Massachusetts Municipal Wholesale Electric Company. Financial Statements. December 31, 2010 and 2009

Transcription

1 Massachusetts Municipal Wholesale Electric Company Financial Statements December 31, 2010 and 2009

2 FINANCIAL STATEMENTS C O N T E N T S Page Independent Auditor s Report... 1 Management s Discussion and Analysis Financial Statements: Balance Sheets... 8 Statements of Revenues and Expenses... 9 Statements of Cash Flows Supplemental Information: Project Balance Sheet Project Statement of Revenues and Expenses Project Statement of Cash Flows Debt Service Coverage Calculation... 42

3 80 City Square Boston, MA O F INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Members of Ludlow, Massachusetts We have audited the accompanying balance sheet of Massachusetts Municipal Wholesale Electric Company (The Company) as of December 31, 2010, and the related statements of revenues and expenses and cash flows for the year then ended. 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 audit. The financial statements of for the year ended December 31, 2009, were audited by Caturano and Company, Inc., independent accountants, certain of whose shareholders became partners of McGladrey & Pullen, LLP on July 20, Caturano and Company, Inc. s report dated March 31, 2010 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2010 financial statements referred to above present fairly, in all material respects, the financial position of as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The Management's Discussion and Analysis is not a required part of the basic financial statements, but is supplemental information required by the Governmental Accounting Standards Board. We have applied certain limited procedures that consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplemental information. However, we did not audit the information and express no opinion on it. The project financial statements and debt service coverage information as identified in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the financial statements and, accordingly we express no opinion on the information. March 31, 2011 Boston, Massachusetts

4 Page 2 Management s Discussion and Analysis Years Ended December 31, 2010, 2009 and 2008 The following discussion and analysis of the (MMWEC) provides an overview and analysis of MMWEC s financial performance during the years ended December 31, 2010, 2009 and This discussion and analysis should be read in conjunction with MMWEC s financial statements and the accompanying notes. OVERVIEW OF THE FINANCIAL STATEMENTS MMWEC is a public corporation and a political subdivision of the Commonwealth of Massachusetts formed to be a joint action agency and to develop a bulk power supply for its member Massachusetts cities and towns having municipal electric systems (Members) and other utilities, both private and public. Among other things, MMWEC is authorized to construct, own or purchase ownership interests in energy facilities and to issue revenue bonds for such purposes. MMWEC s ownership interest in energy generation facilities are through various Projects. Pursuant to its General Bond Resolution (GBR), the bonds of any bond issue relating to a Project are secured solely by revenues derived from that Project. Project revenues are derived primarily from Power Sales Agreements (PSAs) with MMWEC s Members and other utilities that are Participants in a Project (Project Participants). MMWEC s bulk power supply program consists of power purchase arrangements, power brokering services, planning and financial services, and the Projects relating to generating facilities built and operated either by MMWEC or other entities. The accounting records of MMWEC are maintained in accordance with the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission and in conformity with generally accepted accounting principles for regulated utilities using the accrual basis of accounting. This also includes Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, formerly SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, as it relates to the deferral of revenues and expenses to future periods in which the revenues are expected to be earned or expenses expected to be recovered through the ratemaking process. MMWEC follows all Governmental Accounting Standards Board (GASB) statements and follows all statements issued by the Financial Accounting Standards Board (FASB) before November 30, MMWEC also follows all FASB statements issued after November 30, 1989, to the extent there is no GASB guidance available. This annual report consists of two parts: Management s Discussion and Analysis (this section) and the basic financial statements. The Balance Sheets report year-end assets and liabilities based on the original cost adjusted for any depreciation, amortization or unrealized gains/losses as appropriate. The Statements of Revenues and Expenses present MMWEC s operating revenues and expenses incurred as a result of MMWEC s business activity. The Statements of Cash Flows report the cash provided and used for operating activities, as well as investing activities and capital and related financing activities.

5 Page 3 Management s Discussion and Analysis Years Ended December 31, 2010, 2009 and 2008 MMWEC FINANCIAL ANALYSIS An analysis of MMWEC s financial position begins with the review of the Balance Sheets, the Statements of Revenues and Expenses and the Statements of Cash Flows. A summary of MMWEC s Condensed Balance Sheets is presented in Table 1. The Condensed Statements of Revenues and Expenses is summarized in Table 2 and the Condensed Statements of Cash Flows is summarized in Table 3. Table 1 Condensed Balance Sheets Current assets less current portion of restricted special funds $ 80,457 $ 88,147 $ 89,807 Restricted assets including current portion of restricted special funds 257, , ,969 Other assets 91,094 78,414 67,050 Capital assets 604, , ,998 Total assets $ 1,032,958 $ 1,008,940 $ 976,824 Current liabilities $ 212,198 $ 192,931 $ 176,534 Noncurrent liabilities 820, , ,290 Total liabilities $ 1,032,958 $ 1,008,940 $ 976,824 Table 2 Condensed Statements of Revenues and Expenses Operating revenues $ 306,263 $ 286,246 $ 404,617 Depreciation expense 14,774 14,870 14,542 Other operating expenses 227, , ,358 Total operating expenses 241, , ,900 Operating income 64,351 77,660 81,717 Investment income 11,501 9,249 1,023 Interest and amortization expense (15,312) (17,840) (25,337) Increase in amounts payable under terms of the power sales agreements (60,540) (69,069) (57,403) Total non-operating expenses (64,351) (77,660) (81,717) Net revenues and expenses $ - $ - $ -

