1998 Annual Report

                       North Atlantic Energy Corporation

                                    Index


Contents                                                     Page

Balance Sheets........................................         2

Statements of Income..................................         4

Statements of Cash Flows..............................         5

Statements of Common Stockholder's Equity.............         6

Notes to Financial Statements.........................         7

Report of Independent Public Accountants..............        22

Management's Discussion and Analysis of Financial
  Condition and Results of Operations.................        24

Selected Financial Data...............................        30

Statistics (Unaudited)................................        30

Statements of Quarterly Financial Data (Unaudited)....        30

Bondholder Information................................     Back Cover





                                   PART I.  FINANCIAL INFORMATION

NORTH ATLANTIC ENERGY CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
At December 31,                                                   1998           1997
-----------------------------------------------------------------------------------------
                                                                 (Thousands of Dollars)
<S>                                                               <C>          <C>
ASSETS
------

Utility Plant, at original cost:
  Electric................................................   $    753,379   $    779,111

     Less: Accumulated provision for depreciation.........        165,114        143,778
                                                             -------------  -------------
                                                                  588,265        635,333
  Construction work in progress...........................          7,090          4,616
  Nuclear fuel, net.......................................         23,644         27,413
                                                             -------------  -------------
      Total net utility plant.............................        618,999        667,362
                                                             -------------  -------------

Other Property and Investments:                              
  Nuclear decommissioning trust, at market................         35,210         26,547
                                                             -------------  -------------
                                                                   35,210         26,547
                                                             -------------  -------------
Current Assets:                                              
  Cash....................................................             71             13
  Special deposits........................................         11,198           -
  Notes receivable from affiliated companies..............         30,350           -
  Receivables from affiliated companies...................         23,804         25,695
  Taxes receivable........................................          7,887          4,613
  Materials and supplies, at average cost.................         12,812         13,003
  Prepayments and other...................................          2,198          4,220
                                                             -------------  -------------
                                                                   88,320         47,544
                                                             -------------  -------------
Deferred Charges:                                            
  Regulatory assets.......................................        199,882        269,484
  Unamortized debt expense................................          2,742          3,702
                                                             -------------  -------------
                                                                  202,624        273,186
                                                             -------------  -------------



      Total Assets........................................   $    945,153   $  1,014,639
                                                             =============  =============
</TABLE>
See accompanying notes to financial statements.






NORTH ATLANTIC ENERGY CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
At December 31,                                                   1998           1997
-----------------------------------------------------------------------------------------
                                                                 (Thousands of Dollars)
<S>                                                               <C>          <C>
CAPITALIZATION AND LIABILITIES
------------------------------

Capitalization:                                              
  Common stock--$1 par value. Authorized                     
   and outstanding 1,000 shares..........................    $          1   $          1
  Capital surplus, paid in................................        160,999        160,999
  Retained earnings.......................................         43,196         58,702
                                                             -------------  -------------
           Total common stockholder's equity..............        204,196        219,702
  Long-term debt..........................................        405,000        475,000
                                                             -------------  -------------
           Total capitalization...........................        609,196        694,702
                                                             -------------  -------------


Current Liabilities:                                                       
  Notes payable to affiliated companies...................           -             9,950
  Long-term debt--current portion.........................         70,000         20,000
  Accounts payable........................................          5,924          7,912
  Accounts payable to affiliated companies................            867          6,040
  Accrued interest........................................          2,987          3,025
  Accrued taxes...........................................            710           -
  Other...................................................            285          1,055
                                                             -------------  -------------
                                                                   80,773         47,982
                                                             -------------  -------------

Deferred Credits:                                            
  Accumulated deferred income taxes.......................        209,634        216,701
  Deferred obligation to affiliated company...............         22,728         32,472
  Other...................................................         22,822         22,782
                                                             -------------  -------------
                                                                  255,184        271,955
                                                             -------------  -------------


Commitments and Contingencies (Note 7)


                                                             -------------  -------------
           Total Capitalization and Liabilities...........   $    945,153   $  1,014,639
                                                             =============  =============
</TABLE>                                                                   
See accompanying notes to financial statements.                            






NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME

<TABLE>
<CAPTION>


------------------------------------------------------------------------------------
For the Years Ended December 31,                       1998       1997       1996
------------------------------------------------------------------------------------
                                                         (Thousands of Dollars)

<S>                                                   <C>        <C>        <C>
Operating Revenues................................. $ 276,685  $ 192,381  $ 162,152
                                                    ---------- ---------- ----------
Operating Expenses:                                 
  Operation --                                      
     Fuel..........................................    13,305     13,405     15,013
     Other.........................................    36,763     39,091     35,268
  Maintenance......................................    14,120     24,146      9,154
  Depreciation.....................................    25,381     25,170     24,056
  Amortization of regulatory assets, net...........    85,464      6,270       (912)
  Federal and state income taxes...................    36,194     14,845     12,341
  Taxes other than income taxes....................    11,401     12,393     12,343
                                                    ---------- ---------- ----------
        Total operating expenses...................   222,628    135,320    107,263
                                                    ---------- ---------- ----------
Operating Income...................................    54,057     57,061     54,889
                                                    ---------- ---------- ----------
                                                    
