assets 8.25% 8.50 % 8.50% 8.50%

Health care cost rate- 1994 and 1993 11.00% 12.00%

Health care cost rate-1995 to 1999 8.00 % 8.50% 8.50% 9.50%

Health care cost rate -2000 to 2004 6.25% 8.50% 8.50% 9.50%

Health care cost rate - 2005 and beyond 5.26% 6.25% 6.25% 7.25%

The following table sets forth benefits earned and the plans' funded status:

At December 31,(In Millions) 1995 1994 Accumulated postretirement benefit obligation:

Retirees $30 $31 ,

Fully eligible active plan participants 1 3 Other active plan participants 20 17 Total benents earned 51 51 Unrecognized transition obligation (43) (46)

Ureecognized net gain 12 6 20 11 4 Plan assets at fair value 23 15 l

. . Prepaid postretirement benefit costs recorded on books $3 $4 1

y The plans' funded status at December 31,1995 and 1994 were calculated using the assumed

j rates in effect for 1996 and 1995, respectively.

l 1

The health care cost trend rate assumption has a signi5 cant effect on the amounts reported.

Increasing the assumed rates by 1 percent in each year would increase the accumulated postredrement benefit obligation as of December 31,1995 by approxunately $6 million and the net periodic cost for the year 1995 by approxunately $1 million.

The Company funds the annual tax deductible contributions. Plan assets are invested in equi-ty and debt securides and cash equivalents. ,

1 Note G At December 31,1995, the Company had $125 million of short-term debt outstanding includ- ,

. Short-term ing $124 million in commercial paper borrowings and $1 million of borrowings from nmhares. 23 1

. Borrowings and NEES and certain subsidiaries, including the Company, with regulatory approval, operate a Other Accrued money pool to more effectively utilize cash resources and to reduce outside short-term bor-Expenses rowings. Short-term borrowing needs are met first by available funds of the money pool par-ticipants. Borrowing companies pay interest at a rate designed to approxunate the cost of out-side short-term borrowings. Companies which invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool Funds may be withdrawn from or repaid to the pool at any time without prior notice.

I l

• • • • *a New England Powcr Company Notes to Financial Statements (continued)

At December 31,1995, the Company had lines of credit and standby bond purcha:e facilities Note G with banks totaling $510 million which are available to provide liquidity support for commer-Short-term cial paper borrowings and for $342 million of the Company's outstanding variable rate mon-Borrowings and gage bonds in tax-exempt commercial paper mode (see Note I) and for other comorate pur-Other Accrued poses. There were no borrowings under these lines of credit at December 31,1995. Fees r g,, paid on the lines and facilities in lieu of compensating balances.

(continued)

The weighted average rate on outstanding short-term borrowings was 5.9 percent at December 31,1995. The fair value of the Company's shon-term debt equals carrymg value.

The components of other accrued expenses are as follows:

1995 1994 At December 31,(in Thousands) 8 6,258 $ 6,397 Accrued wages and benefits 4,324 4,323 Capitallease obligations due within one year 253 145 Other $10,866 4 10,834 A summary of cumulative preferred stock at December 31,1995 and 1994 is as follows Note H (in thousands of dollars except for share data):

Shares Preferred Stock Dividends Call Authorized and Outstanding Amount Declared Price 1995 1994 1995 1994 1995 1994

$100 Par value - (a) 6.00% Series 75,020 75,020 $ 7,502 $ 7,502 $ 451- $ 458 100,000 100,000 10,000 10,000 456 456 $104.08 4.56% Series 368 101.00 80,140 80,140 8,014 8,014 368 4.60% Series 464 102.56 100,000 100,000 10,000 10,000 464 4.61% Series 608 102.34 100,000 100,000 10,000 10,000 608 6.08% Series 1,086 103.06 150,000 150,000 15,000 15,000 1,086 7.24% Series Total 605,160 605,160 $60,516 $60,516 $3,433 $3,440 (a) Noncallable.

The annual dividend requirement for total cumulative preferred stock was $3,433,000 for 1995 and 1994.