6 Page 4 Management s Discussion and Analysis Years Ended December 31, 2010, 2009 and 2008 MMWEC FINANCIAL ANALYSIS continued Table 3 Condensed Statements of Cash Flows Net cash provided by operating activities $ 116,840 $ 136,163 $ 69,181 Net cash provided by (used in) investing activities (7,620) (103,941) 42,779 Net cash used in capital and related financing activities (100,304) (118,532) (115,051) Net change in cash and cash equivalents 8,916 (86,310) (3,091) Cash and cash equivalents beginning of year 26, , ,811 Cash and cash equivalents end of year $ 35,326 $ 26,410 $ 112,720 BALANCE SHEET The majority of MMWEC s Balance Sheets consists of the financial activity relating to various Projects, representing ownership interests in various electric generation facilities for which MMWEC has corresponding PSAs with each Project Participant. MMWEC s joint ownership interests are shown in Note 9 Project Joint Ownership Agreements in the accompanying notes of the accompanying financial statements. The following analysis compares 2010 financial results to 2009 financial results. Current assets increased by $6.0 million. Cash and temporary investments decreased by $1.3 million, primarily due to timing differences in the portfolio, which in the current year, shows a lower balance in 2010 of investments with a maturity of less than one year than was shown in The decrease in accounts receivable and unbilled revenue of $5.2 million is chiefly attributable to higher amounts billed in 2009 related to the Seabrook Projects for maintenance and refueling outage costs incurred in late Current and noncurrent restricted funds, including related interest receivable, increased by $23.7 million, primarily due to collecting higher than actual amounts for interest on the variable-rate bonds (as discussed in Note 6 of the accompanying financial statements), resulting in the buildup of the revenue fund on Nuclear Mix No. 1 and Nuclear Projects 3, 4 and 5 and Project 6. Deferred charges increased by $12.7 million from 2009 to 2010, reflecting improved investment performance of and monthly contributions made to the nuclear decommissioning trust funds; higher market valuation of and increased contributions made to pension assets; and larger advances made to the lead owners for Project operating costs of Projects where MMWEC is a minority joint owner; as offset by a slight decrease as a result of continued amortization of debt issuance costs. In 2010, capital assets had a net decrease of $4.7 million due to continued depreciation and lower nuclear fuel purchases, offset by increased in-service assets. The $19.3 million increase in current liabilities largely is the result of the buildup of operating and capital reserves in Member and Participant advances partially offset by timing-related decreases in accounts payable and accrued expenses and decreased draws on the lines of credit resulting in lower short-term debt balance than in the prior year.

7 Page 5 Management s Discussion and Analysis Years Ended December 31, 2010, 2009 and 2008 BALANCE SHEET continued Long term debt, including current maturities, decreased by $60.2 million primarily due to the retirement of long term debt. Other noncurrent liabilities excluding long term debt increased $66.3 million due to accretion of asset retirement obligations, and increases in amounts payable under the terms of the PSAs, which include temporary offsets of unbilled expenses, such as depreciation and unrealized gains/losses, and bond payment activity. STATEMENTS OF REVENUES AND EXPENSES The majority of MMWEC s Statements of Revenues and Expenses consists of the financial activity relating to revenues and expenses from power purchases and the PSAs for the Projects. Project revenues are derived, primarily, from PSAs with Project Participants. Under all PSAs, the Participants are required to pay their respective shares of MMWEC s actual costs relating to the Projects, including debt service. Thus, MMWEC s revenues for an individual Project are dependent on debt service and the costs associated with that particular Project. Revenues for the individual Projects vary from year to year as the costs MMWEC incurs vary. MMWEC bills under the PSAs only the expenses and costs it incurs from the lead owner of the generating facility and its own expense associated with each Project plus certain other amounts required pursuant to MMWEC s General Bond Resolution. For 2010, revenue increased by $20 million due to both higher temperatures in 2010 than in 2009 and for reliability reasons, both of which increased load and caused the Stony Brook unit to run more frequently, resulting in greater generation. A portion of the increase resulted from higher net interchange billings from ISO New England, Inc. (ISO-NE) reflecting MMWEC providing ISO-NE settlement services to one additional Member during 2010 as compared to 2009 and increasing purchase power-related revenues. Purchased power expenses increased by $19.8 million during 2010 as compared to 2009 also due to higher temperatures increasing load and resulting in additional power purchases to meet the additional demand. The $13.4 million increase in fuel used in electric generation was driven by greater generation and increased fuel costs at Seabrook Station and Stony Brook, partially offset by lower generation at Millstone. Other operating expense increased $3.1 million reflecting increased generation at Seabrook Station and Stony Brook Intermediate and lead owner restructuring-related expenses incurred at Millstone. Maintenance expense decreased $3.6 million in 2010 due to less maintenance activity at Seabrook Station than in During 2009, Seabrook Station had re-fueling and extended maintenance outages, resulting in higher expense in that year. The decrease attributable to Seabrook Station was partially offset by the outage costs incurred during Millstone Unit 3 maintenance and refueling outages in In 2010, depreciation expense decreased $0.1 million. This is the result of additional capital assets becoming fully depreciated during the year and an extension of useful life for Wyman capital assets (as discussed in Note 1 of the accompanying financial statements). The $0.7 million increase in taxes other than income is attributable to a Millstone property tax settlement which occurred in 2009, which lowered the prior year balance. In addition, Seabrook Station had increased property tax assessments in 2010.