Other Income:                                      
  Deferred Seabrook return--other funds............     6,731      7,205      7,700
  Other, net.......................................    (8,435)      (747)     1,200
  Income taxes.....................................    14,378      4,394      5,052
                                                    ---------- ---------- ----------
        Other income, net..........................    12,674     10,852     13,952
                                                    ---------- ---------- ----------
        Income before interest charges.............    66,731     67,913     68,841
                                                    ---------- ---------- ----------
Interest Charges:                                   
  Interest on long-term debt.......................    50,082     50,722     52,414
  Other interest...................................      (676)       649       (697)
  Deferred Seabrook return--borrowed funds.........   (12,169)   (13,411)   (14,948)
                                                    ---------- ---------- ----------
        Interest charges, net......................    37,237     37,960     36,769
                                                    ---------- ---------- ----------
                                                     
Net Income......................................... $  29,494  $  29,953  $  32,072
                                                    ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.






NORTH ATLANTIC ENERGY CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
For the Years Ended December 31,                                   1998        1997        1996
--------------------------------------------------------------------------------------------------
                                                                      (Thousands of Dollars)
<S>                                                               <C>         <C>         <C>
Operating Activities:
  Net Income.................................................. $   29,494  $   29,953  $   32,072
  Adjustments to reconcile to net cash                          
   from operating activities:
    Depreciation..............................................     25,381      25,170      24,056
    Amortization of nuclear fuel..............................     10,453      10,705      11,668
    Deferred income taxes and investment tax credits, net.....      6,010      22,649      15,749
    Deferred return - Seabrook................................    (18,900)    (20,616)    (22,648)
    Amortization of nuclear plants return.....................     86,376       7,182        -
    Amortization of other regulatory assets...................       (912)       (912)       (912)
    Amortization of deferred obligation to affiliated company.     (9,744)       (812)       -
    Sale of Seabrook 2 steam generator........................       -           -         20,931
    Other sources of cash.....................................     24,643      12,776      10,087
    Other uses of cash........................................     (6,429)     (9,406)     (2,582)
  Changes in working capital:                                   
    Receivables...............................................      1,891      (9,273)      2,270
    Materials and supplies....................................        191          90        (824)
    Accounts payable..........................................     (7,161)    (11,835)     19,509
    Accrued taxes.............................................        710      (3,486)      2,140
    Other working capital (excludes cash).....................    (13,258)      3,429      (7,675)
                                                               ----------- ----------- -----------
Net cash flows from operating activities......................    128,745      55,614     103,841
                                                               ----------- ----------- -----------

Financing Activities:
  Net (decrease)/increase in short-term debt..................     (9,950)      7,450      (5,500)
  Reacquisitions and retirements of long-term debt............    (20,000)    (20,000)    (45,000)
  Cash dividends on common stock..............................    (45,000)    (25,000)    (38,000)
                                                               ----------- ----------- -----------
Net cash flows used for financing activities..................    (74,950)    (37,550)    (88,500)
                                                               ----------- ----------- -----------

Investment Activities:                                          
  Investment in plant:                                          
    Electric utility plant....................................     (9,028)     (6,606)     (5,921)
    Nuclear fuel..............................................     (6,474)     (6,147)    (15,752)
                                                               ----------- ----------- -----------
      Net cash flows used for investments in plant............    (15,502)    (12,753)    (21,673)
  Investment in NU system Money Pool..........................    (30,350)       -          2,500
  Investment in nuclear decommissioning trusts................     (7,885)     (5,597)     (4,404)
  Other investment activities, net............................          -        -            222
                                                               ----------- ----------- -----------
Net cash flows used for investments...........................    (53,737)    (18,350)    (23,355)
                                                               ----------- ----------- -----------
Net increase/(decrease) in cash for the period................         58        (286)     (8,014)
Cash - beginning of period....................................         13         299       8,313
                                                               ----------- ----------- -----------
Cash - end of period.......................................... $       71  $       13  $      299
                                                               =========== =========== ===========

Supplemental Cash Flow Information:                            
Cash paid/(refunded) during the year for:                      
  Interest, net of amounts capitalized........................ $   42,498  $   45,297  $   46,322
                                                               =========== =========== ===========
  Income taxes................................................ $   22,136  $     -     $  (13,160)
                                                               =========== =========== ===========



</TABLE>
See accompanying notes to financial statements. 







