Exhibit 13.3

Managements Discussion and Analysis



Financial Condition and Business Analysis



Executive Summary

The following items in this executive summary are explained in more detail in this annual report.



Results:



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Public Service Company of New Hampshire (PSNH or the company) reported earnings of $41.7 million in 2005 compared with earnings of $46.6 million in 2004 and $45.6 million in 2003.  Included in earnings were transmission earnings of $7.8 million, $6.7 million and $7.3 million in 2005, 2004 and 2003, respectively, and distribution earnings of $33.9 million, $39.9 million and $38.3 million in 2005, 2004 and 2003, respectively.



Legislative Items:



·

On August 8, 2005, President Bush signed into law comprehensive federal energy legislation with several provisions affecting PSNH.  As part of this legislation, the Public Utility Holding Company Act of 1935 (PUHCA) was repealed.  Some but not all of the Securities and Exchange Commission's (SEC) responsibilities under PUHCA were transferred to the Federal Energy Regulatory Commission (FERC).



·

The Regional Greenhouse Gas Initiative (RGGI) agreement, signed on December 20, 2005, is a cooperative effort by certain northeastern states to develop a regional program for stabilizing current levels and reducing carbon dioxide (CO2) emissions by ten percent by 2020 from fossil-fired electric generators.  RGGI may impact PSNHs Merrimack, Newington and Schiller stations.  At this time, the impact of this agreement on PSNH cannot be determined.



·

In November of 2005, PSNH and various legislative, state government and environmental leaders announced that they had reached a consensus to propose legislation to reduce the level of mercury emissions from PSNHs coal-fired plants by 2013 with incentives for early reductions.  As part of the proposed legislation, PSNH's primary long-term alternative to comply with the proposed legislation would be to install wet scrubber technology at its two Merrimack coal units, which combined generate 433 MW, at a cost of approximately $250 million.  The proposed legislation is being considered during the 2006 legislative session.



Regulatory Items:



·

PSNH has received regulatory approval to recover the increased cost of energy being supplied to its customers in 2006.  This increased cost is primarily the result of increased fuel and purchased power costs.



·

PSNHs 2004 stranded cost recovery charge (SCRC) reconciliation filing was filed with the New Hampshire Public Utilities Commission (NHPUC) on May 2, 2005.  In October of 2005, PSNH, the NHPUC staff and the New Hampshire Office of Consumer Advocate (OCA) reached a settlement agreement in this case.  This settlement agreement was approved by the NHPUC on December 22, 2005.  That settlement agreement also recommended that the NHPUC staff engage a coal procurement expert to analyze PSNHs coal procurement and transportation operations.  Consistent with the settlement agreement, the NHPUC deferred action on coal-related costs until that analysis has been completed.



·

On December 2, 2005, the NHPUC issued an order to rehear the order that lowered the return on equity (ROE) on PSNHs generating facilities to 9.62 percent from 11 percent effective August 1, 2005.  On January 3, 2006, PSNH appealed the revised decision to the New Hampshire Supreme Court and simultaneously asked the NHPUC for reconsideration of its decision.  The appeal before the New Hampshire Supreme Court is pending.  On February 10, 2006, PSNH's most recent request for reconsideration by the NHPUC was denied.



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On March 6, 2006, the New England Independent System Operator (ISO-NE) and a broad cross-section of critical stakeholders from around the region, including PSNH, filed a comprehensive settlement agreement at the FERC implementing a Forward Capacity Market (FCM) in place of Locational Installed Capacity (LICAP).  The settlement agreement must be approved by the FERC, and the parties have asked for a decision by June 30, 2006.



Liquidity:



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On October 5, 2005, PSNH issued $50 million of 30-year first mortgage bonds.



·

In 2005, PSNHs capital expenditures totaled $158.8 million compared with $153.2 million in 2004 and $105.1 million in 2003.  The increased level of capital expenditures was caused primarily by higher distribution and generation capital expenditures.



·

Cash flows from operations decreased by $47.5 million to $155.3 million in 2005 from $202.8 million in 2004.





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Overview

PSNH is a wholly owned subsidiary of Northeast Utilities (NU).  NUs other regulated electric subsidiaries include The Connecticut Light and Power Company (CL&P) and Western Massachusetts Electric Company (WMECO).



PSNH earned $41.7 million in 2005, compared with $46.6 million in 2004 and $45.6 million in 2003.  Included in earnings were transmission earnings of $7.8 million, $6.7 million and $7.3 million in 2005, 2004 and 2003, respectively, and distribution earnings of $33.9 million, $39.9 million and $38.3 million in 2005, 2004 and 2003, respectively.  PSNH's distribution and generation earnings in 2005 were lower primarily due to a lower ROE on the generation facilities in 2005 and higher interest and operating expenses, partially offset by delivery rate increases of $3.5 million in October of 2004 and $10 million in June of 2005.



PSNH's retail electric sales were positively impacted by weather in 2005, particularly by an unseasonably hotter than average third quarter of 2005, which increased electricity consumption.  Retail electric sales increased 1.9 percent over 2004; however, on a weather adjusted basis, retail electric sales decreased 0.2 percent.



With a commodity-driven rate increase taking effect early in 2006 and the weather being much milder to date in 2006, management is concerned that actual sales could be lower in 2006 than in 2005.  While sales volume does not affect transmission business earnings positively or negatively, lower electric sales do negatively affect distribution company earnings.



Liquidity

Cash flows from operations decreased by $47.5 million to $155.3 million in 2005 from $202.8 million in 2004.  The decrease in cash flows is primarily due to an increase in regulatory refunds, higher tax payments, payments made relating to the emissions allowance program and a decrease in accounts payable related to an intercompany billing and construction costs.



Cash flows from operations increased by $119.9 million from $82.9 million in 2003 to $202.8 million in 2004.  The increase in cash flows from operations was primarily the result of an increase in amortization of regulatory assets and lower income taxes paid in 2004 than 2003.



On October 5, 2005, PSNH issued $50 million of 30-year first mortgage bonds with an interest rate of 5.60 percent, the proceeds from which were used to repay short-term borrowings used to finance capital expenditures.



On December 9, 2005, PSNH amended its 5-year unsecured revolving credit facility by extending the termination date by one year to November 6, 2010.  The company can borrow up to $100 million on a short-term basis, or subject to regulatory approvals, on a long-term basis.  At December 31, 2005, there were no borrowings outstanding under this facility.  At December 31, 2004, PSNH had $10 million in borrowings under this credit facility.



PSNH's senior secured debt is rated A3, BBB and BBB+ with a stable outlook by Moody's Investors Service (Moody's), Standard and Poor's (S&P) and Fitch Ratings, respectively.



In 2005, PSNH paid approximately $42.4 million to NU in the form of common dividends.



Capital expenditures described herein are cash capital expenditures and exclude cost of removal, allowance for funds used during construction (AFUDC) and the capitalized portion of pension income.  PSNHs capital expenditures totaled $158.8 million in 2005, compared with $153.2 million in 2004 and $105.1 million in 2003.  The increase in PSNH's capital expenditures was primarily the result of higher distribution and generation capital expenditures, which totaled $131.9 million in 2005 compared with $123.1 million in 2004 and $78.2 million in 2003.



Business Development and Capital Expenditures

In 2005, PSNHs capital expenditures totaled $158.8 million compared with $153.2 million in 2004, and $105.1 million in 2003.  PSNH's distribution and generation capital expenditures totaled $131.9 million in 2005, compared with $123.1 million and $78.2 million in 2004 and 2003, respectively.  Total capital expenditures include $45 million related to the conversion of a 50 MW coal-fired unit at Schiller Station in Portsmouth, New Hampshire to burn wood (Northern Wood Power Project).  The Northern Wood Power Project began in late 2004 and is expected to achieve commercial generation in the second half of 2006.  The NHPUC's 2004 approval of the project was appealed to the New Hampshire Supreme Court by some of New Hampshire's existing wood-fired generating plant owners.  The Supreme Court upheld the NHPUC's finding that the project is in the public interest and, as a result, the project was able to proceed in accordance with the original schedule.  This project is approximately 90 percent complete and PSNH has capitalized $64.7 million related to this project at December 31, 2005.



In 2005, PSNH also spent $26.9 million on upgrading and expanding its electric transmission system.



PSNH currently forecasts distribution and generation expenditures of approximately $500 million from 2006 through 2010.  In addition, approximately $250 million of transmission projects is currently forecasted from 2006 to 2010, totaling approximately $750 million in total capital projects.  PSNH estimates total annual capital expenditures of approximately $150 million from 2006 through 2010.



Transmission Access and FERC Regulatory Changes

In January of 2005, the New England transmission owners approved activation of the New England Regional Transmission Organization (RTO) which occurred on February 1, 2005.  PSNH is now a member of the New England RTO and provides regional open access transmission service over its transmission system under the New England Independent System Operator (ISO-NE) Transmission, Markets and Services Tariff, FERC Electric



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Tariff No. 3 and local open access transmission service under the ISO-NE Transmission, Markets and Services Tariff, FERC Electric No. 3, Schedule 21 - NU.



As a result of the RTO start-up on February 1, 2005, the ROE in the local network service (LNS) tariff was increased to 12.8 percent.  The ROE being utilized in the calculation of the current regional network service (RNS) rates is the sum of the 12.8 percent "base" ROE, plus a 50 basis point incentive adder for joining the RTO, or a total of 13.3 percent.  An initial decision by a FERC administrative law judge (ALJ) has set the base ROE at 10.72 percent as compared with the 12.8 percent requested by the New England RTO.  One of the adjustments made by the ALJ was to modify the underlying proxy group used to determine the ROE, resulting in a reduction in the base ROE of approximately 50 basis points.  The ALJ deferred to the FERC for final resolution on the 100 basis point incentive adder for new transmission investments but reaffirmed the 50 basis point incentive for joining the RTO.  The New England transmission owners have challenged the ALJs findings and recommendations through written exceptions filed on June 27, 2005 and a final order from the FERC is expected in 2006.  The result of this order, if upheld by the FERC, would be an ROE for LNS of 10.72 percent and an ROE for RNS of 11.22 percent.  When blended, the resulting "all in" ROE would be approximately 11.15 percent for the NU transmission business.  Management cannot at this time predict what ROE will ultimately be established by the FERC in these proceedings but for purposes of current earnings accruals and estimates, the transmission business is assuming an ROE of 11.5 percent.



In November of 2005, the FERC announced that it was considering a number of proposals to provide financial incentives for the construction of high-voltage electric transmission in the United States.  Those proposals included reflecting in rate base 100 percent of the cost of construction work in progress (CWIP); accelerated recovery of depreciation; imputing hypothetical capital structures in ratemaking; establishing ROEs for transmission owners that join RTOs; and other incentives that could improve the earnings and/or cash flows associated with PSNHs transmission capital expenditures.  Comments on the FERC proposals were submitted in January of 2006, and final rules are expected by the summer of 2006.



Legislative Matters

Federal Energy Legislation:  On August 8, 2005, President Bush signed into law comprehensive energy legislation.  Among provisions potentially affecting PSNH are the repeal of PUHCA, FERC backstop siting authority for transmission, transmission pricing and rate reform, renewable production tax credits, and accelerated depreciation for certain new electric and gas facilities. The renewable production tax credits provision is expected to save PSNH approximately $3 million annually in federal income taxes for the first 10 years after the Northern Wood Power Project becomes operational.  The accelerated depreciation provision, assuming timely rate recovery, is expected to increase PSNHs cash flows by more than $0.6 million annually.  As part of this legislation, some but not all of the SEC's responsibilities under PUHCA were transferred to the FERC.



Environmental Legislation:  The RGGI is a cooperative effort by certain northeastern states to develop a regional program for stabilizing and ultimately reducing CO2 emissions from fossil-fired electric generators.  This initiative proposed to stabilize CO2 emissions at current levels and require a ten percent reduction by 2020.  The RGGI agreement was signed on December 20, 2005 by the states of Connecticut, Delaware, Maine, New Jersey, New Hampshire, New York, and Vermont.  Each state commits to propose for approval legislative and regulatory mechanisms to implement the program.  RGGI may impact PSNHs Merrimack, Newington and Schiller stations.  At this time, the impact of this agreement on PSNH cannot be determined.



The New Hampshire legislature is considering a bill in its 2006 legislative session that would place strict limitations on the level of mercury that PSNHs existing generation plants can emit.  Legislation was first proposed in the 2005 session and passed by the New Hampshire senate in 2005 which would require PSNH to achieve fixed annual caps as early as 2009.  The bill was subsequently defeated by the New Hampshire House of Representatives early in 2006.  The legislature will now take up a new bill that requires PSNH to reduce power plant mercury emissions by at least 80 percent by 2013 while providing incentives for early reductions.  Management has been reviewing the proposed legislation.  PSNHs primary long-term alternative is to install wet scrubber equipment at its Merrimack Station at a cost of approximately $250 million.  PSNHs other alternatives include the use of carbon injection pollution control equipment, reducing operating capacity of its plants and possible retirement or repowering of one or more of its generating units.  While state law and PSNH's restructuring agreement provide for the recovery of its generation costs, including the cost to comply with state environmental regulations, at this time management is unable to determine the impact of any potential new legislation on PSNH's net income or financial position.



Regulatory Issues and Rate Matters

Transmission - Wholesale Rates:Wholesale transmission revenues are based on rates and formulas that are approved by the FERC. Most of PSNHs wholesale transmission revenues are collected through a combination of the RNS tariff and PSNH's LNS tariff.  PSNH's RNS rate is reset on June 1 of each year.  PSNHs LNS rate is reset on January 1 and June 1 of each year.  On January 1, 2006, PSNHs LNS rates increased PSNH's wholesale revenues by $3.2 million on an annualized basis.  The LNS and RNS rates to be effective on June 1, 2006 have not yet been determined.  Additionally, PSNHs LNS tariff provides for a true-up to actual costs, which ensures that PSNH's transmission business recovers its total transmission revenue requirements, including the allowed ROE.  At December 31, 2005, this true-up resulted in the recognition of a $0.6 million regulatory liability.



Transmission - Retail Rates:  A significant portion of the PSNH transmission business revenue comes from the ISO-NE charges to the distribution business.  The distribution business recovers these costs through the retail rates that are charged to its retail customers.  PSNH does not currently have a retail transmission rate tracking mechanism.



LICAP:In March of 2004, ISO-NE proposed at the FERC an administratively determined electric generation capacity pricing mechanism known as LICAP, intended to provide a revenue stream sufficient to maintain existing generation assets and encourage the construction of new generation assets at levels sufficient to serve peak load, plus fixed reserve and contingency margins.





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After opposition from state regulators, utilities and various Congressional delegations, the FERC ordered settlement negotiations before an ALJ to determine whether there was an acceptable alternative to LICAP.  On March 6, 2006, ISO-NE and a broad cross-section of critical stakeholders from around the region, including PSNH, filed a comprehensive settlement agreement at the FERC implementing a FCM in place of LICAP.  The settlement agreement provides for a fixed level of compensation to generators from December 1, 2006 through May 31, 2010 without regard to location in New England, and annual forward capacity auctions, beginning in 2008, for the 1-year period ending on May 31, 2011, and annually thereafter.  The settlement agreement must be approved by the FERC, and the parties have asked for a decision by June 30, 2006.  According to preliminary estimates, FCM would require PSNH to pay approximately $80 million during the 31⁄2-year transition period.  PSNH will incur charges and would be able to recover these costs from its customers.



ES Rates:In accordance with the "Agreement to Settle PSNH Restructuring" and state law, PSNH files for updated Transition Energy Service Rate and Default Energy Service Rate, collectively referred to as Energy Service Rate (ES), periodically to ensure timely recovery of its costs.  The ES rate recovers PSNH's generation and purchased power costs, including a return on PSNH's generation assets.  PSNH defers for future recovery or refund any difference between its ES revenues and the actual costs incurred.



On January 28, 2005, the NHPUC issued an order approving an ES rate of $0.0649 per kWh for the period February 1, 2005 through January 31, 2006 which included an 11 percent ROE on PSNH's generation assets.  This generation ROE was the subject of a second set of proceedings.  On June 8, 2005, the NHPUC issued an order requiring PSNH to use a generation ROE of 9.63 percent, effective July 1, 2005.  On July 7, 2005, PSNH filed a motion for reconsideration in the ROE portion of the above docket.  On December 2, 2005 the NHPUC issued a revised decision, lowering PSNHs allowed ROE to 9.62 percent that was retroactive to an effective date of August 1, 2005.  On January 3, 2006, PSNH appealed the revised decision to the New Hampshire Supreme Court and simultaneously asked the NHPUC for reconsideration of its decision.  The appeal before the New Hampshire Supreme Court is pending.  On February 10, 2006, PSNH's most recent request for reconsideration by the NHPUC was denied.  This decrease in allowed ROE will lower PSNH's net income by approximately $1.5 million annually based on the current level of generation asset investment.



On July 1, 2005, PSNH filed a petition with the NHPUC requesting an increase in the ES rate from the then current $0.0649 per kWh to $0.0734 per kWh based on actual costs and underrecoveries incurred through June 30, 2005 and updated cost projections.  The updated cost projections included an increase in costs as a direct result of higher fuel and purchased power costs that PSNH expected to incur.  The generation ROE used in the updated cost projections was based upon the 9.63 percent ROE ordered on June 8, 2005.  An order changing the ES rate to $0.0724 per kWh, effective August 1, 2005, was issued by the NHPUC on August 1, 2005.



On September 30, 2005, PSNH filed a petition with the NHPUC requesting a change in ES rates for the period February 1, 2006 through January 31, 2007.  On December 14, 2005, PSNH and other parties, including the NHPUC staff and the OCA, filed a stipulation and settlement agreement related to the September 30, 2005 filing.  A provision of the settlement agreement included an allowance to implement deferred accounting treatment for asset retirement obligations (AROs) that PSNH is required to recognize under generally accepted accounting principles, including the future amortization of these ARO deferrals.



On December 19, 2005, PSNH filed updated ES cost information and requested approval of an ES rate of $0.0913 per kWh for the 11-month period from February 1, 2006 through December 31, 2006.  Hearings regarding the settlement agreement and the updated ES rate were held on December 21, 2005 and the NHPUC issued an order on January 20, 2006 approving the settlement agreement, as filed, and the ES rate of $0.0913 per kWh for the 11-month period.



SCRC Reconciliation Filing:The SCRC allows PSNH to recover its stranded costs.  On an annual basis, PSNH files with the NHPUC a SCRC reconciliation filing for the preceding calendar year.  This filing includes the reconciliation of stranded cost revenues and costs and ES revenues and costs.  The NHPUC reviews the filing, including a prudence review of the operations within PSNHs generation business segment.  The cumulative deferral of SCRC revenues in excess of costs was $303.3 million at December 31, 2005.  This cumulative deferral will decrease the amount of non-securitized stranded costs to be recovered from PSNH's customers in the future from $368 million to $64.7 million.



The 2004 SCRC reconciliation filing was filed with the NHPUC on May 2, 2005.  In October of 2005, PSNH, the NHPUC staff and the OCA reached a settlement agreement in this case.  The major provisions of this settlement agreement include the following:  1) PSNH will be allowed to recover its 2004 ES costs and stranded costs without disallowances, 2) PSNH will be allowed to include its cumulative unbilled revenues in its ES and stranded cost reconciliations and 3) the NHPUC will defer any action regarding PSNHs coal supply and transportation procedures until it completes a review using an outside expert.  The NHPUC issued its order on December 22, 2005, approving the settlement agreement as filed.  While management believes its coal procurement and transportation policies and procedures are prudent and consistent with industry practice, it is unable to determine the impact, if any, of the expected NHPUC review on PSNH's net income or financial position.



Litigation with Independent Power Producers (IPPs):Two wood-fired IPPs that sell their output to PSNH under long-term rate orders issued by the NHPUC brought suit against PSNH in state superior court.  The IPPs and PSNH dispute the end dates of the above-market long-term rates set forth in the respective rate orders.  Subsequent to the IPP's court filing, PSNH petitioned the NHPUC to decide this matter, and requested that the court stay its proceeding pending the NHPUC's decision.  By court order dated October 20, 2005, the court granted PSNH's motion to stay indicating that the NHPUC had primary jurisdiction over this matter.



On November 11, 2005, the IPPs filed motions with the NHPUC seeking to disqualify two of the three NHPUC commissioners from participating in this proceeding.  As a result, on December 7, 2005, the IPPs then filed an interlocutory appeal with the New Hampshire Supreme Court (Supreme Court) on the basis that the forum for resolving this dispute is in state superior court.  On December 27, 2005, PSNH and the New Hampshire Attorney Generals Office (representing the NHPUC) each filed motions for summary disposition with the Supreme Court.  On February 7, 2006, the



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Supreme Court declined to accept the IPPs interrogatory appeal.  As a result the matter will returnto the NHPUC for a decision.  PSNH recovers the over-market cost of the IPP contracts through the SCRC.



Deferred Contractual Obligations

FERC Proceedings:  In 2003 the Connecticut Yankee Atomic Power Company (CYAPC) increased the estimated decommissioning and plant closure costs for the period 2000 through 2023 by approximately $395 million over the April 2000 estimate of $436 million approved by the FERC in a 2000 rate case settlement.  The revised estimate reflects the increases in the projected costs of spent fuel storage, increased security and liability and property insurance costs, and the fact that CYAPC is now self performing all work to complete the decommissioning of the plant due to the termination of the decommissioning contract with Bechtel Power Corporation (Bechtel) in July of 2003.  PSNH's share of CYAPC's increase in decommissioning and plant closure costs is approximately $20 million.  On July 1, 2004, CYAPC filed with the FERC for recovery seeking to increase its annual decommissioning collections from $16.7 million to $93 million for a six-year period beginning on January 1, 2005.  On August 30, 2004, the FERC issued an order accepting the rates, with collection beginning on February 1, 2005, subject to refund.