8 Page 6 Management s Discussion and Analysis Years Ended December 31, 2010, 2009 and 2008 STATEMENTS OF REVENUES AND EXPENSES continued Investment income, which is a result of varying fund balances and interest rates, increased by $2.3 million in 2010, due to improved investment market conditions and higher overall investment balances. Interest and amortization expense decreased by $2.5 million, primarily driven by reduced long-term debt balances due to scheduled principal payments. The increase in amounts payable under terms of the PSAs is discussed in Note 1 of the accompanying financial statements. STATEMENT OF CASH FLOWS Cash and cash equivalents are defined as investments, having an initial maturity of three months or less at purchase, plus immediately accessible bank accounts. Cash and cash equivalents increased by $8.9 million from 2009 to The primary reason for this increase was the redeployment of investments into cash and cash equivalents and a decrease in interest payments on long term debt due to reduced long term debt levels and reduced principal payments on short term debt. The 2010 increase also resulted from increased interest received due to better market performance of investments during DEBT SERVICE COVERAGE For the PSAs contract years ended June 30, 2010 and June 30, 2009, MMWEC met the GBR debt service coverage requirements for all of MMWEC s Projects. In accordance with the provisions of MMWEC's GBR, MMWEC covenants that it will fix, revise and collect rates, tolls, rents and other fees and charges sufficient to produce revenues to pay all Project operating and maintenance expenses as well as principal, premium, if any, and interest on the Bonds associated with each Project. Revenues for each Project, which include applicable interest earnings from investments, associated with funds required to be maintained by the GBR are required to equal 1.10 times the annual debt service for the PSA contract year ending June 30, after deduction of certain operating and maintenance expenses and exclusive of depreciation. Further details can be found in the Supplementary Information to the financial statements. DEBT RATINGS During 2010, following their annual credit review of MMWEC, the three major credit rating agencies upgraded their ratings of the MMWEC Projects. Standard & Poor's Ratings Services raised its underlying ratings on bonds outstanding for Nuclear Mix No. 1 and Nuclear Projects No. 3 and 4 to 'A+'. Standard & Poor's also raised its rating on bonds outstanding for Project No. 6 to 'A-' from 'BBB+' and affirmed its 'A' rating on bonds outstanding for Nuclear Project No. 5. Fitch Ratings upgraded the ratings on all MMWEC projects with outstanding bonds to A+ from A. Moody s Investors Service upgraded Nuclear Mix No. 1 and Nuclear Projects No. 3 and 4 and Project 6 to A3 from Baa1 and affirmed its A3 rating of Nuclear Project No. 5. SIGNIFICANT EVENTS During 2010, MMWEC continued development work on its plans to build Stony Brook Unit 3, a 280- megawatt combined-cycle dual fuel generating unit to be located at its Stony Brook site in Ludlow, Massachusetts. Most of the 2010 efforts have been directed at obtaining subscription commitments to Stony Brook Unit 3 and investigating candidates for joint ownership.

9 Page 7 Management s Discussion and Analysis Years Ended December 31, 2010, 2009 and 2008 SIGNIFICANT EVENTS continued Additionally, during 2010, MMWEC invited tender offers from its variable-rate long-term debt holders. The intent of the tender was to replace some or all of its current variable-rate long-term debt with fixed rate long-term debt. Due to market conditions, in November 2010 MMWEC withdrew its tender and declined to accept the variable rate debt tendered. MMWEC is not prohibited from under taking another tender in the future. As of December 31, 2010, 20 Massachusetts cities and towns having municipal electric systems were Members of MMWEC. MMWEC PROJECT OPERATIONS The following table provides 2010 operating information for the MMWEC Projects. See Note 8 Project Joint Ownership Agreements in the accompanying notes for additional information. MMWEC Project Operations January 1 through December 31, 2010 Stony Brook Intermediate Stony Brook Peaking Seabrook Millstone 3 Wyman Availability 96.20% 99.15% 100% 87.35% 89.44% Capacity Factor 9.95% 0.58% 100% 86.14% 2.29% Generation MWH 280,162 8,758 1,264, ,022 4,488 The capacity factor represents the percentage of electricity actually produced as compared with potential production. CONTACT INFORMATION This financial report is designed to provide a general overview of MMWEC s finances. Questions or requests for additional information should be addressed to MMWEC Attn: Director of Accounting & Financial Reporting, PO Box 426, Ludlow, Massachusetts