4 i

New England Power Comptt' Notes to Financial Statesments (continued)

Note I A summary of long-term debt is as follows:

Long-teran Debt At December 31,(In Thousands)

Series Rate % Maturity 1995 1994 General and Refunding Mortgage Bonds:

W(93-3) 5.12 February 2,1996 8 5,000 $ 5,000 W(93-8) 5.06 February 5,1996 5,000 5,000 Y (94-3) 8.10 December 22,1997 3,000 3,000 W(93-2) 6.17 February 2,1998 -

4,300 4,300 W(93-4) 6.14 February 2,1998 1,300 1,300 W(93-5) 6.17 February 3,1998 5,000 5,000 W(93-7) 6.10 February 4,1998 10,000 10,000 W(93-9) 6.04 February 4,1998 29,400 29,400 Y (94-4) 8.28 December 21,1999 10,000 10,000 W(93-6) 6.58 February 10,2000 5,000 5,000 Y (95-1) 7.94 February 14,2000 5,000 Y (95-2) 7.93 February 14,2000 10,000 Y (95-3) 7.40 March 21,2000 10,000 Y (95-4) 6.69 June 5,2000 25,000 W(93-1) 7.00 February 3,2003 25,000 25,000 Y (94-2) 8.33 November 8,2004 10,000 10,000 K 7.25 October 15,2015 38,500 38,500 L 7.80 April 1,2016 29,850 29,850

. X variable March 1,2018 79,250 79,250 9 R vanable November 1,2020 117,850 107,850 S variable November 1,2020 20,750 20,750 i T vanable November 1,2020 18,000 28,000 U 8.00 August 1,2022 170,000 170,000 V variable October 1,2022 106,150 106,150 Y (94-1) 8.53 September 20,2024 5,000 5,000 Unamortized discounts (2,910) (2,884)

Totallong-term debt 745,440 695,466 Long-term debt due in one year (10,000) 4735,440 $695,466 Substantially all of the properties and franchises of the Company are subject to the lien of the mortgage indentures under which the general and refunding mortgage bonds have been issued.

29 The Company will make cash payments of $10 million in 1996, $3 million in 1997, $50 million in 1998, $10 million in 1999, and $55 million in 2000 to retire matunng mortgage bonds.

The terms of $342 million of variable rate pollution control revenue bonds (PCRBs) collater-alized by the Company's mortgage bonds require the Company to reacquire the bonds under certain limited circumstances. At December 31,1995, interest rates on the Company's variable rate bonds ranged from 3.35 percent to 6.00 percent. To date in 1996, the Company has issued

$40 million of additional variable rate PCRBs to refinance $10 million of Series T bonds and

$30 million of Series L bonds.

I

- s New England Power Company Notes to Financial Statesnents (continued)

At December 31,1995, the Company's long-term debt had a carrymg!

Note I $745,000,000 and had a fair value of approximately $785,000,000. Tl I

(continued) reprices frequently at market rates approximat l similar issues or on the current rates offered to the Company for debt o!

maturity.

Pursuant to the provisions of the Articles of Orgamzation and the By-L .

Note J Dividend Series Preferred Stock, certain restrictions on payment of dividend

• stock would come into effect if the " junior stock equity" was, or by re i

'""', dividends became, less than 25 percent of " Total capitahzation." How Available for equity at December 31,1995 was 52 percent of total capitahntion, Dividends on due in one year, and accordingly, none of the Company's retained ea Common Stoc'< 1995 were restricted as to dividends on comaon stock under the foregoing Under restrictions contained in the in lentures relating to general andwere 31,1995 refundin bonds (Series K), none of the Company's retained  !

earnings (less than $20 million) may be restricted due to regulatory hydroelectriclicensed projects.

3 Advertising expenses, expenditures for research and development, and ren Note K lal and there were no royalties paid in 1995,1994, or 1993. Taxes, other than charged to operating expenses are set forth by classes as follows:

,,"[t e nt 1995 1994 1993 Infonnation Year Ended December 31, (In Thousands)

$49,807 $46,506 $44,124 Municipalproperty taxes 8,909 7,894 7,807 Federal and state payroll and other taxes $54,400 $51,931

$58,716 New England Power Service Company, an affihnted senice company op the provisions of Section 13 of the Public Utility including capitalized construction costs of $24,671,000,

$103,961,000, and $94,366,000, 1995,1994, and 1993, respectively.

$22,396,000, and $20,335,000, for each of the years E

l .

I

- _m _

,New England Powr.r Company i Operating Statistica (Unaudited)

I Year Ended Decenber 31, 1995 1994 1993 1992 1991 Sources of Energ/ (Thousands of kk Net generadon -thermal 11,547,856 10,971,319 11,621,038 12,087,775 13,569,122 Net generadon-conventional hydro 1,257,533 1,352,600 1,253,925 1,212,155 1,507,656 Genemtion-pumped s' cage 519,931 525,653 M8,358 530,796 498,895 Net generation -nuclei, 1,812,468 1,767,959 1,696,677 1,592 N0 1,033,332 l l Nuclear entitlements 1,278,598 2,535,534 2,196,998 2,214,976 l 2,713,947 Purchased energy from