Both the Connecticut Department of Public Utility Control (DPUC) and Bechtel filed testimony in the FERC proceeding claiming that CYAPC was imprudent in its management of the decommissioning project.  In its testimony, the DPUC recommended a disallowance of $225 million to $234 million out of CYAPC's requested rate increase of approximately $395 million.  PSNH's share of the DPUC's recommended disallowance would be between $11 million to $12 million.  The FERC staff also filed testimony that recommended a $38 million decrease in the requested rate increase claiming that CYAPC should have used a different gross domestic product (GDP) escalator.  PSNH's share of this recommended decrease is $1.9 million.



On November 22, 2005, a FERC ALJ issued an initial decision finding no imprudence on CYAPC's part.  However, the ALJ did agree with the FERC staffs position that a lower GDP escalator should be used for calculating the rate increase and found that CYAPC should recalculate its decommissioning charges to reflect the lower escalator.  Briefs to the full FERC addressing these issues were filed in January and February of 2006, and a final order is expected later in 2006.  Management expects that if the FERC staff's position on the decommissioning GDP cost escalator is found by the FERC to be more appropriate than that used by CYAPCto develop its proposed rates, then CYAPC would review whether to reduce its estimated decommissioning obligation and reduce the customers' obligation, including PSNH.



The company cannot at this time predict the timing or outcome of the FERC proceeding required for the collection of the increased CYAPC decommissioning costs.  The company believes that the costs have been prudently incurred and will ultimately be recovered from the customers of PSNH.  However, there is a risk that some portion of these increased costs may not be recovered, or will have to be refunded if recovered, as a result of the FERC proceedings.



On June 10, 2004, the DPUC and the Connecticut Office of Consumer Counsel (OCC) filed a petition seeking a declaratory order that CYAPC be allowed to recover all decommissioning costs from its wholesale purchasers, including PSNH, but that such purchasers may not be allowed to recover in their retail rates any costs that the FERC might determine to have been imprudently incurred.  On August 30, 2004, the FERC denied this petition.  On September 29, 2004, the DPUC and OCC asked the FERC to reconsider the petition and on October 20, 2005, the FERC denied the reconsideration, holding that the sponsor companies are only obligated to pay CYAPC for prudently incurred decommissioning costs and the FERC has no jurisdiction over the sponsors' rates to their retail customers.  On December 12, 2005, the DPUC sought review of these orders by the United States Court of Appeals for the D.C. Circuit.  The FERC and CYAPC have asked the court to dismiss the case and the DPUC has objected to a dismissal.  PSNH cannot predict the timing or the outcome of these proceedings.



Bechtel Litigation:  CYAPC and Bechtel commenced litigation in Connecticut Superior Court over CYAPC's termination of Bechtel's contract for the decommissioning of CYAPC's nuclear generating plant.  After CYAPC terminated the contract, responsibility for decommissioning was transitioned to CYAPC, which recommenced the decommissioning process.



On March 7, 2006, CYAPC and Bechtel executed a settlement agreement terminating this litigation.  Bechtel has agreed to pay CYAPC $15 million, and CYAPC will withdraw its termination of the contract for default and deem it terminated by agreement.



Spent Nuclear Fuel Litigation:  CYAPC, Yankee Atomic Energy Company (YAEC) and Maine Yankee Atomic Power Company (MYAPC) (Yankee Companies) also commenced litigation in 1998 charging that the federal government breached contracts it entered into with each company in 1983 under the Act.  Under the Act, the Department of Energy (DOE) was to begin removing spent nuclear fuel from the nuclear plants of the Yankee Companies no later than January 31, 1998 in return for payments by each company into the nuclear waste fund.  No fuel has been collected by the DOE, and spent nuclear fuel is stored on the sites of the Yankee Companies' plants.  The Yankee Companies collected the funds for payments into the nuclear waste fund from wholesale utility customers under FERC-approved contract rates.  The wholesale utility customers in turn collect these payments from their retail electric customers.  The Yankee Companies' individual damage claims attributed to the government's breach ranging between $523 million and $543 million are specific to each plant and include incremental storage, security, construction and other costs through 2010.  The CYAPC damage claim ranges from $186 million to $198 million, the YAEC damage claim ranges from $177 million to $185 million and the MYAPC damage claim is $160 million.  The DOE trial ended on August 31, 2004 and a verdict has not been reached.  Post-trial findings of facts and final briefs were filed by the parties in January of 2005.  The Yankee Companies' current rates do not include an amount for recovery of damages in this matter.  Management can predict neither the outcome of this matter nor its ultimate impact on PSNH.





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YAEC: In November of 2005, YAEC established an updated estimate of the cost of completing the decommissioning of its plant resulting in an increase of approximately $85 million.  PSNHs share of the increase in estimated costs is $6 million.  This estimate reflects the cost of completing site closure activities from October of 2005 forward and storing spent nuclear fuel and other high level waste on site until 2020.  This estimate projects a total cost of $192.1 million for the completion of decommissioning and long-term fuel storage.  To fund these costs, on November 23, 2005, YAEC submitted an application to the FERC to increase YAECs wholesale decommissioning charges.  The DPUC and the Massachusetts attorney general protested these increases.  On January 31, 2006, the FERC issued an order accepting the rate increase, effective February 1, 2006, subject to refund after hearings and settlement judge proceedings.  The hearings have been suspended pending settlement discussions between YAEC, the FERC and other intervenors in the case.  PSNH has a 7 percent ownership interest in YAEC and can predict neither the outcome of this matter nor its ultimate impact on PSNH.



Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and at times difficult, subjective or complex judgments.  Changes in these estimates, assumptions and judgments, in and of themselves, could materially impact the financial statements of PSNH.  Management communicates to and discusses with NU's Audit Committee of the Board of Trustees all critical accounting policies and estimates.  The following are the accounting policies and estimates that management believes are the most critical in nature.



Revenue Recognition:  PSNH's retail revenues are based on rates approved by the NHPUC.  These regulated rates are applied to customers use of energy to calculate a bill.  In general, rates can only be changed through formal proceedings with the NHPUC.



The determination of the energy sales to individual customers is based on the reading of meters, which occurs on a systematic basis throughout the month.  Billed revenues are based on these meter readings.  At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated, and an estimated amount of unbilled revenues is recorded.



Wholesale transmission revenues are based on rates and formulas that are approved by the FERC.  Most of PSNHs wholesale transmission revenues are collected through a combination of the RNS tariff and PSNH's LNS tariff.  The RNS tariff, which is administered by the ISO-NE, recovers the revenue requirements associated with transmission facilities that are deemed by the FERC to be Pool Transmission Facilities.  The LNS tariff, which was accepted by the FERC, provides for the recovery of PSNHs total transmission revenue requirements, net of revenue credits received from various rate components, including revenues received under the RNS rates.  At December 31, 2005, this true up has resulted in the recognition of a $0.6 million regulatory liability.



A significant portion of PSNHs transmission business revenue comes from ISO-NE charges to PSNHs electric distribution business.  PSNH recovers these costs through the retail rates that are charged to its retail customers.  PSNH does not currently have a retail transmission rate tracking mechanism.



Unbilled Revenues:  Unbilled revenues represent an estimate of electricity or gas delivered to customers that has not yet been billed.  Unbilled revenues are included in revenue on the accompanying consolidated statements of income and are assets on the accompanying consolidated balance sheets that are reclassified to accounts receivable in the following month as customers are billed.



The estimate of unbilled revenues is sensitive to numerous factors that can significantly impact the amount of revenues recorded. Estimating the impact of these factors is complex and requires managements judgment.  The estimate of unbilled revenues is important to PSNHs consolidated financial statements as adjustments to that estimate could significantly impact operating revenues and earnings.



Through December 31, 2004, PSNH estimated unbilled revenues monthly using the requirements method.  The requirements method utilized the total monthly volume of electricity or gas delivered to the system and applied a delivery efficiency (DE) factor to reduce the total monthly volume by an estimate of delivery losses in order to calculate total estimated monthly sales to customers.  The total estimated monthly sales amount less the total monthly billed sales amount resulted in a monthly estimate of unbilled sales.  Unbilled revenues were estimated by first allocating sales to the respective rate classes, then applying an average rate to the estimate of unbilled sales.  The estimated DE factor had a significant impact on estimated unbilled revenue amounts.



In the first quarter of 2005, management adopted a new method to estimate unbilled revenues for PSNH.  The new method allocates billed sales to the current calendar month based on the daily load for each billing cycle (DLC method.)  The billed sales are subtracted from total calendar month sales to estimate unbilled sales.  The impact of adopting the new method was not material.  This new method replaces the requirements method described previously.



Regulatory Accounting:  The accounting policies of PSNH historically reflect the effects of the rate-making process in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71).  The transmission, distribution and generation businesses of PSNH continue to be cost-of-service rate regulated, and management believes the application of SFAS No. 71 to those businesses continues to be appropriate.  Management must reaffirm this conclusion at each balance sheet date.  If, as a result of a change in circumstances, it is determined that any portion of the company no longer meets the criteria of regulatory accounting under SFAS No. 71, that portion of the company will have to discontinue regulatory accounting and write-off the respective regulatory assets and liabilities.  Such a write-off could have a material impact on PSNHs consolidated financial statements.



The application of SFAS No. 71 results in recording regulatory assets and liabilities.  Regulatory assets represent the deferral of incurred costs that are probable of future recovery in customer rates.  In some cases, PSNH records regulatory assets before approval for recovery has been received



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from the applicable regulatory commission.  Management must use judgment to conclude that costs deferred as regulatory assets are probable of future recovery.  Management bases its conclusion on certain factors, including changes in the regulatory environment, recent rate orders issued by the applicable regulatory agencies and the status of any potential new legislation.  Regulatory liabilities represent revenues received from customers to fund expected costs that have not yet been incurred or are probable future refunds to customers.



Management uses its best judgment when recording regulatory assets and liabilities; however, regulatory commissions can reach different conclusions about the recovery of costs, and those conclusions could have a material impact on PSNHs consolidated financial statements.  Management believes it is probable that PSNH will recover the regulatory assets that have been recorded.



Presentation:  In accordance with current accounting pronouncements, PSNHs consolidated financial statements include all subsidiaries upon which control is maintained and all variable interest entities (VIE).  Determining whether the company is the primary beneficiary of a VIE is subjective and requires managements judgment.  There are certain variables taken into consideration to determine whether the company is considered the primary beneficiary to the VIE.  A change in any one of these variables could require the company to reconsider whether or not it is the primary beneficiary of the VIE.  All intercompany transactions between these subsidiaries are eliminated as part of the consolidation process.



PSNH has less than 50 percent ownership interests in CYAPC, YAEC and MYAPC.  PSNH does not control these companies and does not consolidate them in its financial statements.  PSNH accounts for the investments in these companies using the equity method.  Under the equity method, PSNH records its ownership share of the earnings or losses at these companies.  Determining whether or not PSNH should apply the equity method of accounting for an investment requires management judgment.



In December of 2003, the Financial Accounting Standards Board (FASB) issued a revised version of FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities," (FIN 46R).  FIN 46R was effective for PSNH for the first quarter of 2004 and did not have an impact on PSNHs consolidated financial statements.



Pension and Postretirement Benefits Other Than Pensions (PBOP):PSNH participates in a uniform noncontributory defined benefit retirement plan (Pension Plan) covering substantially all regular PSNH employees.  PSNH also participates in a postretirement benefit plan (PBOP Plan) to provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees.  For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status and net periodic benefit credit or cost is based on several significant assumptions.  If these assumptions were changed, the resulting change in benefit obligations, fair values of plan assets, funded status and net periodic benefit credits or costs could have a material impact on PSNHs consolidated financial statements.



Pre-tax periodic pension expense for the Pension Plan totaled an expense of $18.1 million, $12.4 million and $6.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.  The pension expense amounts exclude one-time items recorded under SFAS No. 88, "Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits."



Not included in the pension expense amount are pension amounts related to intercompany allocations totaling $2.2 million, $0.7 million and $(0.2) million for the years ended December 31, 2005, 2004 and 2003, respectively, including pension curtailment and termination benefit expenses of $0.6 million and $0.1 million for the years ended December 31, 2005 and 2004, respectively.  These amounts are included in other operating expenses on the accompanying consolidated financial statements.



The pre-tax net PBOP Plan cost, excluding curtailment expense, totaled $9.4 million, $7.5 million and $6.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.



On December 15, 2005, the NU Board of Trustees approved a benefit for new non-union employees hired on and after January 1, 2006 to receive retirement benefits under a new 401(k) benefit rather than under the Pension Plan.  Non-union employees actively employed on December 31, 2005 will be given the choice in 2006 to elect to continue participation in the Pension Plan or instead receive a new employer contribution under the 401(k) Savings Plan effective January 1, 2007.  If the new benefit is elected, their accrued pension liability in the Pension Plan will be frozen as of December 31, 2006.  Non-union employees will make this election in the second half of 2006.  This decision resulted in the recording of an estimated pre-tax curtailment expense of $1.1 million in 2005, as a certain number of employees are expected to elect the new 401(k) benefit, resulting in a reduction in aggregate estimated future years of service under the Pension Plan.  Management estimated the amount of the curtailment expense associated with this change based upon actuarial calculations and certain assumptions, including the expected level of transfers to the new 401(k) benefit.  Any adjustments to this estimate resulting from actual employee elections will be recorded in 2006.



There were no curtailments or termination benefits recorded for the Pension Plan in 2004 or 2003 or the PBOP Plan in 2005, 2004 or 2003.



Long-Term Rate of Return Assumptions:In developing the expected long-term rate of return assumptions, PSNH evaluated input from actuaries and consultants, as well as long-term inflation assumptions and PSNHs historical 20-year compounded return of approximately 11 percent.  PSNHs expected long-term rates of return on assets is based on certain target asset allocation assumptions and expected long-term rates of return.  PSNH believes that 8.75 percent is a reasonable long-term rate of return on Pension Plan and PBOP Plan assets (life assets and non-taxable health assets) and 6.85 percent for PBOP health assets, net of tax for 2005.  PSNH will continue to evaluate these actuarial assumptions, including the expected rate of return, at least annually, and will adjust the appropriate assumptions as necessary.  The Pension Plans and PBOP Plans target asset allocation assumptions and expected long-term rates of return assumptions by asset category are as follows:





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|                             |  |                          |  |                         |  |                          |  |                         
|---------------------------- |  | ------------------------ |  | ----------------------- |  | ------------------------ |  | ------------------------
|                             |  | At December 31,         
|                             |  | Pension Benefits         |  | Postretirement Benefits
|                             |  | 2005 and 2004            |  | 2005 and 2004          
|Asset Category               |  | Target 
Asset
Allocation |  | Assumed
Rate 
of Return |  | Target 
Asset
Allocation |  | Assumed 
Rate 
of Return
|Equity securities:           |  |                          |  |                         |  |                          |  |                         
|United States                |  | 45%                      |  | 9.25%                   |  | 55%                      |  | 9.25%                   
|Non-United States            |  | 14%                      |  | 9.25%                   |  | 11%                      |  | 9.25%                   
|Emerging markets             |  | 3%                       |  | 10.25%                  |  | 2%                       |  | 10.25%                  
|Private                      |  | 8%                       |  | 14.25%                  |  | -                        |  | -                       
|Debt Securities:             |  |                          |  |                         |  |                          |  |                         
|Fixed income                 |  | 20%                      |  | 5.50%                   |  | 27%                      |  | 5.50%                   
|High yield fixed 
    income |  | 5%                       |  | 7.50%                   |  | 5%                       |  | 7.50%                   
|Real estate                  |  | 5%                       |  | 7.50%                   |  | -                        |  | -                       



The actual asset allocations at December 31, 2005 and 2004 approximated these target asset allocations.  PSNH routinely reviews the actual asset allocations and periodically rebalances the investments to the targeted asset allocations when appropriate.  For information regarding actual asset allocations, see Note 3, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements.



Actuarial Determination of Income and Expense:  PSNH bases the actuarial determination of Pension Plan and PBOP Plan income/expense on a market-related valuation of assets, which reduces year-to-year volatility.  This market-related valuation calculation recognizes investment gains or losses over a four-year period from the year in which they occur.  Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets.  Since the market-related valuation calculation recognizes gains or losses over a four-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized.  There will be no impact on the fair value of Pension Plan and PBOP Plan assets in the trust funds of these plans.



At December 31, 2005, the Pension Plan had cumulative unrecognized investment gains of $7.4 million, which will decrease pension expense over the next four years.  At December 31, 2005, the Pension Plan had cumulative unrecognized actuarial losses of $73.3 million, which will increase pension expense over the expected future working lifetime of active Pension Plan participants, or approximately 13 years.  The combined total of unrecognized investment gains and actuarial losses at December 31, 2005 is a net unrecognized loss of $65.9 million.  These gains and losses impact the determination of pension expense and the actuarially determined accrued pension amount recorded on the consolidated balance sheets but have no impact on expected Pension Plan funding.



At December 31, 2005, the PBOP Plan had cumulative unrecognized investment gains of $9.3 million, which will decrease PBOP Plan expense over the next four years.  At December 31, 2005, the PBOP Plan also had cumulative unrecognized actuarial losses of $38.8 million, which will increase PBOP Plan expense over the expected future working lifetime of active PBOP Plan participants, or approximately 13 years.  The combined total of unrecognized investment gains and actuarial losses at December 31, 2005 is a net unrecognized loss of $29.5 million.  These gains and losses impact the determination of PBOP Plan cost and the actuarially determined accrued PBOP Plan cost recorded on the consolidated balance sheets.



Discount Rate:  The discount rate that is utilized in determining future pension and PBOP obligations is based on a yield-curve approach where each cash flow related to the Pension Plan or PBOP Plan liability stream is discounted at an interest rate specifically applicable to the timing of the cash flow.  The yield curve is developed from the top quartile of AA rated Moodys and S&Ps bonds without callable features outstanding at December 31, 2005.  This process calculates the present values of these cash flows and calculates the equivalent single discount rate that produces the same present value for future cash flows.  The discount rates determined on this basis are 5.80 percent for the Pension Plan and 5.65 percent for the PBOP Plan at December 31, 2005.  Discount rates used at December 31, 2004 were 6.00 percent for the Pension Plan and 5.50 percent for the PBOP Plan.



Expected Contributions and Forecasted Expense: Due to the effect of the unrecognized actuarial losses and based on an expected rate of return on Pension Plan assets of 8.75 percent, a discount rate of 6.00 percent and an expected rate of return on PBOP assets of 6.85 percent for health assets, net of tax and 8.75 percent for life assets and nontaxable health assets, a discount rate of 5.50 ­­­percent and various other assumptions, PSNH estimates that expected contributions to and forecasted expense for the Pension Plan and PBOP Plan will be as follows (in millions):



|     |  |                        |  |                     |  |                        |  |                   
|---- |  | ---------------------- |  | ------------------- |  | ---------------------- |  | ------------------
|     |  | Pension Plan           |  | Postretirement Plan
|Year |  | Expected
Contributions |  | Forecasted
Expense  |  | Expected
Contributions |  | Forecasted
Expense
|2006 |  | $ 0.0                  |  | $20.8               |  | $9.6                   |  | $9.6              
|2007 |  | $ 0.0                  |  | $20.4               |  | $8.1                   |  | $8.1              
|2008 |  | $ 0.0                  |  | $21.0               |  | $7.7                   |  | $7.7              



Future actual pension and postretirement expense will depend on future investment performance, changes in future discount rates and various other factors related to the populations participating in the plans and amounts capitalized.





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Sensitivity Analysis:The following represents the increase/(decrease) to the Pension Plan's and PBOP Plan's reported cost as a result of the change in the following assumptions by 50 basis points (in millions):



|                                  |  |                 |  |                     |  |      |  |     
|--------------------------------- |  | --------------- |  | ------------------- |  | ---- |  | ----
|                                  |  | At December 31,
|                                  |  | Pension Plan    |  | Postretirement Plan
|Assumption Change                 |  | 2005            |  | 2004                |  | 2005 |  | 2004
|Lower long-term rate 
  of return |  | $  0.9          |  | $  1.0              |  | $0.2 |  | $0.1
|Lower discount rate               |  | 2.6             |  | 2.2                 |  | 0.2  |  | 0.2 
|Lower compensation
  increase     |  | $(1.2)          |  | $(0.9)              |  | N/A  |  | N/A 



Plan Assets:  The market-related value of the Pension Plan assets has increased by $0.7 million to $202.3 million at December 31, 2005.  The projected benefit obligation (PBO) for the Pension Plan has also increased by $30.5 million to $354.6 million at December 31, 2005.  These changes have increased the underfunded status of the Pension Plan on a PBO basis from an underfunded position of $122.5 million at December 31, 2004 to an underfunded position of $152.3 million at December 31, 2005.  The PBO includes expectations of future employee compensation increases.  The accumulated benefit obligation (ABO) of the Pension Plan was approximately $106.6 million more than Pension Plan assets at December 31, 2005 and approximately $69.1 million more than Pension Plan assets at December 31, 2004.  The ABO for the entire NU plan is the obligation for employee service and compensation provided through December 31, 2005.  Under current accounting rules, if the ABO for the entire NU plan exceeds the entire NU Pension Plan assets at a future plan measurement date, PSNH will record its share of the additional minimum liability.  PSNH has not made employer contributions to the Pension Plan since 1991.