10 Page 8 Balance Sheets December 31, 2010 and ASSETS Current assets: Cash and temporary investments $ 11,237 $ 12,533 Accounts receivable 25,247 29,547 Unbilled revenues 17,291 18,223 Inventories 25,726 26,791 Prepaid expenses 956 1,053 Current portion of restricted special funds 109,105 95,434 Total current assets 189, ,581 Noncurrent assets: Restricted assets: Restricted special funds 147, ,110 Interest receivable 673 1,084 Deferred charges: Unamortized debt issuance costs 1,957 2,614 Nuclear decommissioning trust 65,139 58,088 Other deferred charges 23,998 17,712 Total noncurrent assets 239, ,608 Capital assets: In service 1,348,467 1,338,051 Accumulated depreciation (788,388) (773,780) Construction work in progress 15,610 15,831 Nuclear fuel, net of amortization 28,346 28,649 Total capital assets 604, ,751 Total assets $ 1,032,958 $ 1,008,940 LIABILITIES Current liabilities: Accounts payable $ 13,892 $ 12,983 Member and Participant advances 113,046 92,388 Short-term debt 2,069 2,458 Accrued expenses 23,535 26,834 Current liabilities payable from restricted assets: Current maturities of long-term debt 59,656 58,268 Total current liabilities 212, ,931 Noncurrent liabilities: Long-term debt, net of premiums and current maturities 388, ,439 Asset retirement obligations 105, ,261 Amounts payable under terms of the power sales agreements 265, ,329 Other liabilities 60,744 58,980 Total noncurrent liabilities 820, ,009 Total liabilities $ 1,032,958 $ 1,008,940 The accompanying notes are an integral part of these financial statements.

11 Page 9 Statements of Revenues and Expenses Operating revenues: Revenues $ 306,263 $ 286,246 Operating expenses: Fuel used in electric generation 30,763 17,358 Purchased power 138, ,039 Other operating 43,650 40,579 Maintenance 9,061 12,620 Depreciation 14,774 14,870 Taxes other than income 4,803 4,120 Total operating expenses 241, ,586 Operating income 64,351 77,660 Non-operating revenues (expenses): Investment income 11,501 9,249 Interest expense on long-term debt (16,888) (19,899) Amortization of premium 2,160 2,768 Amortization of debt issuance costs (656) (786) Interest charged to projects during construction Increase in amounts payable under terms of the power sales agreements (60,540) (69,069) Total non-operating expenses (64,351) (77,660) Net revenues and expenses $ - $ - The accompanying notes are an integral part of these financial statements.

12 Page 10 Statements of Cash Flows Cash flows from operating activities: Received from sales to members and participants $ 333,917 $ 315,852 Paid to suppliers for goods and services (217,077) (179,689) Net cash provided by operating activates 116, ,163 Cash flows from investing activities: Net purchases of investments (13,945) (105,763) Interest received 6,325 1,822 Net cash used in investing activities (7,620) (103,941) Cash flows from capital and related financing activities: Construction expenditures and purchases of nuclear fuel (22,072) (24,435) Proceeds from issuance of short-term debt 7,590 6,236 Principal payments on long-term debt (57,990) (68,000) Principal payments on short-term debt (7,979) (8,756) Decommissioning trust payments (1,465) (1,964) Interest payments on long-term debt (18,388) (21,613) Net cash used in capital and related financing activities (100,304) (118,532) Net change in cash and cash equivalents 8,916 (86,310) Cash and cash equivalents, beginning of year 26, ,720 Cash and cash equivalents, end of year $ 35,326 $ 26,410 The accompanying notes are an integral part of these financial statements.

13 Page 11 Statements of Cash Flows continued Reconciliation of operating income to net cash provided by operating activities: Operating income $ 64,351 $ 77,660 Noncash items included in operating income: Depreciation 14,774 14,870 Amortization of nuclear fuel and accretion of asset retirement obligations 17,159 12,718 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 4,300 2,898 Unbilled revenues 932 (2,277) Inventories 1, Prepaid expenses 97 (140) Other deferred charges (6,286) - Increase (decrease) in: Accounts payable 908 (1,762) Member and Participant advances 20,658 26,657 Accrued expenses (1,798) 2,987 Other liabilities 1,764 2,328 Amounts payable under terms of power sales agreements (1,084) 103 Net cash provided by operating activities $ 116,840 $ 136,163 Reconciliation of cash and cash equivalents to the balance sheet: Cash and temporary investments $ 11,237 $ 12,533 Total restricted special funds 256, ,544 Total cash and investments 267, ,077 Less - investments included in restricted special funds (232,610) (218,667) Total cash and cash equivalents $ 35,326 $ 26,410 Supplemental disclosures of cash flow information: Noncash investing, capital and financing transactions: Amortization of debt premiums and issuance costs $ 1,504 $ 1,982 The accompanying notes are an integral part of these financial statements.