! non-affiliates (B) 8,857,842 8,674,191 7,800,975 7,287,856 6,323,144 i Energy forpumping (716,279) (723,352) (750,784) (738,364) (685,659)

Totalgenerated andpurchased 24,557,949 25,103,904 24,367,187 24,187,534 24,960,437 losses, company use, etc. (690,626) (635,695) (548,228) (632,850) (589,001) ,

Totalsources of energy 23,867,323 24,468,209 23,818,959 23,554,684 24,371,436 Sales of Energy (Thousands of kWh)

Resale:

I Affihated companies 22,338,301 22,182,761 21,858,491 21,497,993 21,496,098 l Less -generation by affiliated Company (A) (64,035) (5,781) (4,506) (83,753) (162,844)

Net sales to affihated companies 22,274,266 22,176,980 21,853,985 21,414,240 21,333,2M Other utilities (B) 947,537 1,731,225 1,528,686 1,705,591 2,613,034 l Ih Municipals 633,970 551,866 426,525 415,659

' 411,171 i

Totalsales for resale l 23,855,773 24,460,071 23,809,196 23,535,490 24,357,459

q. Ultimate customers 11,550 8,138 1

9,763 19,194 13.977 h Totalsales of energy 23,867,323 24,468,209 23,818,959 23,554,684 24,371,436 Operating Revenue (In Thousands) i Revenue from electric sales l Resale:

Ambted companies $1,498,848 $1,448,503 $1,459,619 $1,450,831 $1,3M,222 less -G and T credits (A) (43,532) (32,M6) (26,001) (38,697) (50,961)

Net sales to affiliated companies 1,455,316 1,416,157 1,433,618 1,412,134 1,333,261 Other utilities (B) 41,193 56,306 52,695 55,156 76,162 l Municipals 37,036 32,055 27,574 26,980 25,755 l Totalrevenue from sales for resale 1,533,545 1,504,518 1,513,887 1,494,270 1,435,178 Ultimate customers 945 606 752 1,399 1,097 2r Totalrevenue from electric sales 1,534,490 1,505,124 1,514,639 1,495,669 1,436,275 Other operating revenue 36,049 35,633 34,375 35,206 36,016 Totaloperating revenue $1,570,539 $1,M0,757 $1,549,014 $1,530,875 $1,472,291 j Annual Maximum Demand (kW-cne hour peak) 4,381,000 4,385,000 4,081,000 3,964,000 4,250,000 l (A) The generation and transmission facilities of affiliates are operated as an integrated part of the Company's power supply and the affiliates receive generation and transmission (G and T) credits against their power bills j for costs of facilities so integrated.

l (B) Includes transactions with the New England Power Pool, i

N O O '"N M 4 g

.......~..,,,,,

New England Pow:r Company Year End'. ~ December 31, On Millions) 1995 1994 1993 1992 1991 Selected Rnancial Operating revenue:

" Electric sales (excluding fuel cost recovery) $ 941 8 942 $ 939 $ 907 $ 861 Fuelcostrecovery 594 563 576 589 575 Other 36 36 34 35 36 Totaloperating revenue $ 1,571 $1,541 $1,549 f,1,531 $1,472 Netincome $ 151 $'149 $ 141 $ 134 $ 135 Totalassets $ 2,648 $2,613 $2,441 $2f>87 $2,277 Capitali7ation:

Common equity 8 889 $ 877 $ 850 $ 825 $ 797 Cumulative preferred stock 61 61 61 86 86 long-term debt 735 695 667 666 730 Total capitahrntion $ 1,685 $1,633 $1,578 $1,577 $1,613 Preferred dividends declared 8 3 $ 3 $ 5 8 6 8 6 Common dividends declared $ 135 $ 119 $ 111 $ 100 $ 116 Selected Quarterly First Second Third Fourth FinancialWormation On Thousands) Quarter Quarter Quarter Quarter (Unaudited) 1995 Operating revenue $ 391,118 $ 378,177 $ 421,935 $ 379,309 Operatingincome $ 40,089 $ 33,454 $ 69,669 $ 42,201 Netincome $ 30,982 $ 27,689 $ 61,684 $ 31,072 1994 Operating revenue $ 399,574 $356,488 $419,555 $365,140 Operatingincome $ 56,873 $ 32,192 $ 55,217 $ 26,239 Netincome $ 49,189 $ 26,182 $ 49,818 $ 24,184 Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System.

A copf of New England Power Company's Annual Report on Fonn 10-K to the Securities and Exchange Commission for the year ended December 31,1995 will be available on or about April 1,1996, without charge, upon written request to New England Power Company, Shareholder Services Department,25 Research Drive, Westborough, Massachusetts 01582.

-