The value of PBOP Plan assets has increased from $34.6 million at December 31, 2004 to $39.9 million at December 31, 2005.  The benefit obligation for the PBOP Plan has also increased from $79.7 million at December 31, 2004 to $87 million at December 31, 2005.  These changes have increased the underfunded status of the PBOP Plan on an accumulated projected benefit obligation basis from $45.1 million at December 31, 2004 to $47.1 million at December 31, 2005.  PSNH has made a contribution each year equal to the PBOP Plans postretirement benefit cost, excluding curtailment and termination benefits.



Health Care Cost:  The health care cost trend assumption used to project increases in medical costs was 7 percent for 2005 and 8 percent for 2004, decreasing one percentage point per year to an ultimate rate of 5 percent in 2007.  For December 31, 2005 disclosure purposes, the health care cost trend assumption was reset for 2006 at 10 percent, decreasing one percentage point per year to an ultimate rate of 5 Percent in 2011.  The effect of increasing the health care cost trend by one percentage point would have increased service and interest lost components of the PBOP Plan cost by $0.2 million in 2005 and $0.1 million in 2004.



Income Taxes:  Income tax expense is calculated each year in each of the jurisdictions in which PSNH operates.  This process involves estimating PSNHs actual current tax exposures as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction and expenses for tax and book accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in PSNHs consolidated balance sheets.  The income tax estimation process impacts all of PSNHs segments and adjustments made to income taxes could significantly affect PSNHs consolidated financial statements.  Management must also assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely, a valuation allowance must be established.  Significant management judgment is required in determining income tax expense, deferred tax assets and liabilities and valuation allowances.



PSNH accounts for deferred taxes under SFAS No. 109, "Accounting for Income Taxes."  For temporary differences recorded as deferred tax liabilities that will be recovered in rates in the future, PSNH has established a regulatory asset.  The regulatory asset amounted to $35.9 million and $37.5 million at December 31, 2005 and 2004, respectively.  Regulatory agencies in the jurisdictions in which PSNH operates require the tax effect of specific temporary differences to be "flowed through" to utility customers.  Flow through treatment means that deferred tax expense is not recorded on the consolidated statements of income.  Instead, the tax effect of the temporary difference impacts both amounts for income tax expense currently included in customers rates and the companys net income.  Flow through treatment can result in effective income tax rates that are significantly different than expected income tax rates.  Recording deferred taxes on flow through items is required by SFAS No. 109, and the offset to the deferred tax amounts is the regulatory asset referred to above.



A reconciliation from expected tax expense at the statutory federal income tax rate to actual tax expense recorded is included in the accompanying footnotes to the consolidated financial statements.  See Note 1H, "Summary of Significant Accounting Policies - Income Taxes," to the consolidated financial statements, for further information.



The estimates that are made by management in order to record income tax expense, accrued taxes and deferred taxes are compared each year to the actual tax amounts filed on PSNHs income tax returns.  The income tax returns were filed in the fall of 2005 for the 2004 tax year, and PSNH recorded differences between income tax expense, accrued taxes and deferred taxes on its consolidated financial statements and the amounts that were on its income tax returns.



Depreciation: Depreciation expense is calculated based on an assets useful life, and judgment is involved when estimating the useful lives of certain assets.  A change in the estimated useful lives of these assets could have a material impact on PSNHs consolidated financial statements absent timely rate relief for PSNH's assets.





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Accounting for Environmental Reserves:Environmental reserves are accrued using a probabilistic model approach when assessments indicate that it is probable that a liability has been incurred and an amount can be reasonably estimated.  Adjustments made to environmental liabilities could have a significant effect on earnings.  The probabilistic model approach estimates the liability based on the most likely action plan from a variety of available remediation options, ranging from no action to remedies ranging from establishing institutional controls to full site remediation and long-term monitoring.  The probabilistic model approach estimates the liabilities associated with each possible action plan based on findings through various phases of site assessments.



These estimates are based on currently available information from presently enacted state and federal environmental laws and regulations and several cost estimates from outside engineering and remediation contractors.  These amounts also take into consideration prior experience in remediating contaminated sites and data released by the United States Environmental Protection Agency and other organizations.  These estimates are subjective in nature partly because there are usually several different remediation options from which to choose when working on a specific site.  These estimates are subject to revisions in future periods based on actual costs or new information concerning either the level of contamination at the site or newly enacted laws and regulations.  The amounts recorded as environmental liabilities on the consolidated balance sheets represent managements best estimate of the liability for environmental costs based on current site information from site assessments and remediation estimates.  These liabilities are estimated on an undiscounted basis.



PSNH has a regulatory recovery mechanism in place for environmental costs.  Accordingly, regulatory assets have been recorded for certain of PSNHs environmental liabilities.  As of December 31, 2005 and 2004, $7 million and $8.9 million, respectively, have been recorded as regulatory assets on the accompanying consolidated balance sheets.



Asset Retirement Obligations:  On March 30, 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143."  FIN 47 requires an entity to recognize a liability for the fair value of an ARO that is conditional on a future event if the liabilitys fair value can be reasonably estimated.  PSNH adopted FIN 47 on December 31, 2005.  Upon adoption, management identified several conditional removal obligations that have been accounted for as AROs.  For further information regarding the adoption of FIN 47, see Note 1L, "Summary of Significant Accounting Policies - Asset Retirement Obligations," to the consolidated financial statements.



Under SFAS No. 71, PSNH recovers amounts in rates for future costs of removal of plant assets.  At December 31, 2005 and 2004, these amounts totaling $85.7 million and $87.6 million, respectively, are classified as regulatory liabilities on the accompanying consolidated balance sheets.



Special Purpose Entities: During 2001 and 2002, to facilitate the issuance of rate reduction bonds intended to finance certain stranded costs, PSNH established two special purpose entities:  PSNH Funding LLC and PSNH Funding LLC 2.  The funding companies were created as part of a state-sponsored securitization program.  The funding companies are restricted from engaging in non-related activities and are required to operate in a manner intended to reduce the likelihood that they would be included in PSNHs bankruptcy estate if it ever became involved in a bankruptcy proceeding.  The funding companies and the securitization amounts are consolidated in the accompanying consolidated financial statements.



For further information regarding the matters in this "Critical Accounting Policies and Estimates," section, see Note 1, "Summary of Significant Accounting Policies," Note 3, "Pension Benefits and Postretirement Benefits Other Than Pensions," and Note 4B, "Commitments and Contingencies - Environmental Matters," to the consolidated financial statements.



Other Matters

Commitments and Contingencies:For further information regarding other commitments and contingencies, see Note 4, "Commitments and Contingencies," to the consolidated financial statements.



Accounting Standards Issued But Not Yet Adopted:



Accounting Changes and Error Corrections:In May of 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."  SFAS No. 154 is effective beginning on January 1, 2006 for PSNH and requires retrospective application to prior periods financial statements of voluntary changes in accounting principles.  It also applies to accounting changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  SFAS No. 154 does not change previous guidance for reporting the correction of an error in previously issued financial statements or a change in accounting estimate.  Implementation of SFAS No. 154 on January 1, 2006 is not expected to affect PSNHs consolidated financial statements until such time that its provisions are required to be applied as described above.





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Contractual Obligations and Commercial Commitments:Information regarding PSNHs contractual obligations and commercial commitments at December 31, 2005 is summarized through 2010 and thereafter as follows:



|                                                                          |  |          |  |           |  |          |  |          |  |          |  |           
|------------------------------------------------------------------------- |  | -------- |  | --------- |  | -------- |  | -------- |  | -------- |  | ----------
|(Millions of Dollars)                                                     |  | 2006     |  | 2007      |  | 2008     |  | 2009     |  | 2010     |  | Thereafter
|Long-term debt (a) (b)                                                    |  | $      - |  | $       - |  | $      - |  | $      - |  | $      - |  | $507.3    
|Estimated interest
  payments on existing 
  long-term debt               |  | 21.6     |  | 21.6      |  | 21.6     |  | 21.6     |  | 21.6     |  | 250.7     
|Capital leases (c) (d)                                                    |  | 0.3      |  | 0.2       |  | 0.2      |  | -        |  | -        |  | -         
|Operating leases (d) (e)                                                  |  | 6.4      |  | 5.3       |  | 4.4      |  | 2.8      |  | 2.2      |  | 7.1       
|Required funding 
  of other post-
  retirement benefit
  obligations (e) |  | 9.6      |  | 8.1       |  | 7.7      |  | 7.3      |  | 6.9      |  | N/A       
|Long-term contractual 
  arrangements (d) (e)                             |  | 158.6    |  | 78.6      |  | 52.4     |  | 52.2     |  | 51.8     |  | 276.9     
|Totals                                                                    |  | $196.5   |  | $113.8    |  | $ 86.3   |  | $ 83.9   |  | $ 82.5   |  | $1,042.0  



(a) Included in PSNH's debt agreements are usual and customary positive, negative and financial covenants.  Non-compliance with certain covenants, for example the timely payment of principal and interest, may constitute an event of default, which could cause an acceleration of principal in the absence of receipt by the company of a waiver or amendment.  Such acceleration would change the obligations outlined in the table of contractual obligations and commercial commitments.



(b) Long-term debt excludes $0.2 million of net unamortized discounts.



(c) The capital lease obligations include imputed interest of $0.2 million.



(d) PSNH has no provisions in its capital or operating lease agreements or agreements related to its long-term contractual arrangements that could trigger a change in terms and conditions, such as acceleration of payment obligations.



(e)Amounts are not included on PSNH's consolidated balance sheets.



Rate reduction bond amounts are non-recourse to PSNH, have no required payments over the next five years and are not included in this table.  For further information regarding PSNHs contractual obligations and commercial commitments, see Note 2, "Short-Term Debt," Note 4C, "Commitments and Contingencies - Long-Term Contractual Arrangements," Note 6, "Leases," and Note 9, "Long-Term Debt," to the consolidated financial statements.



Forward Looking Statements:This discussion and analysis includes statements concerning PSNH's expectations, plans, objectives, future financial performance and other statements that are not historical facts.  These statements are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  In some cases the reader can identify these forward looking statements by words such as "estimate," "expect," "anticipate," "intend," "plan," "believe," "forecast," "should," "could," and similar expressions.  Forward looking statements involve risks and uncertainties that may cause actual results or outcomes to differ materially from those included in the forward looking statements.  Factors that may cause actual results to differ materially from those included in the forward looking statements include, but are not limited to, actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in weather patterns, changes in laws, regulations or regulatory policy, expiration or initiation of significant energy supply contracts, changes in levels of capital expenditures, developments in legal or public policy doctrines, technological developments, volatility in electric and natural gas commodity markets, effectiveness of our risk management policies and procedures, changes in accounting standards and financial reporting regulations, fluctuations in the value of electricity positions, actions of rating agencies, terrorist attacks on domestic energy facilities and other presently unknown or unforeseen factors. Other risk factors are detailed from time to time in our reports to the SEC.  Management undertakes no obligation to update the information contained in any forward looking statements to reflect developments or circumstances occurring after the statement is made.



Web site:  Additional financial information is available through PSNH's web site at www.psnh.com.





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RESULTS OF OPERATIONS



The following table provides the variances in income statement line items for the consolidated statements of income included in this annual report for the past two years.



|                                          |                        |  |         |                        |  |        |  |         |  
|----------------------------------------- | ---------------------- |  | ------- | ---------------------- |  | ------ |  | ------- | -
|Income Statement Variances                | 2005 over/(under) 2004 |  |         | 2004 over/(under) 2003 | 
|(Millions of Dollars)                     | Amount                 |  | Percent |                        |  | Amount |  | Percent |  
|Operating Revenues                        | $160                   |  | 16      | %                      |  | $81    |  | 9       | %
|                                          |                        |  |         |                        |  |        |  |         |  
|Operating Expenses:                       |                        |  |         |                        |  |        |  |         |  
|Fuel, purchased and net interchange power | 101                    |  | 24      |                        |  | 10     |  | 3       |  
|Other operation                           | 13                     |  | 8       |                        |  | 22     |  | 16      |  
|Maintenance                               | (1)                    |  | (2)     |                        |  | 1      |  | 1       |  
|Depreciation                              | 1                      |  | 2       |                        |  | 2      |  | 5       |  
|Amortization                              | 49                     |  | 52      |                        |  | 58     |  | (a)     |  
|Amortization of rate reduction bonds      | 3                      |  | 7       |                        |  | 4      |  | 9       |  
|Taxes other than income taxes             | 1                      |  | 2       |                        |  | 2      |  | 7       |  
|Total operating expenses                  | 167                    |  | 19      |                        |  | 99     |  | 13      |  
|Operating Income                          | (7)                    |  | (7)     |                        |  | (18)   |  | (15)    |  
|Interest expense, net                     | 1                      |  | 2       |                        |  | 1      |  | 1       |  
|Other income/(loss), net                  | 2                      |  | (a)     |                        |  | 3      |  | 97      |  
|Income before income tax expense          | (6)                    |  | (9)     |                        |  | (16)   |  | (21)    |  
|Income tax expense                        | (1)                    |  | (6)     |                        |  | (17)   |  | (56)    |  
|Net income/(loss)                         | $  (5)                 |  | (11)    | %                      |  | $  1   |  | 2       | %



(a) Percent greater than 100.



Comparison of the Year 2005 to the Year 2004



Operating Revenues

Operating revenues increased $160 million in 2005, as compared to 2004, primarily due to higher distribution revenue ($154 million) and higher transmission revenue ($6 million).  The distribution revenue increase of $154 million is primarily due to the components of revenues which are included in regulatory commission approved tracking mechanisms that track the recovery of certain incurred costs ($141 million).  The tracking mechanisms allow for rates to be changed periodically with over allocations refunded to customers or under collections collected from customers in future periods.  The transition service energy rate component of retail revenues increased by $122 million, primarily due to an increase in the cost of fuel and purchased power.  The distribution and transmission components of PSNHs retail rates which impact earnings increased $13 million primarily due to the retail rate increases effective October 1, 2004 and June 1, 2005 ($8 million) and higher retail sales ($4 million).  Retail sales increased 1.9 percent in 2005 compared to the same period of 2004.



Fuel, Purchased and Net Interchange Power

Fuel, purchased and net interchange power increased $101 million in 2005 primarily due to the higher cost of energy as a result of higher fuel prices.



Other Operation

Other operation expenses increased $13 million in 2005 as a result of higher administrative expenses ($12 million).  The higher administrative expenses are primarily due to higher pension and other benefit costs ($6 million) and employee termination and benefit plan curtailment charges ($2 million).



Maintenance

Maintenance expense decreased $1 million in 2005 primarily due to lower fossil generation expenses ($2 million) and lower overhead line maintenance ($2 million), partially offset by higher substation maintenance ($1 million) and higher tree trimming expenses ($1 million).



Depreciation

Depreciation increased $1 million in 2005 primarily due to higher plant balances.



Amortization of Regulatory Assets, Net

Amortization of regulatory assets, net increased $49 million in 2005 primarily due to an acceleration in the recovery of PSNHs non-securitized stranded costs.  The acceleration of non-securitized stranded cost recovery was due to the positive reconciliation of stranded cost revenues and stranded cost expense, which also includes net ES costs.



Amortization of Rate Reduction Bonds

Amortization of rate reduction bonds increased $3 million in 2005 as a result of the repayment of additional principal.



Taxes Other Than Income Taxes

Taxes other than income taxes increased $1 million in 2005 primarily due to higher property taxes.



---



Interest Expense, Net

Interest expense increased $1 million in 2005 primarily due to higher interest rates on the variable pollution control revenue bonds ($2 million) and the issuance of $50 million of ten-year first mortgage bonds in July 2004 ($2 million), partially offset by lower rate reduction bond interest resulting from lower principal balances outstanding ($3 million).



Other Income/(Loss), Net

Other income, net increased $2 million in 2005 primarily due to a higher earned C&LM incentive and a higher allowance for funds used during construction (AFUDC) as a result of increased eligible CWIP for generation, lower short-term debt, and a greater component of CWIP being subject to a higher equity rate.



Income Taxes

Income tax expense decreased $1 million in 2005 primarily due to lower pre-tax income and lower state unitary taxable income.



Comparison of the Year 2004 to the Year 2003



Operating Revenues

Operating revenues increased $81 million in 2004 compared with the same period of 2003 primarily due to higher distribution retail revenue ($93 million) and higher transmission revenue ($6 million), partially offset by lower wholesale revenue ($19 million).  Distribution retail revenue increased primarily due to higher transition service energy rates ($67 million) and higher sales volumes ($28 million).  The Connecticut Valley Electric Company, Inc. (CVEC) acquisition increased sales and represents $18 million of the revenue increase.  Retail kilowatt-hour (kWh) sales increased by 3.1 percent in 2004.  Transmission revenues were higher primarily due to the October 2003 implementation of the FERC approved transmission rate increase.  The regulated wholesale revenue decrease is primarily due to a lower number of wholesale transactions.



Fuel, Purchased and Net Interchange Power

Fuel, purchased and net interchange power increased $10 million in 2004 primarily due to higher fossil fuel costs ($9 million) as a result of higher fuel prices.



Other Operation

Other operation expenses increased $22 million in 2004 primarily due to higher retail transmission expenses which are collected through retail delivery rates ($7 million), higher fossil generation expense ($6 million), and higher administrative expenses ($10 million) primarily due to higher pension and medical costs.



Maintenance

Maintenance expense increased $1 million in 2004 primarily due to higher tree trimming and substation maintenance ($1 million) and higher transmission station and overhead line maintenance ($1 million), partially offset by lower fossil generation expenses ($1 million), mainly due to a higher level of maintenance overhaul expenses in 2003.



Depreciation

Depreciation increased $2 million in 2004 primarily due to higher plant balances.



Amortization of Regulatory Assets, Net

Amortization of regulatory assets, net increased $58 million primarily due to an acceleration in the recovery of PSNHs non-securitized stranded costs.  The acceleration of non-securitized stranded cost recovery was possible due to the positive reconciliation of stranded costs revenues and stranded cost expense, which also includes net ES costs.



Amortization of Rate Reduction Bonds

Amortization of rate reduction bonds increased $4 million as a result of the repayment of additional principal.



Taxes Other Than Income Taxes

Taxes other than income taxes increased $2 million in 2004 primarily due to higher property tax ($1 million) and higher federal payroll taxes ($1 million).



Interest Expense, Net

Interest expense, net increased $1 million in 2004 primarily due to the issuance of $50 million of 10-year first mortgage bonds in July 2004, partially offset by lower interest on rate reduction bonds as a result of lower debt levels.



Other Income/(Loss), Net

Other income, net increased $3 million in 2004 primarily due to an earned Conservation and Load Management (C&LM) incentive ($2 million) and higher gains on the disposition of property ($1 million).



Income Taxes

Income tax expense decreased $17 million in 2004 primarily due to lower pre-tax earnings and a lower effective tax rate.  The lower effective tax rate resulted from other adjustments to tax expense totaling $5 million and the unitary impact on state income tax expense.



---

Company Report on Internal Controls



Management is responsible for the preparation, integrity, and fair presentation of the accompanying consolidated financial statements of Public Service Company of New Hampshire and subsidiaries and other sections of this annual report.  These financial statements, which were audited by Deloitte & Touche LLP, have been prepared in conformity with accounting principles generally accepted in the United States of America using estimates and judgments, where required, and giving consideration to materiality.



The company has endeavored to establish a control environment that encourages the maintenance of high standards of conduct in all of its business activities.  Management is responsible for maintaining a system of internal controls over financial reporting, that is designed to provide reasonable assurance, at an appropriate cost-benefit relationship, to the companys management and Board of Trustees of Northeast Utilities regarding the preparation of reliable, published financial statements.  The system is supported by an organization of trained management personnel, policies and procedures, and a comprehensive program of internal audits.  Through established programs, the company regularly communicates to its management employees their internal control responsibilities and obtains information regarding compliance with policies prohibiting conflicts of interest and policies segregating information between regulated and unregulated subsidiary companies.  The company has standards of business conduct for all employees, as well as a code of ethics for senior financial officers.



The Audit Committee of the Board of Trustees of Northeast Utilities is composed entirely of independent trustees and includes two members that the Board of Trustees considers "audit committee financial experts."  The Audit Committee meets regularly with management, the internal auditors, and the independent auditors to review the activities of each and to discuss audit matters, financial reporting matters, and the system of internal controls over financial reporting.  The Audit Committee also meets periodically with the internal auditors and the independent auditors without management present.



Because of inherent limitations in any system of internal controls, errors or irregularities may occur and not be detected.  The company believes, however, that its system of internal controls over financial reporting and control environment provide reasonable assurance that its assets are safeguarded from loss or unauthorized use and that its financial records, which are the basis for the preparation of all financial statements, are reliable.  Additionally, management believes that its disclosure controls and procedures are in place and operating effectively.  Disclosure controls and procedures are designed to ensure that information included in reports such as this annual report is recorded, processed, summarized, and reported within the time periods required and that the information disclosed is accumulated and reviewed by management for discussion and approval.



March 7, 2006





---

Report of Independent Registered Public Accounting Firm



To the Board of Directors of 
Public Service Company of New Hampshire:



We have audited the accompanying consolidated balance sheets of Public Service Company of New Hampshire and subsidiaries (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, comprehensive income, common stockholders equity and cash flows for each of the three years in the period ended December 31, 2005.  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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Public Service Company of New Hampshire and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.