14 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS Reporting Entity/Nature of Business The (MMWEC) is a public corporation and a political subdivision of the Commonwealth of Massachusetts formed to be a joint action agency to develop a bulk power supply for its member Massachusetts cities and towns having municipal electric systems (Members) and other utilities, both public and private. Among other things, MMWEC is authorized to construct, own, or purchase ownership interests in energy facilities and to issue revenue bonds for such purposes. MMWEC s ownership interest in energy generation facilities are through various Projects (Note 8). Pursuant to its General Bond Resolution (GBR), the bonds of any bond issue relating to a Project are secured solely by revenues derived from that Project. Project revenues are derived primarily from Power Sales Agreements (PSAs) with MMWEC s Members and other utilities who are Participants in a Project (Project Participants). MMWEC s bulk power supply program consists of power purchase arrangements, power brokering services, planning and financial services, and the Projects relating to generating facilities built and operated either by MMWEC or other entities. A Massachusetts city or town having a municipal electric system, authorized by majority vote of the city or town, may become a Member of MMWEC by applying for admission and agreeing to comply with the terms and conditions of membership as MMWEC By-Laws may require. As of December 31, 2010 and 2009, twenty (20) Massachusetts cities and towns having municipal electric systems were Members. Measurement Focus, Basis of Accounting and Financial Statement Presentation The accounting records of MMWEC are maintained in accordance with the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission (FERC) and in conformity with generally accepted accounting principles (GAAP) for regulated utilities using the accrual basis of accounting. Additionally, MMWEC follows ASC 980, formerly SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, as it relates to the deferral of revenues and expenses to future periods in which the revenues are expected to be earned or expenses are expected to be recovered through the ratemaking process. MMWEC follows all Governmental Accounting Standards Board (GASB) statements and follows all Financial Accounting Standards Board (FASB) statements issued before November 30, MMWEC also follows all FASB statements issued after November 30, 1989, to the extent there is no GASB guidance available. Fair Value Measurements In September 2006, FASB issued guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance provides a consistent definition of fair value which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.

15 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Fair Value Measurements continued The following is a synopsis of the FASB fair value measurements. Level 1 - Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. MMWEC does not adjust the quoted price for these investments, even in situations where MMWEC holds a large position and a sale could reasonably impact the quoted price. Level 2 - Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments. Level 3 - Pricing inputs are unobservable for the investment, that is, inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability. Level 3 includes private investments that are supported by little or no market activity.

16 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Fair Value Measurements continued The following table presents MMWEC's assets measured at fair value on a recurring basis as of December 31: Investment and cash equivalents: 2010 Level 1 Level 2 Level 3 Total Government Money Market Funds $ 3,630 $ - $ - $ 3,630 U.S. Treasury Bills 90, ,130 U.S. Treasury Notes 32, ,749 U.S. Agency Bonds - 120, ,386 U.S. Agency Discount Notes - 8,200-8,200 Investments and Cash Equivalents $ 126,509 $ 128,586 $ - $ 255,095 Nuclear Decommissioning Trust $ - $ 65,139 $ - $ 65,139 Investment and cash equivalents: 2009 Level 1 Level 2 Level 3 Total Government Money Market Funds $ $ - $ 192 U.S. Treasury Bills 69, ,586 U.S. Treasury Notes 46, ,702 U.S. Agency Bonds - 120, ,168 Municipal Bonds - 5,017-5,017 Investments and Cash Equivalents $ 116,480 $ 125,185 $ - $ 241,665 Nuclear Decommissioning Trust $ - $ 58,088 $ - $ 58,088

17 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Fair Value Measurements continued The fair value of Level 1 instruments is based on quoted over-the-counter (OTC) market prices at December 31 for identical securities. The fair value of Level 2 instruments is based on quoted OTC market prices at December 31 for similar issues. Fair Value of Financial Instruments The carrying value of MMWEC s short-term financial instruments, which consist of cash, cash equivalents, temporary investments, accounts receivables, unbilled revenues, short-term debt, accounts payable and accrued expenses, approximates the instruments estimated fair values based on the instruments short-term nature. The estimated fair value of MMWEC s long term financial instruments is as follows: Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value Long-term debt, excluding current maturities $ 384,855 $ 393,487 $ 444,255 $ 456,374 Long-term investments held in restricted special funds $ 147,594 $ 147,594 $ 137,110 $ 137,110 Nuclear Decommissioning Trust $ 65,139 $ 65,139 $ 58,088 $ 58,088 The fair value of long-term financial instruments is estimated based on quoted market prices for the same or similar issues. Assets and Liabilities Cash and Investments For purposes of the Statements of Cash Flows, cash equivalents are cash and investments having an original maturity of three months or less from the date of acquisition. Unrestricted cash and cash equivalents are presented as cash and temporary investments in the accompanying Balance Sheets. Restricted cash and cash equivalents are presented within the current portion of restricted special funds in the accompanying Balance Sheets.

18 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Assets and Liabilities continued Cash and Investments continued MMWEC has adopted an investment policy, which is approved annually by MMWEC s Board of Directors as required by MMWEC s GBR. Although certain cash and temporary investment amounts used for power purchases and working capital requirements of MMWEC are not subject to the provisions of the GBR, they are subject to the provisions of the investment policy. Investments are stated at fair value, as defined under fair value measurements above. No investments are reported at amortized cost. Adjustments necessary to record investments at fair value are recorded in the Statements of Revenues and Expenses as increases or decreases in investment income. Through its investment policy, MMWEC is restricted to investing in certain types of securities and investments, which are: a. Direct obligations of the United States of America b. Bonds, debentures, notes or other indebtedness issued by various federal agencies c. New housing authority bonds issued by public agencies or municipalities d. Bonds or notes issued by states and municipalities that are rated in one of the two highest rated categories by rating agencies e. Bank time deposits f. Repurchase agreements g. Federal funds or bankers acceptances h. Investment agreements Accounts Receivable Accounts receivable are stated at the amount management expects to collect from outstanding balances. Based on the validity of contracts and collection history, an allowance for doubtful accounts is not considered necessary. Should these circumstances change, an allowance for doubtful accounts would be provided for those accounts receivable considered to be uncollectible at the end of the year, and the bad debts would be written off against the allowance when identified. Unbilled Revenue Unbilled revenues are revenues that are not yet billed under the MMWEC Member and Participant agreements and other power arrangements and represent a portion of December services rendered that are collectible in January of the subsequent year. Inventories Fuel oil and spare parts inventories are recorded and accounted for by the average cost method. At December 31, 2010 and 2009, total fuel oil inventory was valued at $14.2 and $16.0 million, respectively, and spare parts inventory amounted to $11.5 and $10.8 million, respectively.

19 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Assets and Liabilities continued Nuclear Fuel Nuclear fuel, net of amortization, includes MMWEC's ownership interest in spent nuclear fuel, fuel in reactor, in stock and in process for both Millstone Unit 3 and Seabrook Station. The cost of nuclear fuel is amortized to fuel used in electric generation for each nuclear unit based on the relationship of energy produced in the current period to total expected energy production for fuel in the reactor. A provision for fuel disposal costs is included in fuel used in electric generation based upon disposal contracts with the Department of Energy (DOE). In addition, fuel used in electric generation includes the annual assessment, under the Energy Policy Act of 1992, for the cost of decontamination and decommissioning of uranium enrichment plants operated by the DOE. The final billing from the DOE occurred in MMWEC, along with all of the other joint owners of both Millstone Unit 3 and Seabrook Station, has filed claims against the DOE in the United States Court of Claims for partial breach of the disposal contracts with the DOE. With respect to Seabrook Station in 2009, MMWEC, and the other Seabrook Station joint owners, settled their claims against the DOE, with the U.S. Department of Justice (DOJ), who represented the DOE. The settlement resulted in cash payments to MMWEC in 2010 and 2009 totaling $1.7 and $1.9 million, respectively. It is anticipated the settlement will result in an additional cash payment of $137,000 to MMWEC in At December 31, 2009, the DOE settlements amount was reflected in accounts receivable and recognized as revenue in the accompanying Balance Sheets and Statements of Revenues and Expenses, respectively. Settlement amounts recorded at December 31, 2010 are included in the Member and Participant advances and restricted special fund balances in the accompanying Balance Sheet. With respect to the Millstone Unit 3 spent nuclear fuel case, on October 28, 2008, the United States Court of Federal Claims ( CFC ) awarded Dominion Nuclear Connecticut, Inc., majority owner of Millstone Unit 3, on behalf of MMWEC and the other joint owner, a judgment for damages incurred through June 30, On December 24, 2008, the DOJ filed a notice of appeal of the CFC decision. This matter remains on appeal. Capital Assets In Service Capital assets in service are generally defined by MMWEC as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of one year. Capital assets of MMWEC are recorded at cost at the date of acquisition. MMWEC capitalizes interest as an element of the cost of electric plant and nuclear fuel in process. A corresponding capitalized interest amount is reflected as a reduction of interest expense. This is recorded on the Statements of Revenues and Expenses on the line interest charged to projects during construction. The amount of interest capitalized is based on the cost of debt, including amortization of debt issuance costs and premiums, related to each Project, net of investment gains and losses, and interest income derived from unexpended restricted special funds. MMWEC capitalized interest costs of $157,000 and $172,000 for the years ended December 31, 2010 and 2009, respectively.