/s/ Deloitte & Touche LLP

Deloitte & Touche LLP



Hartford, Connecticut

March 7, 2006





---



|                                                                                        |  |                                   |  |                                 |  | 
|--------------------------------------------------------------------------------------- |  | --------------------------------- |  | ------------------------------- |  | 
|PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES                               
|                                                                                       
|CONSOLIDATED BALANCE SHEETS                                                            
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|At December 31,                                                                         |  | 2005                              |  | 2004                           
|                                                                                        |  | (Thousands of Dollars)           
|ASSETS                                                                                  |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|Current Assets:                                                                         |  |                                   |  |                                
|Cash                                                                                    |  | $                              27 |  | $                         4,855
|Receivables, less provision for uncollectible                                           |  |                                   |  |                                
|accounts of $2,362 in 2005 and $1,764 in 2004                                           |  | 95,599                            |  | 75,019                         
|Accounts receivable from affiliated companies                                           |  | 20,348                            |  | 34,341                         
|Unbilled revenues                                                                       |  | 47,705                            |  | 39,397                         
|Taxes receivable                                                                        |  | -                                 |  | 4,498                          
|Fuel, materials and supplies                                                            |  | 72,820                            |  | 52,479                         
|Prepayments and other                                                                   |  | 11,987                            |  | 13,092                         
|                                                                                        |  | 248,486                           |  | 223,681                        
|                                                                                        |  |                                   |  |                                
|Property, Plant and Equipment:                                                          |  |                                   |  |                                
|Electric utility                                                                        |  | 1,732,716                         |  | 1,627,174                      
|Other                                                                                   |  | 5,816                             |  | 5,675                          
|                                                                                        |  | 1,738,532                         |  | 1,632,849                      
|Less: Accumulated depreciation                                                          |  | 698,480                           |  | 664,336                        
|                                                                                        |  | 1,040,052                         |  | 968,513                        
|Construction work in progress                                                           |  | 115,371                           |  | 63,190                         
|                                                                                        |  | 1,155,423                         |  | 1,031,703                      
|                                                                                        |  |                                   |  |                                
|Deferred Debits and Other Assets:                                                       |  |                                   |  |                                
|Regulatory assets                                                                       |  | 821,951                           |  | 900,115                        
|Other                                                                                   |  | 68,723                            |  | 49,875                         
|                                                                                        |  | 890,674                           |  | 949,990                        
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|                                                                                        |  |                                   |  |                                
|Total Assets                                                                            |  | $                  2,294,583      |  | $                  2,205,374   
|                                                                                        |  |                                   |  |                                
|The accompanying notes are an integral part of these consolidated financial statements. |  |                                  
|                                                                                       





---



|                                                                                        |  |                                   |  |                               
|--------------------------------------------------------------------------------------- |  | --------------------------------- |  | ------------------------------
|PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES                               
|                                                                                       
|CONSOLIDATED BALANCE SHEETS                                                            
|                                                                                        |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|At December 31,                                                                         |  | 2005                              |  | 2004                          
|                                                                                        |  | (Thousands of Dollars)           
|LIABILITIES AND CAPITALIZATION                                                          |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|Current Liabilities:                                                                    |  |                                   |  |                               
|Notes payable to banks                                                                  |  | $                               - |  | $                       10,000
|Notes payable to affiliated companies                                                   |  | 15,900                            |  | 20,400                        
|Accounts payable                                                                        |  | 63,320                            |  | 51,786                        
|Accounts payable to affiliated companies                                                |  | 16,738                            |  | 38,591                        
|Accrued taxes                                                                           |  | 5,186                             |  | -                             
|Accrued interest                                                                        |  | 8,202                             |  | 11,799                        
|Other                                                                                   |  | 15,733                            |  | 13,184                        
|                                                                                        |  | 125,079                           |  | 145,760                       
|                                                                                        |  |                                   |  |                               
|Rate Reduction Bonds                                                                    |  | 382,692                           |  | 428,769                       
|                                                                                        |  |                                   |  |                               
|Deferred Credits and Other Liabilities:                                                 |  |                                   |  |                               
|Accumulated deferred income taxes                                                       |  | 242,590                           |  | 311,998                       
|Accumulated deferred investment tax credits                                             |  | 1,230                             |  | 1,625                         
|Deferred contractual obligations                                                        |  | 48,262                            |  | 54,459                        
|Regulatory liabilities                                                                  |  | 414,558                           |  | 323,707                       
|Accrued pension                                                                         |  | 76,446                            |  | 57,199                        
|Other                                                                                   |  | 44,136                            |  | 24,968                        
|                                                                                        |  | 827,222                           |  | 773,956                       
|Capitalization:                                                                         |  |                                   |  |                               
|Long-Term Debt                                                                          |  | 507,086                           |  | 457,190                       
|                                                                                        |  |                                   |  |                               
|Common Stockholder's Equity:                                                            |  |                                   |  |                               
|Common stock, $1 par value  authorized                                                 |  |                                   |  |                               
|100,000,000 shares; 301 shares outstanding                                              |  |                                   |  |                               
|in 2005 and 2004                                                                        |  | -                                 |  | -                             
|Capital surplus, paid in                                                                |  | 209,788                           |  | 156,532                       
|Retained earnings                                                                       |  | 242,633                           |  | 243,277                       
|Accumulated other comprehensive income/(loss)                                           |  | 83                                |  | (110)                         
|Common Stockholder's Equity                                                             |  | 452,504                           |  | 399,699                       
|Total Capitalization                                                                    |  | 959,590                           |  | 856,889                       
|                                                                                        |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|Commitments and Contingencies (Note 4)                                                  |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|                                                                                        |  |                                   |  |                               
|Total Liabilities and Capitalization                                                    |  | $                  2,294,583      |  | $                  2,205,374  
|                                                                                        |  |                                   |  |                               
|The accompanying notes are an integral part of these consolidated financial statements.





---



|                                                                                        |  |                        |  |                   |  |                 |  |  | 
|--------------------------------------------------------------------------------------- |  | ---------------------- |  | ----------------- |  | --------------- |  |  | 
|PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES                               
|                                                                                       
|CONSOLIDATED STATEMENTS OF INCOME                                                      
|                                                                                        |  |                        |  |                   | 
|                                                                                        |  |                        | 
|For the Years Ended December 31,                                                        |  | 2005                   |  | 2004              |  | 2003           
|                                                                                        |  | (Thousands of Dollars)
|                                                                                        |  |                        |  |                   |  |                
|                                                                                        |  |                        |  |                   |  |                
|Operating Revenues                                                                      |  | $       1,128,427      |  | $        968,749  |  | $      888,186 
|                                                                                        |  |                        |  |                   |  |                
|Operating Expenses:                                                                     |  |                        |  |                   |  |                
|Operation -                                                                             |  |                        |  |                   |  |                
|Fuel, purchased and net interchange power                                               |  | 515,801                |  | 414,687           |  | 404,431        
|Other                                                                                   |  | 175,828                |  | 162,513           |  | 140,642        
|Maintenance                                                                             |  | 64,200                 |  | 65,620            |  | 64,872         
|Depreciation                                                                            |  | 46,467                 |  | 45,662            |  | 43,322         
|Amortization of regulatory assets, net                                                  |  | 144,746                |  | 95,436            |  | 37,861         
|Amortization of rate reduction bonds                                                    |  | 46,648                 |  | 43,764            |  | 40,040         
|Taxes other than income taxes                                                           |  | 36,498                 |  | 35,805            |  | 33,407         
|Total operating expenses                                                                |  | 1,030,188              |  | 863,487           |  | 764,575        
|Operating Income                                                                        |  | 98,239                 |  | 105,262           |  | 123,611        
|                                                                                        |  |                        |  |                   |  |                
|Interest Expense:                                                                       |  |                        |  |                   |  |                
|Interest on long-term debt                                                              |  | 20,481                 |  | 17,441            |  | 15,408         
|Interest on rate reduction bonds                                                        |  | 24,074                 |  | 26,901            |  | 29,081         
|Other interest                                                                          |  | 1,733                  |  | 1,197             |  | 727            
|Interest expense, net                                                                   |  | 46,288                 |  | 45,539            |  | 45,216         
|Other Income/(Loss), Net                                                                |  | 2,022                  |  | (89)              |  | (2,998)        
|Income Before Income Tax Expense                                                        |  | 53,973                 |  | 59,634            |  | 75,397         
|Income Tax Expense                                                                      |  | 12,234                 |  | 12,993            |  | 29,773         
|Net Income                                                                              |  | $            41,739    |  | $          46,641 |  | $        45,624
|                                                                                        |  |                        |  |                   |  |                
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                         |  |                        |  |                   |  |                
|Net Income                                                                              |  | $            41,739    |  | $          46,641 |  | $        45,624
|Other comprehensive income/(loss), net of tax:                                          |  |                        |  |                   |  |                
|Unrealized (losses)/gains on securities                                                 |  | (39)                   |  | 76                |  | 128            
|Minimum supplemental executive retirement                                               |  |                        |  |                   |  |                
|pension liability adjustments                                                           |  | 232                    |  | (69)              |  | (140)          
|Other comprehensive income/(loss), net of tax                                           |  | 193                    |  | 7                 |  | (12)           
|Comprehensive Income                                                                    |  | $            41,932    |  | $          46,648 |  | $        45,612
|                                                                                        |  |                        |  |                   |  |                
|                                                                                        |  |                        |  |                   |  |                
|                                                                                        |  |                        |  |                   |  |                
|                                                                                        |  |                        |  |                   |  |                
|                                                                                        |  |                        |  |                   |  |                
|The accompanying notes are an integral part of these consolidated financial statements.





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|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                      |  |  |  | 
|--------------------------------------------------------------------------------------- | ------------ |  | --------------- | ------------------------------------------------ | ----------- |  | ---------- |  | ----------------------- |  | -------------------- |  |  |  | 
|PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES                               
|                                                                                        |              | 
|CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY                                 
|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|                                                                                        |              |  |                 |                                                  |             |  |            |  | Accumulated             |  |                     
|                                                                                        | Common Stock |  | Capital         |                                                  |             |  | Other      |  |                        
|                                                                                        |              |  |                 |                                                  | Surplus,    |  | Retained   |  | Comprehensive           |  |                     
|                                                                                        | Shares       |  | Amount          |                                                  | Paid In     |  | Earnings   |  | (Loss)/Income           |  | Total               
|                                                                                        |              |  |                 | (Thousands of Dollars, except share information) |             |  |           
|Balance at January 1, 2003                                                              | 301          |  | $             - |                                                  | $  126,937  |  | $  194,998 |  | $                 (105) |  | $          321,830  
|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|Net income for 2003                                                                     |              |  |                 |                                                  |             |  | 45,624     |  |                         |  | 45,624              
|Cash dividends on common stock                                                          |              |  |                 |                                                  |             |  | (16,800)   |  |                         |  | (16,800)            
|Allocation of benefits  ESOP                                                           |              |  |                 |                                                  | (382)       |  |            |  |                         |  | (382)               
|Capital contribution from NU parent                                                     |              |  |                 |                                                  | 30,000      |  |            |  |                         |  | 30,000              
|Other comprehensive loss                                                                |              |  |                 |                                                  |             |  |            |  | (12)                    |  | (12)                
|Balance at December 31, 2003                                                            | 301          |  | -               |                                                  | 156,555     |  | 223,822    |  | (117)                   |  | 380,260             
|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|Net income for 2004                                                                     |              |  |                 |                                                  |             |  | 46,641     |  |                         |  | 46,641              
|Cash dividends on common stock                                                          |              |  |                 |                                                  |             |  | (27,186)   |  |                         |  | (27,186)            
|Allocation of benefits  ESOP                                                           |              |  |                 |                                                  | (220)       |  |            |  |                         |  | (220)               
|Tax deduction for stock options exercised and Employee Stock Purchase                   |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|Plan disqualifying dispositions                                                         |              |  |                 |                                                  | 197         |  |            |  |                         |  | 197                 
|Other comprehensive income                                                              |              |  |                 |                                                  |             |  |            |  | 7                       |  | 7                   
|Balance at December 31, 2004                                                            | 301          |  | -               |                                                  | 156,532     |  | 243,277    |  | (110)                   |  | 399,699             
|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|Net income for 2005                                                                     |              |  |                 |                                                  |             |  | 41,739     |  |                         |  | 41,739              
|Cash dividends on common stock                                                          |              |  |                 |                                                  |             |  | (42,383)   |  |                         |  | (42,383)            
|Allocation of benefits  ESOP                                                           |              |  |                 |                                                  | (208)       |  |            |  |                         |  | (208)               
|Tax deduction for stock options exercised and Employee Stock Purchase                   |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|Plan disqualifying dispositions                                                         |              |  |                 |                                                  | 45          |  |            |  |                         |  | 45                  
|Capital contribution from NU parent                                                     |              |  |                 |                                                  | 53,419      |  |            |  |                         |  | 53,419              
|Other comprehensive income                                                              |              |  |                 |                                                  |             |  |            |  | 193                     |  | 193                 
|Balance at December 31, 2005                                                            | 301          |  | $             - |                                                  | $   209,788 |  | $  242,633 |  | $                    83 |  | $            452,504
|                                                                                        |              |  |                 |                                                  |             |  |            |  |                         |  |                     
|The accompanying notes are an integral part of these consolidated financial statements. |              |  |                 |                                                  |            





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|                                                                                        |                            |  |                          |  |                         
|--------------------------------------------------------------------------------------- | -------------------------- |  | ------------------------ |  | ------------------------
|PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES                               
|                                                                                        |                           
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                  
|                                                                                       
|                                                                                       
|                                                                                        |                            | 
|For the Years Ended December 31,                                                        | 2005                       |  | 2004                     |  | 2003                    
|                                                                                        | (Thousands of Dollars)    
|                                                                                        |                            |  |                          |  |                         
|Operating activities:                                                                   |                            |  |                          |  |                         
|Net income                                                                              | $                41,739    |  | $                46,641  |  | $                45,624 
|Adjustments to reconcile to net cash flows                                              |                            |  |                          |  |                         
|provided by operating activities:                                                       |                            |  |                          |  |                         
|Bad debt expense                                                                        | 3,904                      |  | 2,742                    |  | 1,379                   
|Depreciation                                                                            | 46,467                     |  | 45,662                   |  | 43,322                  
|Deferred income taxes                                                                   | (68,347)                   |  | (24,160)                 |  | (6,670)                 
|Amortization of regulatory assets, net                                                  | 144,746                    |  | 95,436                   |  | 37,861                  
|Amortization of rate reduction bonds                                                    | 46,648                     |  | 43,764                   |  | 40,040                  
|Amortization of recoverable energy costs                                                | 23,388                     |  | 23,388                   |  | 23,388                  
|Pension expense                                                                         | 14,338                     |  | 8,994                    |  | 4,882                   
|Regulatory (refunds)/overrecoveries                                                     | (22,910)                   |  | (21,169)                 |  | 11,276                  
|Deferred contractual obligations                                                        | (12,465)                   |  | (9,654)                  |  | (9,028)                 
|Other non-cash adjustments                                                              | (8,468)                    |  | 5,184                    |  | (53,013)                
|Other sources of cash                                                                   | 442                        |  | 5,769                    |  | 9,425                   
|Other uses of cash                                                                      | (19,962)                   |  | (5,615)                  |  | (5,275)                 
|Changes in current assets and liabilities:                                              |                            |  |                          |  |                         
|Receivables and unbilled revenues, net                                                  | (18,799)                   |  | (33,867)                 |  | (9,136)                 
|Fuel, materials and supplies                                                            | (16,300)                   |  | (5,411)                  |  | 2,114                   
|Other current assets                                                                    | 1,170                      |  | (6,248)                  |  | (6,445)                 
|Accounts payable                                                                        | (9,009)                    |  | 37,659                   |  | 3,457                   
|Accrued taxes                                                                           | 9,684                      |  | (1,914)                  |  | (56,241)                
|Other current liabilities                                                               | (1,013)                    |  | (4,448)                  |  | 5,921                   
|Net cash flows provided by operating activities                                         | 155,253                    |  | 202,753                  |  | 82,881                  
|                                                                                        |                            |  |                          |  |                         
|Investing Activities:                                                                   |                            |  |                          |  |                         
|Investments in plant                                                                    | (158,832)                  |  | (153,248)                |  | (105,088)               
|Net proceeds from sale of property                                                      | 1,461                      |  | -                        |  | -                       
|Proceeds from sales of investment securities                                            | 3,227                      |  | 3,038                    |  | 2,015                   
|Purchases of investment securities                                                      | (3,415)                    |  | (3,970)                  |  | (3,544)                 
|CVEC acquisition special deposit                                                        | -                          |  | -                        |  | (30,105)                
|Other investing activities                                                              | (2,767)                    |  | 2,958                    |  | (5,016)                 
|Net cash flows used in investing activities                                             | (160,326)                  |  | (151,222)                |  | (141,738)               
|                                                                                        |                            |  |                          |  |                         
|Financing Activities:                                                                   |                            |  |                          |  |                         
|Issuance of long-term debt                                                              | 50,000                     |  | 50,000                   |  | -                       
|Retirement of rate reduction bonds                                                      | (46,077)                   |  | (43,453)                 |  | (38,619)                
|(Decrease)/increase in short-term debt                                                  | (10,000)                   |  | -                        |  | 10,000                  
|NU Money Pool (lending)/borrowing                                                       | (4,500)                    |  | (28,500)                 |  | 71,900                  
|Capital contribution from Northeast Utilities                                           | 53,419                     |  | -                        |  | 30,000                  
|Cash dividends on common stock                                                          | (42,383)                   |  | (27,186)                 |  | (16,800)                
|Other financing activities                                                              | (214)                      |  | (274)                    |  | (206)                   
|Net cash flows provided by/(used in) financing activities                               | 245                        |  | (49,413)                 |  | 56,275                  
|Net (decrease)/increase in cash                                                         | (4,828)                    |  | 2,118                    |  | (2,582)                 
|Cash - beginning of year                                                                | 4,855                      |  | 2,737                    |  | 5,319                   
|Cash - end of year                                                                      | $                       27 |  | $                  4,855 |  | $                  2,737
|                                                                                        |                            |  |                          |  |                         
|                                                                                        |                            |  |                          |  |                         
|Supplemental Cash Flow Information:                                                     |                            |  |                          |  |                         
|Cash paid during the year for:                                                          |                            |  |                          |  |                         
|Interest, net of amounts capitalized                                                    | $                48,165    |  | $                43,550  |  | $                45,639 
|Income taxes                                                                            | $                72,140    |  | $                49,452  |  | $                97,165 
|                                                                                        |                            |  |                          |  |                         
|The accompanying notes are an integral part of these consolidated financial statements.





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Notes To Consolidated Financial Statements



1.   Summary of Significant Accounting Policies



A.

About Public Service Company of New Hampshire

Public Service Company of New Hampshire (PSNH or the company) is a wholly owned subsidiary of Northeast Utilities (NU).  PSNH is a reporting company under the Securities Exchange Act of 1934.  Until February 8, 2006, NU was registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA).  On February 8, 2006, PUHCA was repealed.  Arrangements among PSNH, other NU companies, outside agencies, and other utilities covering interconnections, interchange of electric power and sales of utility property, are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC.  PSNH is subject to further regulation for rates, accounting and other matters by the FERC and the New Hampshire Public Utilities Commission (NHPUC).  PSNH furnishes franchised retail electric service in New Hampshire.  PSNHs results include the operations of its distribution and generation and transmission segments.



Several wholly owned subsidiaries of NU provide support services for NUs companies, including PSNH.  Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information technology, legal, operational, planning, purchasing, and other services to NUs companies.



Included in the consolidated balance sheet at December 31, 2005, are accounts receivable from affiliated companies and accounts payable to affiliated companies totaling $20.3 million and $16.7 million, respectively, relating to transactions between PSNH and other subsidiaries that are wholly owned by NU.  At December 31, 2004, these amounts totaled $34.3 million and $38.6 million, respectively.



B.

Presentation

The consolidated financial statements of PSNH include the accounts of its subsidiaries, PSNH Funding LLC and PSNH Funding LLC2.  Intercompany transactions have been eliminated in consolidation.



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



Certain reclassifications of prior period data included in the accompanying consolidated financial statements have been made to conform with the current years' presentation.



In the company's consolidated balance sheet at December 31, 2004, the company changed the classification of certain deposit amounts totaling $7.3 million related to its rate reduction bonds.  The company previously presented these amounts on a gross basis in deferred debits and other assets - other with an equal and offsetting amount in other current liabilities.  For the current year presentation, these amounts are presented on a net basis in the company's accompanying consolidated balance sheet.



In the companys consolidated statements of income for the years ended December 31, 2004 and 2003, the company changed the classification of certain costs that were not recoverable from regulated customers totaling $0.9 million and $2 million, respectively.  The company previously presented these amounts in other income, net.  For the current year presentation, these amounts are presented in other operation expenses in the consolidated statements of income for the years ended December 31, 2004 and 2003.



The consolidated statements of cash flows for the years ended December 31, 2004 and 2003 have also been reclassified to exclude from cash flows from operations the change in accounts payable related to capital projects as well as excluding these amounts from investments in property and plant in investing activities.  These amounts totaled sources of cash of $9.6 million and uses of cash of $0.3 million for the years ended December 31, 2004 and 2003, respectively.



C.

Accounting Standards Issued But Not Yet Adopted

Accounting Changes and Error Corrections:In May of 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections."  SFAS No. 154 is effective beginning on January 1, 2006 for PSNH and requires retrospective application to prior periods financial statements of voluntary changes in accounting principle.  It also applies to accounting changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  SFAS No. 154 does not change previous guidance for reporting the correction of an error in previously issued financial statements or a change in accounting estimate.  Implementation of SFAS No. 154 on January 1, 2006 is not expected to affect PSNHs consolidated financial statements until such time that its provisions are required to be applied as described above.





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D.

Guarantees

NU provides credit assurances on behalf of subsidiaries, including PSNH, in the form of guarantees and letters of credit (LOCs) in the normal course of business.  At December 31, 2005, the maximum level of exposure in accordance with FASB Interpretation No. (FIN) 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," under guarantees by NU on behalf of PSNH totaled $3.5 million.  A majority of these guarantees do not have established expiration dates, and some guarantees have unlimited exposure to commodity price movements.  Additionally, NU had $0.1 million of LOCs issued on behalf of PSNH at December 31, 2005.  PSNH has no guarantees of the performance of third parties.



Several underlying contracts that NU guarantees, as well as certain surety bonds, contain credit ratings triggers that would require NU to post collateral in the event that NUs credit ratings are downgraded below investment grade.



Until the repeal of PUHCA on February 8, 2006, NU was authorized by the SEC to provide up to $50 million of guarantees to the Utility Group, including PSNH, through June 30, 2007.  The amount of guarantees on behalf of PSNH outstanding for compliance with this limit at December 31, 2005 is $0.1 million.  These amounts are calculated using different, more probabilistic and fair-value based criteria than the maximum level of exposure required to be disclosed under FIN 45.  FIN 45 includes all exposures even though they are not reasonably likely to result in exposure to NU, on behalf of PSNH.



With the repeal of PUHCA, there are no regulatory limits on NU's ability to guarantee the obligation of its subsidiaries, including PSNH.



E.

Revenues

PSNH's retail revenues are based on rates approved by the NHPUC.  These regulated rates are applied to customers' use of energy to calculate a bill.  In general, rates can only be changed through formal proceedings with the NHPUC.



Unbilled Revenues:  Unbilled revenues represent an estimate of electricity delivered to customers that has not yet been billed.  Unbilled revenues are included in revenue on the statement of income and are assets on the balance sheet that are reclassified to accounts receivable in the following month as customers are billed.  Such estimates are subject to adjustment when actual meter readings become available, when changes in estimating methodology occur and under other circumstances.



Through December 31, 2004, PSNH estimated unbilled revenues monthly using the requirements method.  The requirements method utilized the total monthly volume of electricity delivered to the system and applied a delivery efficiency (DE) factor to reduce the total monthly volume by an estimate of delivery losses in order to calculate total estimated monthly sales to customers.  The total estimated monthly sales amount less the total monthly billed sales amount resulted in a monthly estimate of unbilled sales.  Unbilled revenues were estimated by first allocating sales to the respective rate classes, then applying an average rate to the estimate of unbilled sales.  The estimated DE factor had a significant impact on estimated unbilled revenue amounts.



In the first quarter of 2005, management adopted a new method to estimate unbilled revenues for PSNH.  The new method allocates billed sales to the current calendar month based on the daily load for each billing cycle (DLC method).  The billed sales are subtracted from total calendar month sales to estimate unbilled sales.  The impact of adopting the new method was not material.  This new method replaces the requirements method described above.



Transmission Revenues - Wholesale Rates:  Wholesale transmission revenues are based on rates and formulas that are approved by the FERC.  Most of PSNHs wholesale transmission revenues are collected through a combination of the New England Regional Network Service (RNS) tariff and PSNHs Local Network Service (LNS) tariff.  The RNS tariff, which is administered by the New England Independent System Operator (ISO-NE), recovers the revenue requirements associated with transmission facilities that are deemed by the FERC to be regional facilities.  This regional rate is reset on June 1 of each year.  The LNS tariff provides for the recovery of PSNHs total transmission revenue requirements, net of revenues received from other sources, including those revenues received under RNS rates.  PSNHs LNS tariff is reset on January 1 and June 1 of each year.  Additionally, PSNHs LNS tariff provides for a true-up to actual costs, which ensures that PSNH recovers its total transmission revenue requirements, including an allowed return on equity (ROE).  At December 31, 2005, this true-up has resulted in the recognition of a $0.6 million regulatory liability.



Transmission Revenues - Retail Rates:  A significant portion of PSNH'S transmission business revenue comes from ISO-NE charges to PSNH's distribution business.  PSNH recovers these costs through the retail rates that are charged to its retail customers.  PSNH does not currently have a retail transmission rate tracking mechanism.



F.

Derivative Instruments

PSNH has energy contracts that meet the definition of a derivative and qualify for the normal purchases and sales exception.  Derivatives under the normal purchases and sales exception and non derivative contracts are recorded at the time of delivery or settlement under accrual accounting.



PSNH also has derivative sales contracts that, although they may result in physical delivery, are included in operating expenses because these transactions are part of procurement activities.  Management believes that net classification in operating expenses best depicts these sales activities and is in accordance with Emerging Issues Task Force (EITF) Issue No. 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, and Not 'Held for Trading Purposes' as Defined in Issue No. 02-3."





---

G.

Regulatory Accounting

The accounting policies of PSNH conform to accounting principles generally accepted in the United States of America applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."



The transmission, distribution and generation businesses of PSNH continue to be cost-of-service rate regulated, and management believes that the application of SFAS No. 71 to those businesses continues to be appropriate.  Management also believes it is probable that PSNH will recover their investments in long-lived assets, including regulatory assets.  In addition, all material net regulatory assets are earning an equity return, except for securitized regulatory assets, which are not supported by equity, and substantial portions of the unrecovered contractual obligations.  New Hampshires electric utility industry restructuring laws have been modified to delay the sale of PSNHs fossil and hydroelectric generation assets until at least April of 2006.  There has been no regulatory action to the contrary, and management currently has no plans to divest these generation assets.  As the NHPUC has allowed and is expected to continue to allow rate recovery of a return on and recovery of these assets, as well as all operating expenses, PSNH meets the criteria for the application of SFAS No. 71.  Generation costs that are not currently recovered in rates are deferred for future recovery.  Stranded costs related to generation assets are deferred for recovery as stranded costs under the "Agreement to Settle PSNH Restructuring" (Restructuring Settlement).  Part 3 stranded costs are non-securitized regulatory assets that must be recovered by a recovery end date determined in accordance with the Restructuring Settlement or be written off.  Based on current projections, PSNH expects to fully recover its Part 3 costs by the middle of 2006.



Regulatory Assets:The components of PSNH's regulatory assets are as follows:



|                                    |  |                 |  |       
|----------------------------------- |  | --------------- |  | ------
|                                    |  | At December 31,
|(Millions of Dollars)               |  | 2005            |  | 2004  
|Recoverable nuclear costs           |  | $  26.1         |  | $ 29.7
|Securitized assets                  |  | 375.0           |  | 421.6 
|Income taxes, net                   |  | 35.9            |  | 37.5  
|Unrecovered contractual obligations |  | 63.2            |  | 64.4  
|Recoverable energy costs            |  | 171.5           |  | 194.9 
|Other                               |  | 150.3           |  | 152.0 
|Totals                              |  | $822.0          |  | $900.1



Included in other regulatory assets above of $150.3 million at December 31, 2005 are the regulatory assets recorded associated with the implementation of FIN 47, "Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143," totaling $17.3 million which has been approved for deferred accounting treatment.



Additionally, PSNH had $0.4 million and $0.1 million of regulatory costs at December 31, 2005 and 2004, respectively, that are included in deferred debits and other assets - other on the accompanying consolidated balance sheets.  These amounts represent regulatory costs that have not yet been approved by the NHPUC.  Management believes these costs are recoverable in future regulated rates.



Recoverable Nuclear Costs:  PSNH recorded a regulatory asset in conjunction with the sale of its share of Millstone 3 in March of 2001 with an unamortized balance of $26.1 million and $29.7 million at December 31, 2005 and 2004, respectively, which is included in recoverable nuclear costs.



Securitized Assets:  In April of 2001, PSNH issued rate reduction bonds in the amount of $525 million.  PSNH used the majority of the proceeds from that issuance to buydown its affiliated power contracts with North Atlantic Energy Corporation (NAEC).  The unamortized PSNH securitized asset balance is $354.5 million and $392.2 million at December 31, 2005 and 2004, respectively.  In January of 2002, PSNH issued an additional $50 million in rate reduction bonds and used the proceeds from that issuance to repay short-term debt that was incurred to buyout a purchased-power contract in December of 2001.  The unamortized PSNH securitized asset balance for the January of 2002 issuance is $20.5 million and $29.4 million at December 31, 2005 and 2004, respectively.



Securitized assets are being recovered over the amortization period of their associated rate reduction bonds.  All outstanding rate reduction bonds of PSNH are scheduled to fully amortize by May 1, 2013.



Income Taxes, Net:  The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the NHPUC and SFAS No. 109, "Accounting for Income Taxes."  Differences in income taxes between SFAS No. 109 and the rate-making treatment of the NHPUC are recorded as regulatory assets which totaled $35.9 million and $37.5 million at December 31, 2005 and 2004, respectively.  For further information regarding income taxes, see Note 1H, "Summary of Significant Accounting Policies - Income Taxes," to the consolidated financial statements.





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Unrecovered Contractual Obligations:  Under the terms of contracts with Connecticut Yankee Atomic Power Company (CYAPC), Yankee Atomic Energy Company (YAEC) and Maine Yankee Atomic Power Company (MYAPC) (Yankee Companies), PSNH is responsible for its proportionate share of the remaining costs of the units, including decommissioning.  These amounts which totaled $63.2 million and $64.4 million at December 31, 2005 and 2004, respectively, are recorded as unrecovered contractual obligations.  These amounts are being recovered along with other stranded costs.  As discussed in Note 4D, "Commitments and Contingencies - Deferred Contractual Obligations," substantial portions of the unrecovered contractual obligations regulatory assets have not yet been approved for recovery.  At this time management believes that these regulatory assets are probable of recovery.



Recoverable Energy Costs:  In conjunction with the implementation of restructuring under the Restructuring Settlement on May 1, 2001, PSNH's fuel and purchased-power adjustment clause (FPPAC) was discontinued.  At December 31, 2005 and 2004, PSNH had $127.5 million and $144.8 million, respectively, of recoverable energy costs deferred under the FPPAC.  Under the Restructuring Settlement, the FPPAC deferrals are recovered as a Part 3 stranded cost through a stranded cost recovery charge (SCRC).  Also included in PSNH's recoverable energy costs are deferred costs associated with certain contractual purchases from Independent Power Producers (IPPs).  These costs are also treated as Part 3 stranded costs and amounted to $44 million and $50.1 million at December 31, 2005 and 2004, respectively.



The majority of recoverable energy costs are currently recovered in rates from the customers of PSNH and are Part 3 stranded costs.



Regulatory Liabilities:  PSNH had $414.6 million and $323.7 million of regulatory liabilities at December 31, 2005 and 2004, respectively, including revenues subject to refund.  These amounts are comprised of the following:



|                             |  |                 |  |        
|---------------------------- |  | --------------- |  | -------
|                             |  | At December 31,
|(Millions of Dollars)        |  | 2005            |  | 2004   
|Cost of removal              |  | $  85.7         |  | $  87.6
|Cumulative deferrals - SCRC  |  | 303.3           |  | 208.6  
|Other regulatory liabilities |  | 25.6            |  | 27.5   
|Totals                       |  | $414.6          |  | $323.7 



Cost of Removal:  Under SFAS No. 71, PSNH currently recovers amounts in rates for future costs of removal of plant assets.  These amounts which totaled $85.7 million and $87.6 million at December 31, 2005 and 2004, respectively, are classified as regulatory liabilities on the accompanying consolidated balance sheets.



Cumulative Deferrals - SCRC:  The cumulative deferrals accrued under the SCRC totaled $303.3 million and $208.6 million at December 31, 2005 and 2004, respectively, and will decrease the amount of non-securitized stranded costs to be recovered from PSNH's customers in the future.



H.

Income Taxes

The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the NHPUC and SFAS No. 109.



Details of income tax expense are as follows:



|                                                                    |                                  |                       |  |        |  |       | 
|------------------------------------------------------------------- | -------------------------------- | --------------------- |  | ------ |  | ----- | 
|                                                                    | For the Years Ended December 31,
|                                                                    |                                  | 2005                  |  | 2004   |  | 2003 
|                                                                    |                                  | (Millions of Dollars)
|The components of the federal and 
state income tax provisions are: |                                  |                      
|Current income taxes:                                               |                                  |                       |  |        |  |      
|Federal                                                             |                                  | $81.6                 |  | $37.2  |  | $27.9
|State                                                               |                                  | (1.0)                 |  | -      |  | 8.5  
|Total current                                                       |                                  | 80.6                  |  | 37.2   |  | 36.4 
|Deferred income taxes, net:                                         |                                  |                       |  |        |  |      
|Federal                                                             |                                  | (60.5)                |  | (17.7) |  | (3.8)
|State                                                               |                                  | (7.5)                 |  | (6.0)  |  | (2.3)
|Total deferred                                                      |                                  | (68.0)                |  | (23.7) |  | (6.1)
|Investment tax credits, net                                         |                                  | (0.4)                 |  | (0.5)  |  | (0.5)
|Total income tax expense                                            |                                  | $12.2                 |  | $13.0  |  | $29.8





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



|                                           |  |                                  |      |       |      |       |     
|------------------------------------------ |  | -------------------------------- | ---- | ----- | ---- | ----- | ----
|                                           |  | For the Years Ended December 31,
|                                           |  |                                  | 2005 |       | 2004 |       | 2003
|                                           |  | (Millions of Dollars)           
|Expected federal income tax expense        |  | $18.9                            |      | $20.9 |      | $26.3
|Tax effect of differences:                 |  |                                  |      |       |      |      
|Depreciation                               |  | 0.2                              |      | 1.3   |      | 1.1  
|Amortization of  regulatory assets         |  | 1.8                              |      | 1.8   |      | 1.8  
|Investment tax credit amortization         |  | (0.4)                            |      | (0.5) |      | (0.5)
|State income taxes,
net of federal benefit |  | (5.5)                            |      | (3.9) |      | 4.1  
|Parent company loss                        |  | -                                |      | (1.7) |      | -    
|Medicare subsidy                           |  | (1.1)                            |      | (0.2) |      | -    
|Other, net                                 |  | (1.7)                            |      | (4.7) |      | (3.0)
|Total income tax expense                   |  | $12.2                            |      | $13.0 |      | $29.8



NU and its subsidiaries, including PSNH, file a consolidated federal income tax return.  NU and its subsidiaries, including PSNH, are parties to a tax allocation agreement under which taxable subsidiaries pay no more taxes than they would have otherwise paid had they filed a stand-alone tax return.  Subsidiaries generating tax losses are similarly paid for their losses when utilized.



The tax effects of temporary differences that give rise to the current and long-term net accumulated deferred tax obligations are as follows:



|                                                             |  |                 |  |        
|------------------------------------------------------------ |  | --------------- |  | -------
|                                                             |  | At December 31,
|(Millions of Dollars)                                        |  | 2005            |  | 2004   
|Deferred tax liabilities - current:                          |  |                 |  |        
|Property tax accruals                                        |  | $  2.8          |  | $   2.6
|Deferred tax assets - current:                               |  |                 |  |        
|Provision for uncollectible accounts                         |  | 0.9             |  | 0.7    
|Net deferred tax liabilities - current                       |  | 1.9             |  | 1.9    
|Deferred tax liabilities - long-term:                        |  |                 |  |        
|Accelerated depreciation and
other plant-related differences |  | 148.8           |  | 145.4  
|Securitized costs                                            |  | 137.0           |  | 154.1  
|Income tax gross-up                                          |  | 14.4            |  | 15.0   
|Deferred fuel and small power
producer costs                 |  | 71.9            |  | 81.8   
|Other                                                        |  | 68.9            |  | 68.2   
|Total deferred tax liabilities - long-term                   |  | 441.0           |  | 464.5  
|Deferred tax assets - long-term:                             |  |                 |  |        
|Regulatory deferrals                                         |  | 156.2           |  | 124.1  
|Employee benefits                                            |  | 33.2            |  | 25.8   
|Income tax gross-up                                          |  | 0.9             |  | 0.9    
|Other                                                        |  | 8.1             |  | 1.7    
|Total deferred tax assets - long-term                        |  | 198.4           |  | 152.5  
|Net deferred tax liabilities - long-term                     |  | 242.6           |  | 312.0  
|Net deferred tax liabilities                                 |  | $244.5          |  | $313.9 



I.

Depreciation

The provision for depreciation on utility assets is calculated using the straight-line method based on the estimated remaining useful lives of depreciable plant-in-service, which range primarily from 14 years to 75 years, adjusted for salvage value and removal costs, as approved by the appropriate regulatory agency where applicable.  Depreciation rates are applied to plant-in-service from the time it is placed in service.  When plant is retired from service, the original cost of the plant, including costs of removal less salvage, is charged to the accumulated provision for depreciation.  Cost of removal is classified as a regulatory liability.  The depreciation rates for the several classes of electric utility plant-in-service are equivalent to a composite rate of 2.8 percent in 2005, 2.9 percent in 2004 and 3.0 percent in 2003.



J.

Jointly Owned Electric Utility Plant

At December 31, 2005, PSNH owns common stock in the Yankee Companies.  Each of the remaining Yankee Companies owns a single nuclear generating plant which is being decommissioned.  PSNHs ownership interests in the Yankee Companies at December 31, 2005, which are accounted for on the equity method, are 5 percent of CYAPC, 7 percent of YAEC and 5 percent of MYAPC.  The total carrying value of CYAPC, MYAPC and YAEC, which is included in deferred debits and other assets - other on the accompanying consolidated balance sheets and the electric distribution reportable segment, totaled $3.8 million and $4 million at December 31, 2005 and 2004, respectively.  Earnings related to these equity investments are included in other income/(loss), net on the accompanying consolidated statements of income.  For further information, see Note 1N, "Other Income/(Loss), Net" to the consolidated financial statements.





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CYAPC filed with the FERC to recover the increased estimate of decommissioning and plant closure costs.  The FERC proceeding is ongoing.  Management believes that the FERC proceeding has not impaired the value of its investment in CYAPC totaling $2.3 million at December 31, 2005 but will continue to evaluate the impacts that the FERC proceeding has on PSNH's investment.  For further information, see Note 4D, "Commitments and Contingencies - Deferred Contractual Obligations," to the consolidated financial statements.



K.

Allowance for Funds Used During Construction

The allowance for funds used during construction (AFUDC) is a non-cash item that is included in the cost of PSNH plant and represents the cost of borrowed and equity funds used to finance construction.  The portion of AFUDC attributable to borrowed funds is recorded as a reduction of other interest expense and the cost of equity funds is recorded as other income on the accompanying consolidated statements of income as follows:



|                                          |  |                                  |   |  |       |   |  |      |  
|----------------------------------------- |  | -------------------------------- | - |  | ----- | - |  | ---- | -
|                                          |  | For the Years Ended December 31, |  
|(Millions of Dollars, except percentages) |  | 2005                             |   |  | 2004  |   |  | 2003 |  
|Borrowed funds                            |  | $1.9                             |   |  | $ 0.3 |   |  | $0.6 |  
|Equity funds                              |  | 1.6                              |   |  | (0.1) |   |  | 0.6  |  
|Totals                                    |  | $3.5                             |   |  | $ 0.2 |   |  | $1.2 |  
|Average AFUDC rate                        |  | 5.2                              | % |  | 2.7   | % |  | 3.9  | %



The average AFUDC rate is based on a FERC-prescribed formula that develops an average rate using the cost of the company's short-term financings as well as the company's capitalization (long-term debt and common equity).  The average rate is applied to eligible construction work in progress amounts to calculate AFUDC.  The increase in the average AFUDC rate during 2005 is primarily due to increases in short-term and long-term debt interest rates.



L.

Asset Retirement Obligations

On January 1, 2003, PSNH implemented SFAS No. 143, "Accounting for Asset Retirement Obligations," requiring legal obligations associated with the retirement of property, plant and equipment to be recognized as a liability at fair value when incurred and when a reasonable estimate of the fair value of the liability can be made.  Management concluded that there were no asset retirement obligations (AROs) to be recorded upon implementation of SFAS No. 143.



In March of 2005, the FASB issued FIN 47, required to be implemented by December 31, 2005.  FIN 47 requires an entity to recognize a liability for the fair value of an ARO even if it is conditional on a future event and the liabilitys fair value can be reasonably estimated.  FIN 47 provides that settlement dates and future costs should be reasonably estimated when sufficient information becomes available, and provides guidance on the definition and timing of sufficient information in determining expected cash flows and fair values.  Management has completed its identification of conditional AROs and has identified various categories of AROs primarily certain assets containing asbestos and hazardous contamination.  A fair value calculation, reflecting expected probabilities for settlement scenarios, and a data consistency review across operating companies have been performed.



PSNH utilized regulatory accounting in accordance with SFAS No. 71 and the impact of this implementation is included in other regulatory assets at December 31, 2005.  The fair value of the AROs is included in property, plant and equipment and related accretion is recorded as a regulatory asset, with corresponding credits reflecting the ARO liabilities in deferred credits and other liabilities - other, on the accompanying consolidated balance sheet at December 31, 2005.  Depreciation of the ARO asset is also included as a regulatory asset with an offsetting amount in accumulated depreciation.