20 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Assets and Liabilities continued Capital Assets In Service continued Provisions for depreciation are computed using the straight-line method based on estimated useful lives for Stony Brook and Service. Seabrook, Millstone and Wyman are depreciated based on the group life basis. The lives are as follows: Stony Brook Building Building improvements Equipment Computer equipment and vehicles Service Office equipment and software Other Generation Facilities Seabrook Station Millstone Unit 3 W.F. Wyman No years 20 years years 3-4 years 3-8 years 60 years 60 years 50 years In 2010, MMWEC revised its estimated useful life for Wyman to 50 years. This revision was effective January 1, The revision was accounted for prospectively as a change in accounting estimate and as a result, depreciation expense and accumulated depreciation for Wyman at December 31, 2010 decreased by approximately $492,000. Construction Work in Progress Construction Work In Progress is stated at cost. Any internal costs that are capitalized are limited to those costs that can be directly identified with the design, engineering or construction of a specific Project and do not include any costs related to production, general corporate overhead or similar activities. Nuclear Decommissioning Trust As required by the Nuclear Regulatory Commission (NRC) and respective state statutes and/or regulations, as well as MMWEC s own determinations, MMWEC has funded trust funds maintained by external trustees to provide for the estimated future decommissioning activities of Millstone Unit 3 and Seabrook Station. The December 31, 2010 and 2009 Millstone Unit 3 balances of $25.5 and $22.8 million, respectively, and Seabrook Station balances of $39.6 and $35.3 million, respectively, are stated at fair value and are included in deferred charges and amounts recoverable (payable) under terms of the PSAs on the Balance Sheet. Decommissioning balances for the Seabrook Station include funds in the New Hampshire Nuclear Decommissioning Trust and in an escrow account into which payments are made by MMWEC as a funding assurance mechanism. Depending on future circumstances, the funds held in the escrow account will be placed either in the Decommissioning Trust Fund for Seabrook Station, or will be returned to MMWEC, per order of the Nuclear Decommissioning Financing Committee of the State of New Hampshire.

21 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Assets and Liabilities continued Amounts Recoverable (Payable) Under Terms of the Power Sales Agreements Billings to Project Participants are structured to recover costs in accordance with the PSAs, which generally provide for billing debt service, operating expenses and reserve requirements. Expenses are reflected in the Statements of Revenues and Expenses in accordance with GAAP. The timing difference between amounts billed and expensed is charged, or credited, to amounts recoverable (payable) under terms of the PSAs. Such amounts will be recovered through future billings or an expense will be recognized to offset credit balances. The principal differences include depreciation, fuel amortization, costs associated with canceled Projects (or assets abandoned within a Project), asset retirement obligations, cost of refinancing, billing for certain interest, reserves, net unrealized gains or losses on investments and other costs. Individual Projects have a cumulative deferral of costs, which total $0 and $7.9 million and have cumulative billings in excess of costs, which total $265.8 and $214.2 million at December 31, 2010 and 2009, respectively. In accordance with the PSAs, these amounts have been offset in amounts payable under terms of the PSAs on the Balance Sheet. The change in the December 31, 2010 and 2009 amounts payable balances of $265.8 and $206.3 million, respectively, reflect as compared to the amount reflected in the Statements of Revenues and Expenses net increase of $60.5 million and $69.1 million for the years then ended December 31, 2010 consists of the following differences; the difference between the current year increase in amounts payable under terms of the PSAs on the Statements of Revenues and Expenses and the increase shown on the Balance Sheets is due to the reclassification of approximately $1.9 million in amounts payable to member and participant advances related to the Seabrook DOE refund received in the prior year, offset by the following current year transactions which were not required to be reflected in the amounts payable balance on the balance sheet due to their temporary nature: amount of pension expense in excess of contributions of approximately $700,000 and approximately $200,000 related to unrealized gains related to the Nuclear Decommissioning Trust. The change in the December 31, 2009 and 2008 amounts payable balances of $206.3 and $137.1 million, respectively, as compared to the amount reflected in the Statements of Revenues and Expenses of $69.1 million for the year ended December 31, 2009 consists of pension expense in excess of contributions in 2009 of approximately $100,000. Member and Participant Advances and Reserves and Other Liabilities MMWEC maintains numerous operating reserves and advances from its Members and Project Participants in accordance with the PSAs, Power Purchase Agreements (PPAs) and other arrangements. Member and Participant advances for 2010 and 2009, which are considered current liabilities, were $113.0 million and $92.4 million, respectively, and are included in Member and Participant advances on the Balance Sheets. Other Member and Participant reserves for 2010 and 2009, which are considered long term, were $60.7 million and $58.9 million, respectively, and are included in other liabilities on the Balance Sheet.