The following table presents the fair value of the ARO, the related accumulated depreciation, the regulatory asset, and the ARO liabilities:



|                        |  |                          |  |                                       |  |                  |  |                
|----------------------- |  | ------------------------ |  | ------------------------------------- |  | ---------------- |  | ---------------
|                        |  | At December 31, 2005    
|(Millions of Dollars)   |  | Fair 
Value of
ARO Asset |  | Accumulated
Depreciation
of
ARO Asset |  | Regulatory
Asset |  | ARO
Liabilities
|Asbestos                |  | $1.4                     |  | $(0.8)                                |  | $  8.6           |  | $  (9.2)       
|Hazardous
contamination |  | 0.5                      |  | (0.2)                                 |  | 1.7              |  | (2.0)          
|Other AROs              |  | 0.4                      |  | (0.2)                                 |  | 7.0              |  | (7.2)          
|Total  PSNH AROs        |  | $2.3                     |  | $(1.2)                                |  | $17.3            |  | $(18.4)        



The ARO liabilities as of December 31, 2005, 2004 and January 1, 2004, as if FIN 47 had been applied for all periods affected, were $18.4 million, $18.2 million and $17.9 million, respectively.



M.

Fuel, Materials and Supplies

Fuel, materials and supplies include materials purchased primarily for construction, operation and maintenance (O&M) purposes.  Fuel, materials and supplies are valued at the lower of average cost or market.





---

N.

Other Income/(Loss), Net

The pre-tax components of PSNHs other income/(loss) items are as follows:



|                                                                      |  |                                  |  |        |  |       
|--------------------------------------------------------------------- |  | -------------------------------- |  | ------ |  | ------
|                                                                      |  | For the Years Ended December 31,
|(Millions of Dollars)                                                 |  | 2005                             |  | 2004   |  | 2003  
|Other Income:                                                         |  |                                  |  |        |  |       
|Investment income                                                     |  | $ 1.0                            |  | $ 0.3  |  | $ 0.2 
|Equity in earnings of 
    regional nuclear 
    generating companies |  | 0.2                              |  | 0.2    |  | 0.4   
|AFUDC - equity funds                                                  |  | 1.6                              |  | (0.1)  |  | 0.6   
|Gain on sale of property                                              |  | 1.1                              |  | 2.0    |  | 0.3   
|Conservation and Load
    Management Incentive                        |  | 2.5                              |  | 1.8    |  | -     
|Other                                                                 |  | 0.3                              |  | 0.3    |  | 0.8   
|Total Other Income                                                    |  | 6.7                              |  | 4.5    |  | 2.3   
|Other Loss:                                                           |  |                                  |  |        |  |       
|Charitable donations                                                  |  | (0.5)                            |  | (0.5)  |  | (0.4) 
|Advertising                                                           |  | (1.4)                            |  | (1.5)  |  | (1.0) 
|Administrative fees for 
    rate reduction bonds                     |  | (1.5)                            |  | (1.5)  |  | (1.7) 
|Lobbying costs                                                        |  | (0.6)                            |  | (0.5)  |  | (0.6) 
|Other                                                                 |  | (0.7)                            |  | (0.6)  |  | (1.6) 
|Total Other Loss                                                      |  | (4.7)                            |  | (4.6)  |  | (5.3) 
|Total Other
     Income/(Loss), Net                                   |  | $ 2.0                            |  | $(0.1) |  | $(3.0)



None of the amounts in either other income - other or other loss - other are individually significant as defined by the SEC.



O.

Provision for Uncollectible Accounts

PSNH maintains a provision for uncollectible accounts to record its receivables at an estimated net realizable value.  This provision is determined based upon a variety of factors, including applying an estimated uncollectible account percentage to each receivables aging category, historical collection and write-off experience and management's assessment of collectibility from individual customers.   Management reviews at least quarterly the collectibility of the receivables, and if circumstances change, collectibility estimates are adjusted accordingly.  Receivable balances are written-off against the provision for uncollectible accounts when these balances are deemed to be uncollectible.



P.

Severance Benefits

As a result of NUs decision to pursue a fundamentally different business strategy, and align the structure of the company to support this business strategy, PSNH recorded a $0.8 million severance benefits charge in other operating expenses on the accompanying consolidated statement of income for the year ended December 31, 2005.



2.  Short-Term Debt



Limits:  The amount of short-term borrowings that may be incurred by PSNH is subject to periodic approval by either the SEC, the FERC, or by the NHPUC.  On June 30, 2004, the SEC granted authorization allowing PSNH to incur total short-term borrowings up to a maximum $100 million through June 30, 2007.  The SEC also granted authorization for borrowing through the NU Money Pool (Pool) until June 30, 2007.  Although PUHCA was repealed on February 8, 2006, under FERC's transition rules, all of the existing orders under PUHCA relevant to FERC authority will continue to be in effect until December 31, 2007, except for those related to NU, which will have no borrowing limitations after February 8, 2006. PSNH is authorized by the NHPUC to incur short-term borrowings up to a maximum of $100 million.  As a result of this NHPUC authorization, PSNH is not required to obtain SEC or FERC approval for its short-term debt borrowings.



Credit Agreement:On December 9, 2005, PSNH amended its 5-year unsecured revolving credit facility by extending the expiration date by one year to November 6, 2010.  The company can borrow up to $100 million on a short-term basis, or subject to regulatory approvals, on a long-term basis.  At December 31, 2005, PSNH had no borrowings outstanding under this credit facility.  At December 31, 2004, there were $10 million in borrowings under this credit facility.  The weighted average interest rate of PSNHs notes payable to banks outstanding on December 31, 2004 was 5.25 percent.



Under this credit agreement, PSNH may borrow at variable rates plus an applicable margin based upon certain debt ratings, as rated by the higher of Standard and Poors (S&P) or Moodys Investors Service (Moody's).



Under this credit agreement, PSNH must comply with certain financial and non-financial covenants, including but not limited to consolidated debt ratios.  PSNH currently is and expects to remain in compliance with these covenants.





---

Amounts outstanding under this credit facility are classified as current liabilities as notes payable to banks on the accompanying consolidated balance sheets as management anticipates that all borrowings under this credit facility will be outstanding for no more than 364 days at one time.



Pool:  PSNH is a member of the Pool.  The Pool provides a more efficient use of cash resources of NU and reduces outside short-term borrowings.  NUSCO administers the Pool as agent for the member companies.  Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent.  NU parent may lend to the Pool but may not borrow.  Funds may be withdrawn from or repaid to the Pool at any time without prior notice.  Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate.  Borrowings based on loans from NU parent, however, bear interest at NU parents cost and must be repaid based upon the terms of NU parents original borrowing.  At December 31, 2005 and 2004, PSNH had borrowings of $15.9 million and $20.4 million from the pool, respectively.  The interest rate on borrowings from the Pool at December 31, 2005 and 2004 was 4.09 percent and 2.24 percent, respectively.



3.   Pension Benefits and Postretirement Benefits Other Than Pensions



Pension Benefits:  PSNH participates in a uniform noncontributory defined benefit retirement plan (Pension Plan) covering substantially all regular NU employees.  Benefits are based on years of service and the employees highest eligible compensation during 60 consecutive months of employment.  PSNH uses a December 31stmeasurement date for the Pension Plan.  Pension expense attributable to earnings is as follows:



|                                                     |  |                                  |  |       |  |      
|---------------------------------------------------- |  | -------------------------------- |  | ----- |  | -----
|                                                     |  | For the Years Ended December 31,
|(Millions of Dollars)                                |  | 2005                             |  | 2004  |  | 2003 
|Total pension expense                                |  | $19.2                            |  | $12.4 |  | $ 6.8
|Amount capitalized as utility plant                  |  | (4.9)                            |  | (3.4) |  | (2.0)
|Total pension expense, net of 
  amounts capitalized |  | $14.3                            |  | $9.0  |  | $ 4.8



Amounts above include pension curtailments of $1.1 million in 2005.  Not included in the pension expense above are amounts related to certain intercompany allocations totaling $2.2 million, $0.7 million and $(0.2) million for the years ended December 31, 2005, 2004 and 2003, respectively, including pension curtailment and termination benefit expenses of $0.6 million and $0.1 million for the years ended December 31, 2005 and 2004, respectively.  These amounts are included in other operating expenses on the accompanying consolidated financial statements.



Pension Curtailments:On December 15, 2005, the NU Board of Trustees approved a benefit for new non-union employees hired on and after January 1, 2006 to receive retirement benefits under a new 401(k) benefit rather than under the Pension Plan.  Non-union employees actively employed on December 31, 2005 will be given the choice in 2006 to elect to continue participation in the Pension Plan or instead receive a new employer contribution under the 401(k) Savings Plan effective January 1, 2007.  If the new benefit is elected, their accrued pension liability in the Pension Plan will be frozen as of December 31, 2006.  Non-union employees will make this election in the second half of 2006.  This decision resulted in the recording of an estimated pre-tax curtailment expense of $1.1 million in 2005, as a certain number of employees are expected to elect the new 401(k) benefit, resulting in a reduction in aggregate estimated future years of service under the Pension Plan.  Management estimated the amount of the curtailment expense associated with this change based upon actuarial calculations and certain assumptions, including the expected level of transfers to the new 401(k) benefit.



There were no curtailments or termination benefits in 2004 and 2003 that impacted earnings.



Market-Related Value of Pension Plan Assets:PSNH bases the actuarial determination of pension plan expense or income on a market-related valuation of assets, which reduces year-to-year volatility.  This market-related valuation calculation recognizes investment gains or losses over a four-year period from the year in which they occur.  Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets.  Since the market-related valuation calculation recognizes gains or losses over a four-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized.



Postretirement Benefits Other Than Pensions (PBOP):  PSNH also provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (PBOP Plan).  These benefits are available for employees retiring from PSNH who have met specified service requirements.  For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost.  These costs are charged to expense over the estimated work life of the employee.  PSNH uses a December 31stmeasurement date for the PBOP Plan.



PSNH annually funds postretirement costs through external trusts with amounts that have been and will continue to be rate-recovered and which also are tax deductible.  Currently, there are no pending regulatory actions regarding postretirement benefit costs and there are no postretirement benefit costs that are deferred as regulatory assets.



Impact of New Medicare Changes on PBOP:  On December 8, 2003, the President signed into law a bill that expands Medicare, primarily by adding a prescription drug benefit starting in 2006 for Medicare-eligible retirees as well as a federal subsidy to plan sponsors of retiree health care benefit plans who provide a prescription drug benefit at least actuarially equivalent to the new Medicare benefit.





---

Based on the current PBOP Plan provisions, PSNH qualifies for this federal subsidy because the actuarial value of PSNHs PBOP Plan exceeds the threshold required for the subsidy.  The Medicare changes decreased the PBOP benefit obligation by $5.4 million.  The total $5.4 million decrease is currently being amortized as a reduction to PBOP expense over approximately 13 years.  For the years ended December 31, 2005 and 2004, this reduction in PBOP expense totaled approximately $0.7 million, including amortization of the actuarial gain of $0.4 million and a reduction in interest cost and service cost based on a lower PBOP benefit obligation of $0.3 million.



PBOP Curtailments and Termination Benefits:PSNH had no curtailments or termination benefits in 2005, 2004 or 2003.



The following table represents information on the plans benefit obligation, fair value of plan assets, and the respective plans funded status:



|                                               |  |                  |  |                         |  |           |  |          
|---------------------------------------------- |  | ---------------- |  | ----------------------- |  | --------- |  | ---------
|                                               |  | At December 31, 
|                                               |  | Pension Benefits |  | Postretirement Benefits
|(Millions of Dollars)                          |  | 2005             |  | 2004                    |  | 2005      |  | 2004     
|Change in benefit obligation                   |  |                  |  |                         |  |           |  |          
|Benefit obligation at beginning of year        |  | $(324.1)         |  | $(289.0)                |  | $ (79.7)  |  | $ (66.8) 
|Service cost                                   |  | (8.8)            |  | (7.5)                   |  | (1.6)     |  | (1.3)    
|Interest cost                                  |  | (19.3)           |  | (17.9)                  |  | (4.4)     |  | (4.3)    
|Transfers                                      |  | (0.6)            |  | (0.5)                   |  | -         |  | (0.1)    
|Actuarial loss                                 |  | (24.7)           |  | (23.2)                  |  | (7.5)     |  | (12.8)   
|Benefits paid                                  |  | 15.0             |  | 14.0                    |  | 6.2       |  | 5.6      
|Curtailment/impact of plan changes             |  | 7.9              |  | -                       |  | -         |  | -        
|Benefit obligation at end of year              |  | $(354.6)         |  | $(324.1)                |  | $ (87.0)  |  | $ (79.7) 
|Change in plan assets                          |  |                  |  |                         |  |           |  |          
|Fair value of plan assets at beginning of year |  | $ 201.6          |  | $  191.9                |  | $  34.6   |  | $   29.7 
|Actual return on plan assets                   |  | 15.1             |  | 23.2                    |  | 2.1       |  | 2.9      
|Employer contribution                          |  | -                |  | -                       |  | 9.4       |  | 7.5      
|Transfers                                      |  | 0.6              |  | 0.5                     |  | -         |  | 0.1      
|Benefits paid                                  |  | (15.0)           |  | (14.0)                  |  | (6.2)     |  | (5.6)    
|Fair value of plan assets at end of year       |  | $  202.3         |  | $  201.6                |  | $   39.9  |  | $   34.6 
|Funded status at December 31st                 |  | $(152.3)         |  | $(122.5)                |  | $ (47.1)  |  | $ (45.1) 
|Unrecognized transition obligation             |  | 1.2              |  | 1.7                     |  | 17.4      |  | 19.8     
|Unrecognized prior service cost                |  | 8.8              |  | 11.5                    |  | -         |  | -        
|Unrecognized net loss                          |  | 65.9             |  | 52.1                    |  | 29.5      |  | 25.1     
|Accrued benefit cost                           |  | $ (76.4)         |  | $  (57.2)               |  | $   (0.2) |  | $   (0.2)



The $7.9 million reduction in the plan's obligation that is included in the curtailment/impact of plan changes relates to the reduction in the future years of service expected to be rendered by plan participants.  This reduction is the result of the transition of employees into the new 401(k) benefit.  This overall reduction in plan obligation serves to reduce the previously unrecognized actuarial losses.



The company amortizes its unrecognized transition obligation over the remaining service lives of its employees as calculated for PSNH on an individual operating company basis.  The company amortizes the unrecognized prior service cost and unrecognized net loss over the remaining service lives of its employees as calculated on an NU consolidated basis.



The accumulated benefit obligation (ABO) for the Pension Plan was $308.9 million and $270.7 million at December 31, 2005 and 2004, respectively.  Total pension plan assets on an NU consolidated basis were approximately $62 million and $225 million more than ABO at December 31, 2005 and 2004, respectively.  Under current accounting rules, if the ABO for the entire NU plan exceeds the entire NU Pension Plan assets at a future plan measurement date, PSNH will record its share of the additional minimum liability.



The following actuarial assumptions were used in calculating the plans year end funded status:



|                              |  |                  |   |  |                         |   |  |      |   |  |      |  
|----------------------------- |  | ---------------- | - |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                              |  | At December 31,  |  
|                              |  | Pension Benefits |   |  | Postretirement Benefits |  
|Balance Sheets                |  | 2005             |   |  | 2004                    |   |  | 2005 |   |  | 2004 |  
|Discount rate                 |  | 5.80             | % |  | 6.00                    | % |  | 5.65 | % |  | 5.50 | %
|Compensation/progression rate |  | 4.00             | % |  | 4.00                    | % |  | N/A  |   |  | N/A  |  
|Health care cost trend rate   |  | N/A              |   |  | N/A                     |   |  | 7.00 | % |  | 8.00 | %





---

The components of net periodic expense are as follows:



|                                                       |  |                                  |  |                         |  |        |  |       |  |       |  |        
|------------------------------------------------------ |  | -------------------------------- |  | ----------------------- |  | ------ |  | ----- |  | ----- |  | -------
|                                                       |  | For the Years Ended December 31,
|                                                       |  | Pension Benefits                 |  | Postretirement Benefits
|(Millions of Dollars)                                  |  | 2005                             |  | 2004                    |  | 2003   |  | 2005  |  | 2004  |  | 2003   
|Service cost                                           |  | $ 8.8                            |  | $  7.4                  |  | $  6.4 |  | $1.6  |  | $1.2  |  | $   1.1
|Interest cost                                          |  | 19.3                             |  | 17.9                    |  | 17.3   |  | 4.4   |  | 4.3   |  | 4.5    
|Expected return on plan assets                         |  | (16.6)                           |  | (17.1)                  |  | (18.2) |  | (2.1) |  | (2.1) |  | (2.6)  
|Amortization of unrecognized net
transition obligation |  | 0.3                              |  | 0.3                     |  | 0.3    |  | 2.5   |  | 2.5   |  | 2.5    
|Amortization of prior service cost                     |  | 1.5                              |  | 1.5                     |  | 1.5    |  | -     |  | -     |  | -      
|Amortization of actuarial loss/(gain)                  |  | 4.8                              |  | 2.4                     |  | (0.5)  |  | -     |  | -     |  | -      
|Other amortization, net                                |  | -                                |  | -                       |  | -      |  | 3.0   |  | 1.6   |  | 0.7    
|Net periodic expense before curtailments               |  | 18.1                             |  | 12.4                    |  | 6.8    |  | 9.4   |  | 7.5   |  | 6.2    
|Curtailment expense                                    |  | 1.1                              |  | -                       |  | -      |  | -     |  | -     |  | -      
|Total - net periodic expense                           |  | $19.2                            |  | $12.4                   |  | $ 6.8  |  | $9.4  |  | $7.5  |  | $  6.2 



For calculating pension and postretirement benefit expense amounts, the following assumptions were used:



|                                               |  |                                  |   |  |                         |   |  |      |   |  |      |   |  |      |   |  |      |  
|---------------------------------------------- |  | -------------------------------- | - |  | ----------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                               |  | For the Years Ended December 31, |  
|Statements of Income                           |  | Pension Benefits                 |   |  | Postretirement Benefits |  
|                                               |  | 2005                             |   |  | 2004                    |   |  | 2003 |   |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Discount rate                                  |  | 6.00                             | % |  | 6.25                    | % |  | 6.75 | % |  | 5.50 | % |  | 6.25 | % |  | 6.75 | %
|Expected long-term rate of return              |  | 8.75                             | % |  | 8.75                    | % |  | 8.75 | % |  | N/A  |   |  | N/A  |   |  | N/A  |  
|Compensation/progression rate                  |  | 4.00                             | % |  | 3.75                    | % |  | 4.00 | % |  | N/A  |   |  | N/A  |   |  | N/A  |  
|Expected long-term rate of return -            |  |                                  |   |  |                         |   |  |      |   |  |      |   |  |      |   |  |      |  
|Health assets, net of tax                      |  | N/A                              |   |  | N/A                     |   |  | N/A  |   |  | 6.85 | % |  | 6.85 | % |  | 6.85 | %
|Life assets and non-taxable 
    health assets |  | N/A                              |   |  | N/A                     |   |  | N/A  |   |  | 8.75 | % |  | 8.75 | % |  | 8.75 | %



The following table represents the PBOP assumed health care cost trend rate for the next year and the assumed ultimate trend rate:



|                                                                                                |  |                             |   |  |      |  
|----------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ---- | -
|                                                                                                |  | Year Following December 31, |  
|                                                                                                |  | 2005                        |   |  | 2004 |  
|Health care cost trend rate 
  assumed for next year                                            |  | 10.00                       | % |  | 7.00 | %
|Rate to which health care 
  cost trend rate is assumed to 
  decline (the ultimate trend rate) |  | 5.00                        | % |  | 5.00 | %
|Year that the rate reaches 
  the ultimate trend rate                                           |  | 2011                        |   |  | 2007 |  



At December 31, 2004, the health care cost trend assumption was assumed to decrease by one percentage point each year through 2007.  For December 31, 2005 disclosure purposes, the health care cost trend assumption was reset for 2006 at 10 percent, decreasing one percentage point per year to an ultimate rate of 5 percent in 2011.



Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects:



|                                                        |  |                                |  |                              
|------------------------------------------------------- |  | ------------------------------ |  | -----------------------------
|(Millions of Dollars)                                   |  | One Percentage 
Point Increase |  | One Percentage
Point Decrease
|Effect on total service and 
  interest cost components |  | $0.2                           |  | $(0.1)                       
|Effect on postretirement 
  benefit obligation          |  | $3.2                           |  | $(2.8)                       



PSNH's investment strategy for its Pension Plan and PBOP Plan is to maximize the long-term rate of return on those plans' assets within an acceptable level of risk.  The investment strategy establishes target allocations, which are routinely reviewed and periodically rebalanced.  PSNH's expected long-term rates of return on Pension Plan assets and PBOP Plan assets are based on these target asset allocation assumptions and related expected long-term rates of return.  In developing its expected long-term rate of return assumptions for the Pension Plan and the PBOP Plan, PSNH also evaluated input from actuaries and consultants as well as long-term inflation assumptions and PSNH's historical 20-year compounded return of approximately 11 percent.  The Pension Plan's and PBOP Plan's target asset allocation assumptions and expected long-term rate of return assumptions by asset category are as follows:





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|                             |  |                          |  |                         |  |                          |  |                         
|---------------------------- |  | ------------------------ |  | ----------------------- |  | ------------------------ |  | ------------------------
|                             |  | At December 31,         
|                             |  | Pension Benefits         |  | Postretirement Benefits
|                             |  | 2005 and 2004            |  | 2005 and 2004          
|Asset Category               |  | Target 
Asset
Allocation |  | Assumed
Rate 
of Return |  | Target 
Asset
Allocation |  | Assumed 
Rate 
of Return
|Equity securities:           |  |                          |  |                         |  |                          |  |                         
|United States                |  | 45%                      |  | 9.25%                   |  | 55%                      |  | 9.25%                   
|Non-United States            |  | 14%                      |  | 9.25%                   |  | 11%                      |  | 9.25%                   
|Emerging markets             |  | 3%                       |  | 10.25%                  |  | 2%                       |  | 10.25%                  
|Private                      |  | 8%                       |  | 14.25%                  |  | -                        |  | -                       
|Debt Securities:             |  |                          |  |                         |  |                          |  |                         
|Fixed income                 |  | 20%                      |  | 5.50%                   |  | 27%                      |  | 5.50%                   
|High yield fixed 
    income |  | 5%                       |  | 7.50%                   |  | 5%                       |  | 7.50%                   
|Real estate                  |  | 5%                       |  | 7.50%                   |  | -                        |  | -                       



The actual asset allocations at December 31, 2005 and 2004, approximated these target asset allocations.  The plans actual weighted-average asset allocations by asset category are as follows:



|                             |  |                  |  |                         |  |      |  |     
|---------------------------- |  | ---------------- |  | ----------------------- |  | ---- |  | ----
|                             |  | At December 31, 
|                             |  | Pension Benefits |  | Postretirement Benefits
|Asset Category               |  | 2005             |  | 2004                    |  | 2005 |  | 2004
|Equity securities:           |  |                  |  |                         |  |      |  |     
|United States                |  | 46%              |  | 47%                     |  | 54%  |  | 55% 
|Non-United States            |  | 16%              |  | 17%                     |  | 14%  |  | 14% 
|Emerging markets             |  | 4%               |  | 3%                      |  | 1%   |  | 1%  
|Private                      |  | 5%               |  | 4%                      |  | -    |  | -   
|Debt Securities:             |  |                  |  |                         |  |      |  |     
|Fixed income                 |  | 19%              |  | 19%                     |  | 29%  |  | 28% 
|High yield fixed
     income |  | 5%               |  | 5%                      |  | 2%   |  | 2%  
|Real estate                  |  | 5%               |  | 5%                      |  | -    |  | -   
|Total                        |  | 100%             |  | 100%                    |  | 100% |  | 100%



Estimated Future Benefit Payments:  The following benefit payments, which reflect expected future service, are expected to be paid for the Pension and PBOP Plans:



|                      |  |                  |  |                         |  |                   
|--------------------- |  | ---------------- |  | ----------------------- |  | ------------------
|(Millions of Dollars) |  |                  |  |                         |  |                   
|Year                  |  | Pension
Benefits |  | Postretirement
Benefits |  | Government
Subsidy
|2006                  |  | $ 15.3           |  | $ 7.0                   |  | $0.7              
|2007                  |  | 16.0             |  | 7.2                     |  | 0.7               
|2008                  |  | 16.7             |  | 7.2                     |  | 0.8               
|2009                  |  | 17.6             |  | 7.3                     |  | 0.8               
|2010                  |  | 18.4             |  | 7.4                     |  | 0.8               
|2011-2015             |  | 106.1            |  | 37.5                    |  | 5.2               



Government subsidy represents amounts expected to be received from the federal government for the new Medicare prescription drug benefit under the PBOP plan.



Contributions:  PSNH does not expect to make any contributions to the Pension Plan in 2006 and expects to make $9.6 million in contributions to the PBOP Plan in 2006.



Currently, PSNHs policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code.



Postretirement health plan assets for non-union employees are subject to federal income taxes.



4.  Commitments and Contingencies



A.

Regulatory Developments and Rate Matters

SCRC Reconciliation Filings:  The SCRC allows PSNH to recover its stranded costs.  On an annual basis, PSNH files with the NHPUC a SCRC reconciliation filing for the preceding calendar year.  This filing includes the reconciliation of stranded cost revenues and costs and Transition Energy Service Rate and Default Energy Service Rate, collectively referred to as Energy Service Rate (ES) revenues and costs.  The NHPUC reviews the filing, including a prudence review of the operations within PSNH's generation business segment.  The cumulative deferral of SCRC revenues in



---

excess of costs was $303.3 million at December 31, 2005.  This cumulative deferral will decrease the amount of non-securitized stranded costs to be recovered from PSNH's customers in the future from $368 million to $64.7 million.



The 2004 SCRC reconciliation filing was filed with the NHPUC on May 2, 2005.  In October of 2005, PSNH, the NHPUC staff and the New Hampshire Office of Consumer Advocate (OCA) reached a settlement agreement in this case.  The major provisions of this settlement agreement include the following: 1) PSNH will be allowed to recover its 2004 ES costs and stranded costs without disallowances, 2) PSNH will be allowed to include its cumulative unbilled revenues in its ES and stranded cost reconciliations and 3) the NHPUC will defer any action regarding PSNHs coal supply and transportation procedures until it completes a review using an outside expert.  The NHPUC issued its order on December 22, 2005, approving the settlement agreement as filed.  While management believes its coal procurement and transportation policies and procedures are prudent and consistent with industry practice, it is unable to determine the impact, if any, of the expected NHPUC review on PSNH's net income or financial position.



Litigation with IPPs:Two wood-fired IPPs that sell their output to PSNH under long-term rate orders issued by the NHPUC brought suit against PSNH in state superior court.  The IPPs and PSNH dispute the end dates of the above-market long-term rates set forth in the respective rate orders.  Subsequent to the IPP's court filing, PSNH petitioned the NHPUC to decide this matter, and requested that the court stay its proceeding pending the NHPUC's decision.  By court order dated October 20, 2005, the court granted PSNH's motion to stay indicating that the NHPUC had primary jurisdiction over this matter.



On November 11, 2005, the IPPs filed motions with the NHPUC seeking to disqualify two of the three NHPUC commissioners from participating in this proceeding.  As a result, the NHPUC chair excused himself from participating in this proceeding.  On December 7, 2005, the IPPs then filed an interlocutory appeal with the New Hampshire Supreme Court (Supreme Court) on the basis that the forum for resolving this dispute is in state superior court.  On December 27, 2005, PSNH and the New Hampshire Attorney Generals Office (representing the NHPUC) each filed motions for summary disposition with the Supreme Court.On February 7, 2006, the Supreme Court declined to accept the IPP's interlocutory appeal.  As a result, the matter will return to the NHPUC for decision.  PSNH recovers the over market costs of IPP contracts through the SCRC.



Environmental Legislation:The New Hampshire legislature is considering a bill in its 2006 legislative session that would place strict limitations on the level of mercury that PSNHs existing generation plants can emit.  Legislation was first proposed in the 2005 session and passed by the New Hampshire senate in 2005 which would require PSNH to achieve fixed annual caps as early as 2009.  The bill was subsequently defeated by the New Hampshire House of Representatives early in 2006.  The legislature will now take up a new bill that requires PSNH to reduce power plant mercury emissions by at least 80 percent by 2013 while providing incentives for early reductions.  Management has been reviewing the proposed legislation.  PSNH's primary long-term alternative is to install wet scrubber equipment at its Merrimack Station at a cost of approximately $250 million.  PSNHs other alternatives include the use of carbon injection pollution control equipment, reducing operating capacity of its plants and possible retirement or repowering of one or more of its generating units.  While state law and PSNH's restructuring agreement provide for the recovery of its generation costs, including the cost to comply with state environmental regulations, at this time management is unable to determine the impact of any potential new legislation on PSNH's net income or financial position.



B.

Environmental Matters

General:PSNH is subject to environmental laws and regulations intended to mitigate or remove the effect of past operations and improve or maintain the quality of the environment.  These laws and regulations require the removal or the remedy of the effect on the environment of the disposal or release of certain specified hazardous substances at current and former operating sites.  As such, PSNH has an active environmental auditing and training program and believes that it is substantially in compliance with all enacted laws and regulations.



Environmental reserves are accrued using a probabilistic model approach when assessments indicate that it is probable that a liability has been incurred and an amount can be reasonably estimated.  The probabilistic model approach estimates the liability based on the most likely action plan from a variety of available remediation options, including no action is required or several different remedies ranging from establishing institutional controls to full site remediation and monitoring.



These estimates are subjective in nature as they take into consideration several different remediation options at each specific site.  The reliability and precision of these estimates can be affected by several factors including new information concerning either the level of contamination at the site, recently enacted laws and regulations or a change in cost estimates due to certain economic factors.





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The amounts recorded as environmental liabilities on the consolidated balance sheets represent managements best estimate of the liability for environmental costs and takes into consideration site assessment and remediation costs.  Based on currently available information for estimated site assessment and remediation costs at December 31, 2005 and 2004, PSNH had $6.2 million and $7.3 million, respectively, recorded as environmental reserves.  A reconciliation of the activity in these reserves at December 31, 2005 and 2004 is as follows:



|                             |  |                                  |  |      
|---------------------------- |  | -------------------------------- |  | -----
|                             |  | For the Years Ended December 31,
|(Millions of Dollars)        |  | 2005                             |  | 2004 
|Balance at beginning of year |  | $ 7.3                            |  | $9.8 
|Additions and adjustments    |  | 0.7                              |  | 3.1  
|Payments                     |  | (1.8)                            |  | (5.6)
|Balance at end of year       |  | $ 6.2                            |  | $7.3 



PSNH currently has 16 sites included in the environmental reserve.  Of those 16 sites, 10 sites are in the remediation or long-term monitoring phase, 2 sites have had some level of site assessment completed and the remaining 4 sites are in the preliminary stages of site assessment.



For 2 sites that are included in the company's liability for environmental costs, the information known and nature of the remediation options at those sites allow an estimate of the range of losses to be made.  These sites primarily relate to manufactured gas plant (MGP) sites.  At December 31, 2005, $0.9 million has been accrued as a liability for these sites, which represents management's best estimate of the liability for environmental costs.  This amount differs from an estimated range of loss from $0.1 million to $4.4 million as management utilizes the probabilistic model approach to make its estimate of the liability for environmental costs.



For the 14 remaining sites for which an estimate is based on the probabilistic model approach, determining an estimated range of estimated losses is not possible.   These liabilities are estimated on an undiscounted basis and do not assume that any amounts are recoverable from insurance companies or other third parties.  The environmental reserve includes sites at different stages of discovery and remediation and does not include any unasserted claims.



At December 31, 2005, there are 2 sites for which there are unasserted claims; however, any related remediation costs are not probable or estimable at this time.  PSNH's environmental liability also takes into account recurring costs of managing hazardous substances and pollutants, mandated expenditures to remediate previously contaminated sites and any other infrequent and non-recurring clean up costs.



It is possible that new information or future developments could require a reassessment of the potential exposure to related environmental matters.  As this information becomes available, management will continue to assess the potential exposure and adjust the reserves accordingly.



MGP Sites:MGP sites comprise the largest portion of PSNH's environmental liability.  MGPs are sites that manufactured gas from coal which produced certain byproducts that may pose risk to human health and the environment.  PSNH currently has 7 MGP sites included in its environmental liability.  Of the 7 MGP sites, 5 sites are currently undergoing or have undergone remediation and 2 sites are in the preliminary stages of site assessment.  At December 31, 2005 and 2004, $5.3 million and $6.3 million, respectively, represents amounts for the site assessment and remediation of MGPs.  At December 31, 2005 and 2004, the 2 largest MGP sites comprise approximately 85 percent and 86 percent, respectively, of the total MGP environmental liability.



CERCLA Matters:The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and its amendments or state equivalents impose joint and several strict liabilities, regardless of fault, upon generators of hazardous substances resulting in removal and remediation costs and environmental damages.  Liabilities under these laws can be material and in some instances may be imposed without regard to fault or for past acts that may have been lawful at the time they occurred.  PSNH has 2 superfund sites under CERCLA for which it has been notified that it is a potentially responsible party (PRP).  For sites where there are other PRPs and PSNH is not managing the site assessment and remediation, the liability accrued represents PSNH's estimate of what it will pay to settle its obligations with respect to the site.



It is possible that new information or future developments could require a reassessment of the potential exposure to related environmental matters.  As this information becomes available management will continue to assess the potential exposure and adjust the reserves accordingly.



Rate Recovery:PSNH has a rate recovery mechanism for environmental costs.



C.

Long-Term Contractual Arrangements

Vermont Yankee Nuclear Power Corporation (VYNPC): Previously under the terms of their agreements, PSNH paid their ownership (or entitlement) shares of costs, which included depreciation, O&M expenses, taxes, the estimated cost of decommissioning, and a return on invested capital to VYNPC and recorded these costs as purchased-power expenses.  On July 31, 2002, VYNPC consummated the sale of its nuclear generating unit to a subsidiary of Entergy Corporation for approximately $180 million.  PSNH has commitments to buy approximately 4 percent of the VYNPC plants output through March of 2012 at a range of fixed prices.  The total cost of purchases under contracts with VYNPC amounted to $6.4 million in 2005, $6.7 million in 2004 and $7.5 million in 2003.



Electricity Procurement Obligations:PSNH has entered into various arrangements for the purchase of electricity.  The total cost of purchases under these arrangements amounted to $125.3 million in 2005, $121.1 million in 2004 and $122.8 million in 2003.  These amounts relate to IPP contracts and do not include PSNHs short-term power supply management.





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Portland Natural Gas Transmission System (PNGTS) Pipeline Commitments:PSNH has a contract for capacity on the PNGTS pipeline which extends through 2018.  The total cost under this contract amounted to $1.6 million in 2005, $2 million in 2004 and $1.9 million in 2003.  These costs are not recovered from PSNH's retail customers.



Hydro-Quebec:  Along with other New England utilities, PSNH has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada.  PSNH is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities.  The total cost of this agreement amounted to $6.6 million in 2005, $7.4 million in 2004 and $7.9 million in 2003.



Northern Wood Power Project:  In October of 2004, PSNH received the approvals necessary to begin construction related to the conversion of one of three 50 MW units at the coal-fired Schiller Station to burn wood (Northern Wood Power Project).  Construction of the $75 million Northern Wood Power Project began in 2004 and significant construction has been completed.  Certain other estimated construction expenditures totaling $3.8 million are not included in the contracts signed for the Northern Wood Power Project and are not included in the table of estimated future annual costs below.



Yankee Companies FERC-Approved Billings, Subject to Refund:  PSNH has significant decommissioning and plant closure cost obligations to the Yankee Companies.  Each plant has been shut down and is undergoing decommissioning.  The Yankee Companies collect decommissioning and closure costs through wholesale, FERC-approved rates charged under power purchase agreements with several New England utilities, including PSNH.  PSNH in turn passes these costs on to its customers through NHPUC approved retail rates.  YAEC and MYAPC received FERC approval to collect all presently estimated decommissioning and closure costs.  On November 23, 2005, YAEC submitted an application to the FERC to increase YAEC's wholesale decommissioning charges.  On January 31, 2006, the FERC issued an order accepting the rate increase, effective February 1, 2006, subject to refund after hearings and settlement judge proceedings.  CYAPC received an order on August 30, 2004 from the FERC allowing collection of its decommissioning and closure costs, subject to refund.  The table of estimated future annual costs below includes the decommissioning and closure costs for YAEC, MYAPC and CYAPC.



Estimated Future Annual Costs:  The estimated future annual costs of PSNHs significant long-term contractual arrangements are as follows:



|                                                               |  |        |  |         |  |       |  |       |  |        |  |           
|-------------------------------------------------------------- |  | ------ |  | ------- |  | ----- |  | ----- |  | ------ |  | ----------
|(Millions of Dollars)                                          |  | 2006   |  | 2007    |  | 2008  |  | 2009  |  | 2010   |  | Thereafter
|VYNPC                                                          |  | $  7.1 |  | $   6.9 |  | $ 7.0 |  | $ 7.6 |  | $  7.3 |  | $   9.3   
|Electricity procurement 
  contracts                           |  | 122.5  |  | 52.6    |  | 27.6  |  | 27.8  |  | 28.0   |  | 185.0     
|PNGTS pipeline 
  commitments                                  |  | 2.0    |  | 2.0     |  | 2.0   |  | 2.0   |  | 2.0    |  | 15.9      
|Hydro-Quebec                                                   |  | 7.3    |  | 6.9     |  | 6.8   |  | 6.7   |  | 6.7    |  | 66.7      
|Northern Wood 
  Power Project                                 |  | 6.5    |  | -       |  | -     |  | -     |  | -      |  | -         
|Yankee Companies  
  FERC-approved billings,
subject to refund |  | 13.2   |  | 10.2    |  | 9.0   |  | 8.1   |  | 7.8    |  | -         
|Totals                                                         |  | $158.6 |  | $ 78.6  |  | $52.4 |  | $52.2 |  | $51.8  |  | $276.9    



D.

Deferred Contractual Obligations

FERC Proceedings:  In 2003 the Connecticut Yankee Atomic Power Company (CYAPC) increased the estimated decommissioning and plant closure costs for the period 2000 through 2023 by approximately $395 million over the April 2000 estimate of $436 million approved by the FERC in a 2000 rate case settlement.  The revised estimate reflects the increases in the projected costs of spent fuel storage, increased security and liability and property insurance costs, and the fact that CYAPC is now self performing all work to complete the decommissioning of the plant due to the termination of the decommissioning contract with Bechtel Power Corporation (Bechtel) in July of 2003.  PSNH's share of CYAPC's increase in decommissioning and plant closure costs is approximately $20 million.  On July 1, 2004, CYAPC filed with the FERC for recovery seeking to increase its annual decommissioning collections from $16.7 million to $93 million for a six-year period beginning on January 1, 2005.  On August 30, 2004, the FERC issued an order accepting the rates, with collection beginning on February 1, 2005, subject to refund.



Both the Connecticut Department of Public Utility Control  (DPUC) and Bechtel filed testimony in the FERC proceeding claiming that CYAPC was imprudent in its management of the decommissioning project.  In its testimony, the DPUC recommended a disallowance of $225 million to $234 million out of CYAPC's requested rate increase of approximately $395 million.  PSNH's share of the DPUC's recommended disallowance would be between $11 million to $12 million.  The FERC staff also filed testimony that recommended a $38 million decrease in the requested rate increase claiming that CYAPC should have used a different gross domestic product (GDP) escalator.  PSNH's share of this recommended decrease is $1.9 million.



On November 22, 2005, a FERC administrative law judge (ALJ) issued an initial decision finding no imprudence on CYAPC's part.  However, the ALJ did agree with the FERC staffs position that a lower GDP escalator should be used for calculating the rate increase and found that CYAPC should recalculate its decommissioning charges to reflect the lower escalator.  Briefs to the full FERC addressing these issues were filed in January and February of 2006, and a final order is expected later in 2006.  Management expects that if the FERC staff's position on the decommissioning GDP cost escalator is found by the FERC to be more appropriate than that used by CYAPCto develop its proposed rates, then CYAPC would review whether to reduce its estimated decommissioning obligation and reduce the customers' obligation, including PSNH.





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The company cannot at this time predict the timing or outcome of the FERC proceeding required for the collection of the increased CYAPC decommissioning costs.  The company believes that the costs have been prudently incurred and will ultimately be recovered from the customers of PSNH.  However, there is a risk that some portion of these increased costs may not be recovered, or will have to be refunded if recovered, as a result of the FERC proceedings.



On June 10, 2004, the DPUC and the Connecticut Office of Consumer Counsel (OCC) filed a petition seeking a declaratory order that CYAPC be allowed to recover all decommissioning costs from its wholesale purchasers, including PSNH, but that such purchasers may not be allowed to recover in their retail rates any costs that the FERC might determine to have been imprudently incurred.  On August 30, 2004, the FERC denied this petition.  On September 29, 2004, the DPUC and OCC asked the FERC to reconsider the petition and on October 20, 2005, the FERC denied the reconsideration, holding that the sponsor companies are only obligated to pay CYAPC for prudently incurred decommissioning costs and the FERC has no jurisdiction over the sponsors' rates to their retail customers.  On December 12, 2005, the DPUC sought review of these orders by the United States Court of Appeals for the D.C. Circuit.  The FERC and the CYAPC have asked the court to dismiss the case and the DPUC has objected to a dismissal.  PSNH cannot predict the timing or the outcome of these proceedings.



Bechtel Litigation:  CYAPC and Bechtel commenced litigation in Connecticut Superior Court over CYAPC's termination of Bechtel's contract for the decommissioning of CYAPC's nuclear generating plant.  After CYAPC terminated the contract, responsibility for decommissioning was transitioned to CYAPC, which recommenced the decommissioning process.



On March 7, 2006, CYAPC and Bechtel executed a settlement agreement terminating this litigation.  Bechtel has agreed to pay CYAPC $15 million, and CYAPC will withdraw its termination of the contract for default and deem it terminated by agreement.