22 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Assets and Liabilities continued Short and Long-Term Debt Long-term debt and other obligations are reported as MMWEC liabilities. Bond premiums, as well as issuance costs, are deferred and amortized over the term of the bonds using the effective interest method for Series A bonds and the straight line method for Series One bonds. Asset Retirement Obligations MMWEC has identified certain asset retirement obligations (AROs), which are primarily associated with the decommissioning of MMWEC s ownership interest in Millstone Unit 3 and Seabrook Station. MMWEC s AROs, other than those associated with nuclear decommissioning AROs, are not significant. MMWEC recorded accretion expense of approximately $5.1 and $4.8 million for the years ended December 31, 2010 and 2009, respectively, which is included in other operating expenses in the Statements of Revenue and Expenses. At December 31, 2010 and 2009, the AROs totaled $105.3 and $100.3 million, respectively. AROs are recorded at the present value of amounts expected to be paid and capitalized as part of the cost of the related tangible long-lived assets. In the absence of quoted market prices, MMWEC estimated the present value of AROs using techniques involving discounted cash flow analysis. Using such measurement techniques is dependent upon many subjective factors, including the selection of discount and cost escalation rates, identification of planned retirement activities and related cost estimates, and assertions of probability regarding the timing, nature and costs of such activities. Inputs and assumptions are based on the best information available at the time the estimates are made. However, estimates of future cash flows are highly uncertain by nature and may vary significantly from actual results. Revenues Operating revenues include electric sales for resale provided through MMWEC s bulk power supply program. Revenues consist, in significant part, of billings under the PSAs, PPAs, and other power arrangements. MMWEC also records service revenues by providing it s Members with power supply planning and related services, which are billed pursuant to the MMWEC Service Agreement or the All-Requirements Bulk Power Sales Agreement. Revenues related to financing and other activities are reflected as non-operating. Revenues are comprised of the following: Electric sales for resale $ 302,048 $ 280,124 Service 4,215 6,122 $ 306,263 $ 286,246

23 Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS continued Assets and Liabilities continued Taxes Chapter 775 of the Massachusetts Acts of 1975 (the Act) specifically exempts the MMWEC from paying any taxes upon its income, existence or franchise, and any revenues from the transfer or sale of bonds issued by the MMWEC. Chapter 775 exempts real and personal property situated within the Commonwealth from property taxation. However, the Act requires the MMWEC to pay an amount in lieu of property taxes to any governmental body authorized to levy local taxes in Massachusetts. MMWEC pays an amount in lieu of property taxes for its interest in the Stony Brook Peaking and Intermediate fossil-fuel burning plants located in Ludlow, Massachusetts. MMWEC pays property taxes for its ownership interest in Millstone Unit 3 located in Waterford, Connecticut and Seabrook Station, which is mostly located in Seabrook, New Hampshire. In addition, MMWEC pays property taxes for its ownership interest in the Wyman Unit 4 fossil-fuel burning plant, which is located in Yarmouth, Maine. Restricted Funds When available for use, it is MMWEC s practice to use restricted funds on hand before using unrestricted funds. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, the selection of the useful lives of capital assets, provision necessary for contingent liabilities, accrued expenses and other similar charges. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates. Reclassifications Certain amounts on the Statements of Cash Flows for the year ended December 31, 2009 have been reclassified, with no impact to net increase (decrease) in cash, to be consistent with the classifications used for the year ended December 31, 2010.

24 Page CASH AND INVESTMENTS MMWEC S cash and investments at December 31, 2010 and 2009 were comprised of the following: Bank & Bank & Type of Investment or Cash Carrying Investment Carrying Investment Associated Equivalent Value Value Value Value Risks Cash and Cash Equivalents: Government Money Market Funds $ 3,630 $ 3,630 $ 192 $ 192 Credit Risk Bank Cash Management Accounts 8,299 8,299 1,391 1,391 Credit Risk, Custodial Credit Risk U.S. Treasury Bills 8,699 8,699 15,294 15,294 Credit Risk, Interest Rate Risk U.S. Treasury Notes 1,402 1, Credit Risk, Concentration of Credit Risk, Interest Rate Risk U.S. Agency Bonds ,512 7,512 Credit Risk, Concentration of Credit Risk, Interest Rate U.S. Agency Discount Notes 8,200 8, Credit Risk, Concentration of Credit Risk, Interest Rate Risk Invested/Bank Cash 4,542 5,116 2,021 2,010 Custodial Credit Risk Total Cash and Cash Equivalents 35,326 35,900 26,410 26,399 Other Investments: U.S. Treasury Bills 81,431 81,431 54,292 54,292 Credit Risk, Interest Rate Risk U.S. Treasury Notes 31,347 31,347 46,702 46,702 Credit Risk, Concentration of Credit Risk, Interest Rate Risk U.S. Agency Bonds 119, , , ,656 Credit Risk, Concentration of Credit Risk, Interest Rate Risk Municipal Bonds - - 5,017 5,017 Credit Risk, Concentration of Credit Risk, Interest Rate Risk Total Other Investments 232, , , ,667 Totals $ 267,936 $ 268,510 $ 245,077 $ 245,066 Investments are stated at fair value as described earlier in fair value measurements policy in Note 1. Fair values are based on quoted market prices of identical or similar securities. No investments are reported at amortized cost. The difference between the bank and investment value and carrying value is due to outstanding checks and/or deposits in transit. At December 31, 2010 and 2009, all investments were held in MMWEC's name by custodians consisting of the Bond Fund Trustee (as defined in the GBR), or MMWEC's depository bank.