Spent Nuclear Fuel Litigation:  CYAPC, Yankee Atomic Energy Company (YAEC) and Maine Yankee Atomic Power Company (MYAPC) (Yankee Companies) also commenced litigation in 1998 charging that the federal government breached contracts it entered into with each company in 1983 under the Act.  Under the Act, the Department of Energy (DOE) was to begin removing spent nuclear fuel from the nuclear plants of the Yankee Companies no later than January 31, 1998 in return for payments by each company into the nuclear waste fund.  No fuel has been collected by the DOE, and spent nuclear fuel is stored on the sites of the Yankee Companies' plants.  The Yankee Companies collected the funds for payments into the nuclear waste fund from wholesale utility customers under FERC-approved contract rates.  The wholesale utility customers in turn collect these payments from their retail electric customers.  The Yankee Companies' individual damage claims attributed to the government's breach ranging between $523 million and $543 million are specific to each plant and include incremental storage, security, construction and other costs through 2010.  The CYAPC damage claim ranges from $186 million to $198 million, the YAEC damage claim ranges from $177 million to $185 million and the MYAPC damage claim is $160 million.  The DOE trial ended on August 31, 2004 and a verdict has not been reached.  Post-trial findings of facts and final briefs were filed by the parties in January of 2005.  The Yankee Companies' current rates do not include an amount for recovery of damages in this matter.  Management can predict neither the outcome of this matter nor its ultimate impact on PSNH.



YAEC: In November of 2005, YAEC established an updated estimate of the cost of completing the decommissioning of its plant resulting in an increase of approximately $85 million.  PSNHs share of the increase in estimated costs is $6 million.  This estimate reflects the cost of completing site closure activities from October of 2005 forward and storing spent nuclear fuel and other high level waste on site until 2020.  This estimate projects a total cost of $192.1 million for the completion of decommissioning and long-term fuel storage.  To fund these costs, on November 23, 2005, YAEC submitted an application to the FERC to increase YAECs wholesale decommissioning charges.  The DPUC and the Massachusetts attorney general protested these increases.  On January 31, 2006, the FERC issued an order accepting the rate increase, effective February 1, 2006, subject to refund after hearings and settlement judge proceedings.  The hearings have been suspended pending settlement discussions between YAEC, the FERC and other intervenors in the case.  PSNH has a 7 percent ownership interest in YAEC and can predict neither the outcome of this matter nor its ultimate impact on PSNH.



5.  Fair Value of Financial Instruments



The following methods and assumptions were used to estimate the fair value of each of the following financial instruments:



Long-Term Debt and Rate Reduction Bonds:The fair value of PSNHs fixed-rate securities is based upon the quoted market price for those issues or similar issues.  Adjustable rate securities are assumed to have a fair value equal to their carrying value.  The carrying amounts of PSNHs financial instruments and the estimated fair values are as follows:



|                      |  |                      |  |            
|--------------------- |  | -------------------- |  | -----------
|                      |  | At December 31, 2005
|(Millions of Dollars) |  | Carrying 
Amount     |  | Fair 
Value
|Long-term debt -      |  |                      |  |            
|First mortgage bonds  |  | $100.0               |  | $100.8     
|Other long-term debt  |  | 407.3                |  | 421.5      
|Rate reduction bonds  |  | 382.7                |  | 402.8      





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|                      |  |                      |  |            
|--------------------- |  | -------------------- |  | -----------
|                      |  | At December 31, 2004
|(Millions of Dollars) |  | Carrying 
Amount     |  | Fair 
Value
|Long-term debt -      |  |                      |  |            
|First mortgage bonds  |  | $ 50.0               |  | $ 51.0     
|Other long-term debt  |  | 407.3                |  | 427.5      
|Rate reduction bonds  |  | 428.8                |  | 464.8      



Other Financial Instruments:  The carrying value of financial instruments included in current assets and current liabilities approximates their fair value.



6.  Leases



PSNH has entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles, and office space.  The provisions of these lease agreements generally provide for renewal options.  Certain lease agreements contain contingent lease payments.  The contingent lease payments are based on various factors, such as the commercial paper rate plus a credit spread or the consumer price index.



Capital lease rental payments were $0.4 million in 2005 and 2004 and $0.5 million in 2003.  Interest included in capital lease rental payments was $0.2 million in 2005 and 2004 and $0.3 million in 2003.  Capital lease asset amortization was $0.2 million for the years ended December 31, 2005, 2004 and 2003.



Operating lease rental payments charged to expense were $4.1 million in 2005, $3.6 million in 2004 and $3.3 million in 2003.  The capitalized portion of operating lease payments was approximately $1.8 million for the year ended December 31, 2005 and $1.7 million for the years ended December 31, 2004 and 2003.



Future minimum rental payments excluding executory costs, such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable leases, at December 31, 2005 are as follows:



|                                                  |  |                |  |                 
|------------------------------------------------- |  | -------------- |  | ----------------
|(Millions of Dollars)                             |  | Capital
Leases |  | Operating
Leases
|2006                                              |  | $ 0.3          |  | $ 6.4           
|2007                                              |  | 0.2            |  | 5.3             
|2008                                              |  | 0.2            |  | 4.4             
|2009                                              |  | -              |  | 2.8             
|2010                                              |  | -              |  | 2.2             
|Thereafter                                        |  | -              |  | 7.1             
|Future minimum lease payments                     |  | 0.7            |  | $28.2           
|Less amount representing interest                 |  | (0.2)          |  |                 
|Present value of future minimum
   lease payments |  | $ 0.5          |  |                 



7.  Dividend Restrictions



The Federal Power Act and certain state statutes limit the payment of dividends by PSNH to its retained earnings balance.  At December 31, 2005, retained earnings available for payment of dividends is restricted to $232 million.



8.  Accumulated Other Comprehensive Income/(Loss)



The accumulated balance for each other comprehensive income/(loss) item is as follows:



|                                                                        |  |                    |  |                       |  |                  
|----------------------------------------------------------------------- |  | ------------------ |  | --------------------- |  | -----------------
|(Millions of Dollars)                                                   |  | December 31, 
2004 |  | Current
Period
Change |  | December 31,
2005
|Unrealized gains 
  on securities                                       |  | $  0.2             |  | $   -                 |  | $  0.2           
|Minimum supplemental
executive retirement
pension liability
adjustments |  | (0.3)              |  | 0.2                   |  | (0.1)            
|Accumulated other
comprehensive 
  (loss)/income                        |  | $(0.1)             |  | $0.2                  |  | $ 0.1            





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|                                                                        |  |                    |  |                       |  |                  
|----------------------------------------------------------------------- |  | ------------------ |  | --------------------- |  | -----------------
|(Millions of Dollars)                                                   |  | December 31, 
2003 |  | Current
Period
Change |  | December 31,
2004
|Unrealized gains 
   on securities                                      |  | $0.1               |  | $0.1                  |  | $  0.2           
|Minimum supplemental
executive retirement
pension liability
adjustments |  | (0.2)              |  | (0.1)                 |  | (0.3)            
|Accumulated other 
  comprehensive loss                                 |  | $(0.1)             |  | $   -                 |  | $(0.1)           



The changes in the components of other comprehensive (loss)/income are reported net of the following income tax effects:



|                                                                        |  |        |  |        |  |       
|----------------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|(Millions of Dollars)                                                   |  | 2005   |  | 2004   |  | 2003  
|Unrealized gains 
  on securities                                       |  | $    - |  | $(0.1) |  | $(0.1)
|Minimum supplemental
executive retirement
pension liability
adjustments |  | (0.1)  |  | -      |  | 0.2   
|Accumulated other
comprehensive
(loss)/income                           |  | $(0.1) |  | $(0.1) |  | $ 0.1 



The unrealized gains on securities above relate to $3.4 million and $3.3 million of Supplemental Executive Retirement Plan securities at December 31, 2005 and 2004, respectively, that are included in prepayments and other on the accompanying consolidated balance sheets.



9.  Long-Term Debt



Details of long-term debt outstanding are as follows:



|                                                    |  |                       |  |        
|--------------------------------------------------- |  | --------------------- |  | -------
|At December 31,                                     |  | 2005                  |  | 2004   
|                                                    |  | (Millions of Dollars)
|First Mortgage Bonds:                               |  |                       |  |        
|5.25% Series L, due 2014                            |  | $  50.0               |  | $  50.0
|5.60% Series M, due 2035                            |  | 50.0                  |  | -      
|Total First Mortgage Bonds                          |  | $100.0                |  | $ 50.0 
|Pollution Control Revenue Bonds:                    |  |                       |  |        
|6.00% Tax-Exempt, Series D,
     due 2021           |  | 75.0                  |  | 75.0   
|6.00% Tax-Exempt due 2021, 
     Series E, due 2021 |  | 44.8                  |  | 44.8   
|Adjustable Rate, Series A, due 2021                 |  | 89.3                  |  | 89.3   
|Adjustable Rate, Series B, due 2021                 |  | 89.3                  |  | 89.3   
|5.45% Tax-Exempt, Series C, 
     due 2021          |  | 108.9                 |  | 108.9  
|Total Pollution Control Revenue Bonds               |  | $407.3                |  | $407.3 
|Less amounts due within a year                      |  | -                     |  | -      
|Unamortized premiums and 
  discounts, net          |  | (0.2)                 |  | (0.1)  
|Long-term debt                                      |  | $507.1                |  | $457.2 



There are no cash sinking fund requirements or debt maturities for the years 2006 through 2010.  There are annual renewal and replacement fund requirements equal to 2.25 percent of the average of net depreciable utility property owned by PSNH in 1992, plus cumulative gross property additions thereafter.  PSNH expects to meet these future fund requirements by certifying property additions.  Any deficiency would need to be satisfied by the deposit of cash or bonds.



Essentially, all utility plant of PSNH is subject to the liens of the company's first mortgage bond indenture.



PSNH entered into financing arrangements with the Business Finance Authority (BFA) of the state of New Hampshire, pursuant to which the BFA issued five series of Pollution Control Revenue Bonds (PCRBs) and loaned the proceeds to PSNH.  At both December 31, 2005 and 2004, $407.3 million of the PCRBs were outstanding.  PSNHs obligation to repay each series of PCRBs is secured by bond insurance and by first mortgage bonds.  Each such series of first mortgage bonds contains similar terms and provisions as the applicable series of PCRBs.  For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless PSNH failed to meet its obligations under the PCRBs.





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The weighted-average effective interest rate on PSNH's variable-rate pollution control notes was 2.51 percent for 2005 and 1.25 percent for 2004.



PSNH's long-term debt agreements provide that it must comply with certain financial and non-financial covenants as are customarily included in such agreements.  PSNH currently is and expects to remain in compliance with these covenants.



On October 5, 2005, PSNH issued $50 million of first mortgage bonds with a fixed coupon of 5.60 percent and a maturity of October 5, 2035.  The proceeds of this issuance were used to refinance the company's short-term debt and to fund its capital needs.



10. Segment Information



Segment information related to the distribution (including generation) and transmission businesses for PSNH for the years ended December 31, 2005, 2004, and 2003 is as follows (millions of dollars):



|                                             |  |                                      |  |              |  |            
|-------------------------------------------- |  | ------------------------------------ |  | ------------ |  | -----------
|                                             |  | For the Year Ended December 31, 2005
|                                             |  | Distribution                         |  | Transmission |  | Totals     
|Operating revenues                           |  | $1,091.9                             |  | $36.5        |  | $1,128.4   
|Depreciation and 
  amortization             |  | (233.6)                              |  | (4.3)        |  | (237.9)    
|Other operating expenses                     |  | (774.6)                              |  | (17.7)       |  | (792.3)    
|Operating income                             |  | 83.7                                 |  | 14.5         |  | 98.2       
|Interest expense, 
  net of AFUDC            |  | (43.9)                               |  | (2.4)        |  | (46.3)     
|Interest income                              |  | 0.3                                  |  | 0.1          |  | 0.4        
|Other income, net                            |  | 1.6                                  |  | -            |  | 1.6        
|Income tax expense                           |  | (7.8)                                |  | (4.4)        |  | (12.2)     
|Net income                                   |  | $     33.9                           |  | $  7.8       |  | $      41.7
|Total assets  (1)                            |  | $2,294.6                             |  | $      -     |  | $2,294.6   
|Cash flows for total 
  investments in plant |  | $  131.9                             |  | $26.9        |  | $   158.8  



|                                             |  |                                      |  |              |  |           
|-------------------------------------------- |  | ------------------------------------ |  | ------------ |  | ----------
|                                             |  | For the Year Ended December 31, 2004
|                                             |  | Distribution                         |  | Transmission |  | Totals    
|Operating revenues                           |  | $ 937.9                              |  | $30.8        |  | $   968.7 
|Depreciation and 
  amortization             |  | (180.5)                              |  | (4.4)        |  | (184.9)   
|Other operating expenses                     |  | (662.7)                              |  | (15.8)       |  | (678.5)   
|Operating income                             |  | 94.7                                 |  | 10.6         |  | 105.3     
|Interest expense, 
  net of AFUDC            |  | (43.5)                               |  | (2.0)        |  | (45.5)    
|Interest income                              |  | 0.3                                  |  | -            |  | 0.3       
|Other (loss)/income, net                     |  | (1.0)                                |  | 0.5          |  | (0.5)     
|Income tax expense                           |  | (10.6)                               |  | (2.4)        |  | (13.0)    
|Net income                                   |  | $     39.9                           |  | $   6.7      |  | $     46.6
|Total assets  (1)                            |  | $2,205.4                             |  | $       -    |  | $2,205.4  
|Cash flows for total 
  investments in plant |  | $   123.1                            |  | $ 30.1       |  | $   153.2 



|                                          |  |                                      |  |              |  |           
|----------------------------------------- |  | ------------------------------------ |  | ------------ |  | ----------
|                                          |  | For the Year Ended December 31, 2003
|                                          |  | Distribution                         |  | Transmission |  | Totals    
|Operating revenues                        |  | $   863.0                            |  | $25.2        |  | $   888.2 
|Depreciation and
amortization             |  | (118.2)                              |  | (3.0)        |  | (121.2)   
|Other operating expenses                  |  | (633.1)                              |  | (10.3)       |  | (643.4)   
|Operating income                          |  | 111.7                                |  | 11.9         |  | 123.6     
|Interest expense, 
  net of AFUDC         |  | (44.8)                               |  | (0.4)        |  | (45.2)    
|Interest income                           |  | 0.2                                  |  | -            |  | 0.2       
|Other loss, net                           |  | (3.0)                                |  | (0.2)        |  | (3.2)     
|Income tax expense                        |  | (25.8)                               |  | (4.0)        |  | (29.8)    
|Net income                                |  | $     38.3                           |  | $  7.3       |  | $     45.6
|Cash flows for total
investments in plant |  | $     78.2                           |  | $26.9        |  | $  105.1  



(1) Information for segmenting total assets between distribution and transmission is not available at December 31, 2005 or 2004.  The distribution and transmission assets are disclosed in the distribution columns above.



---



|                                                  |  |                       |  |          |  |               |  |             
|------------------------------------------------- |  | --------------------- |  | -------- |  | ------------- |  | ------------
|Consolidated Quarterly Financial Data (Unaudited) |  |                      
|                                                  |  | Quarter Ended (a) (b)
|(Thousands of Dollars)                            |  | March 31,             |  | June 30, |  | September 30, |  | December 31,
|2005                                              |  |                       |  |          |  |               |  |             
|Operating Revenues                                |  | $268,891              |  | $259,586 |  | $307,305      |  | $292,645    
|Operating Income                                  |  | 25,439                |  | 24,264   |  | 26,312        |  | 22,224      
|Net Income                                        |  | 8,788                 |  | 9,063    |  | 11,921        |  | 11,967      
|                                                  |  |                       |  |          |  |               |  |             
|2004                                              |  |                       |  |          |  |               |  |             
|Operating Revenues                                |  | $244,148              |  | $226,448 |  | $258,876      |  | $239,277    
|Operating Income                                  |  | 31,259                |  | 20,022   |  | 30,066        |  | 23,915      
|Net Income                                        |  | 11,760                |  | 6,025    |  | 18,239        |  | 10,617      



|                                                                           |  |            |  |             |  |             |  |             |  |            
|-------------------------------------------------------------------------- |  | ---------- |  | ----------- |  | ----------- |  | ----------- |  | -----------
|Selected Consolidated Financial Data (Unaudited)                           |  |            |  |             |  |             |  |             |  |            
|(Thousands of Dollars)                                                     |  | 2005       |  | 2004        |  | 2003        |  | 2002        |  | 2001       
|Operating Revenues                                                         |  | $1,128,427 |  | $   968,749 |  | $   888,186 |  | $   947,178 |  | $   964,415
|Net Income                                                                 |  | 41,739     |  | 46,641      |  | 45,624      |  | 62,897      |  | 81,776     
|Cash Dividends on Common Stock                                             |  | 42,383     |  | 27,186      |  | 16,800      |  | 45,000      |  | 27,000     
|Property, Plant and Equipment, net (c)                                     |  | 1,155,423  |  | 1,031,703   |  | 925,592     |  | 839,716     |  | 809,740    
|Total Assets (d)                                                           |  | 2,294,583  |  | 2,205,374   |  | 2,171,181   |  | 2,155,447   |  | 2,094,514  
|Rate Reduction Bonds                                                       |  | 382,692    |  | 428,769     |  | 472,222     |  | 510,841     |  | 507,381    
|Long-Term Debt (e)                                                         |  | 507,086    |  | 457,190     |  | 407,285     |  | 407,285     |  | 407,285    
|Obligations Under Seabrook Power Contracts and 
  Other Capital Leases (e) |  | 498        |  | 712         |  | 986         |  | 1,192       |  | 110,275    



(a)

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

(b)

Quarterly operating income amounts differ from those previously reported as a result of the change in classification of certain costs that were not recoverable from regulated customers.  These amounts, previously presented in other income, net, have been reclassified to other operation expenses and are summarized as follows (thousands of dollars):



|              |  |      |  |     
|------------- |  | ---- |  | ----
|Quarter Ended |  | 2005 |  | 2004
|March 31,     |  | $110 |  | $225
|June 30,      |  | 254  |  | 212 
|September 30, |  | 247  |  | 320 



(c)

Amount includes construction work in progress.

(d)

Total assets were not adjusted for cost of removal prior to 2002.

(e)

Includes portions due within one year.



---



|                                                 |  |            |  |          |  |          |  |          |  |         
|------------------------------------------------ |  | ---------- |  | -------- |  | -------- |  | -------- |  | --------
|Consolidated Statistics (Unaudited)              |  |            |  |          |  |          |  |          |  |         
|                                                 |  | 2005       |  | 2004     |  | 2003     |  | 2002     |  | 2001    
|Revenues:  (Thousands)                           |  |            |  |          |  |          |  |          |  |         
|Residential                                      |  | $  450,230 |  | $384,667 |  | $351,622 |  | $325,912 |  | $323,642
|Commercial                                       |  | 423,884    |  | 361,603  |  | 318,081  |  | 297,196  |  | 297,632 
|Industrial                                       |  | 190,299    |  | 175,921  |  | 159,560  |  | 150,582  |  | 175,575 
|Other Utilities                                  |  | 34,688     |  | 19,712   |  | 38,622   |  | 152,131  |  | 144,350 
|Streetlighting and Railroads                     |  | 5,685      |  | 5,297    |  | 4,801    |  | 4,820    |  | 5,227   
|Miscellaneous                                    |  | 23,641     |  | 21,549   |  | 15,500   |  | 16,537   |  | 17,989  
|Total                                            |  | $1,128,427 |  | $968,749 |  | $888,186 |  | $947,178 |  | $964,415
|Sales:(kWh - Millions)                           |  |            |  |          |  |          |  |          |  |         
|Residential                                      |  | 3,162      |  | 3,015    |  | 2,944    |  | 2,765    |  | 2,592   
|Commercial                                       |  | 3,342      |  | 3,235    |  | 3,100    |  | 2,969    |  | 2,873   
|Industrial                                       |  | 1,612      |  | 1,716    |  | 1,684    |  | 1,646    |  | 1,926   
|Other Utilities                                  |  | 501        |  | 242      |  | 674      |  | 4,034    |  | 4,086   
|Streetlighting and Railroads                     |  | 24         |  | 25       |  | 23       |  | 23       |  | 23      
|Total                                            |  | 8,641      |  | 8,233    |  | 8,425    |  | 11,437   |  | 11,500  
|Customers:  (Average)                            |  |            |  |          |  |          |  |          |  |         
|Residential                                      |  | 408,959    |  | 403,088  |  | 388,133  |  | 382,481  |  | 376,832 
|Commercial                                       |  | 68,232     |  | 66,572   |  | 63,324   |  | 61,775   |  | 59,538  
|Industrial                                       |  | 2,768      |  | 2,783    |  | 2,758    |  | 2,818    |  | 2,863   
|Other                                            |  | 600        |  | 572      |  | 554      |  | 540      |  | 517     
|Total                                            |  | 480,559    |  | 473,015  |  | 454,769  |  | 447,614  |  | 439,750 
|Average Annual Use Per Residential Customer(kWh) |  | 7,733      |  | 7,484    |  | 7,584    |  | 7,208    |  | 6,868   
|Average Annual Bill Per Residential Customer     |  | $1,100.95  |  | $954.96  |  | $905.52  |  | $849.10  |  | $859.87 
|Average Revenue Per kWh:                         |  |            |  |          |  |          |  |          |  |         
|Residential                                      |  | 14.24¢     |  | 12.76¢   |  | 11.94¢   |  | 11.78¢   |  | 12.52¢  
|Commercial                                       |  | 12.68      |  | 11.18    |  | 10.26    |  | 10.01    |  | 10.36   
|Industrial                                       |  | 11.81      |  | 10.25    |  | 9.48     |  | 9.15     |  | 9.12