NORTH ATLANTIC ENERGY CORPORATION

STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------
                                                     Capital    Retained
                                           Common    Surplus,   Earnings
                                           Stock     Paid In      (a)      Total  
-----------------------------------------------------------------------------------
                                                   (Thousands of Dollars)

<S>                                              <C>  <C>       <C>        <C>
Balance at January 1, 1996 ............. $       1  $ 160,999  $ 59,677  $ 220,677
                                        
    Net income..........................                         32,072     32,072
    Cash dividends......................                        (38,000)   (38,000)
                                         ---------- ---------- --------- ----------
                                        
Balance at December 31, 1996............         1    160,999    53,749    214,749

    Net income..........................                         29,953     29,953
    Cash dividends......................                        (25,000)   (25,000)
                                         ---------- ---------- --------- ----------

Balance at December 31, 1997............         1    160,999    58,702    219,702

    Net income..........................                         29,494     29,494
    Cash dividends......................                        (45,000)   (45,000)
                                         ---------- ---------- --------- ----------

Balance at December 31, 1998............ $       1  $ 160,999  $ 43,196  $ 204,196
                                         ========== ========== ========= ==========



</TABLE>
(a) All retained earnings are available for distribution, plus an allowance of 
    $10 million. However, there is a 25% common equity ratio test that must be
    met in order to comply with the 1995 Term Credit Agreement maturing November
    2000. Therefore, the company can pay out all of its retained earnings plus a
    portion of the allowance. Currently there is $45.8 million available for
    dividends.

See accompanying notes to financial statements.






1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

       The NU system furnishes franchised retail electric service in
       Connecticut, New Hampshire, and western Massachusetts through CL&P,
       PSNH and WMECO.  NAEC sells all of its entitlement to the capacity
       and output of the Seabrook nuclear power plant, (Seabrook or Seabrook
       1, a 1,148 megawatt nuclear generating unit) to PSNH under two life-
       of-unit full cost recovery contracts (the Seabrook Power Contracts).
       HWP is also engaged in the production and distribution of electric
       power.  The NU system also furnishes firm and other wholesale
       electric services to various municipalities and other utilities,
       and participates in limited retail access programs, providing off-
       system retail electric service.  The NU system serves in excess of 30
       percent of New England's electric needs and is one of the 24 largest
       electric utility systems in the country as measured by revenues.

       NU is registered with the Securities and Exchange Commission (SEC)
       as a holding company under the Public Utility Holding Company Act
       of 1935 (1935 Act).  NU and its subsidiaries, including NAEC, are
       subject to the provisions of the 1935 Act. Arrangements among the
       NU system 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. NAEC is subject to further
       regulation for rates, accounting and other matters by the FERC
       and/or applicable state regulatory commissions.

       Other wholly owned subsidiaries of NU provide support services for
       the NU system companies and, in some cases, for other New England
       utilities.  Northeast Utilities Service Company (NUSCO) provides
       centralized accounting, administrative, information resources,
       engineering, financial, legal, operational, planning, purchasing and
       other services to the NU system companies.  North Atlantic Energy
       Service Corporation (NAESCO) acts as agent for NAEC and CL&P and has
       operational responsibility for Seabrook.  Northeast Nuclear Energy
       Company (NNECO) acts as agent for the NU system companies and other
       New England utilities in operating the Millstone nuclear generating
       facilities.

       During the first quarter of 1999, NU established three new
       subsidiaries: NU Enterprises, Inc., Northeast Generation Company,
       and Northeast Generation Services Company.  Directly or through
       multiple subsidiaries, these entities will engage in a variety of
       energy-related activities, including the acquisition and management
       of non-nuclear generating plants.

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

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

       All transactions among affiliated companies are on a recovery of cost
       basis which may include amounts representing a return on equity and
       are subject to approval by various federal and state regulatory
       agencies.

    C. New Accounting Standards
       The Financial Accounting Standards Board (FASB) issued a new
       accounting standard during 1998:  Statement of Financial Accounting
       Standards (SFAS) 133, "Accounting for Derivative Instruments and
       Hedging Activities."

       SFAS 133 establishes accounting and reporting standards for
       derivative instruments and hedging activities.  This statement
       becomes effective for NAEC on January 1, 2000 and will require
       derivative instruments used by NAEC to be recognized on the balance
       sheets as assets or liabilities at fair value.  NAEC uses derivative
       instruments for hedging purposes.  The accounting for these hedging
       instruments will depend on which hedging classification each
       derivative instrument falls under, as defined by SFAS 133, offset 
       by any changes in the market value of the hedged item.

       Based on the derivative instruments which are currently being
       utilized by NAEC to hedge some of its interest-rate risks, there will
       be an impact on earnings upon adoption of SFAS 133 which management
       cannot estimate at this time.  For further information regarding
       derivative instruments, see Note 8, "Market Risk-Management."

    D. Jointly Owned Electric Utility Plant
       NAEC has a 35.98 percent joint-ownership interest in Seabrook which
       includes the 0.4 percent ownership interest in Seabrook 1 which
       NAEC acquired from Vermont Electric Generation and Transmission 
       Cooperative in February 1994.  NAEC sells all of its entitlement
       to the capacity and output of the Seabrook nuclear generating unit
       to PSNH under the Seabrook Power Contracts.  

       As of December 31, 1998 and 1997, plant-in-service included
       approximately $721.2 million and $723.2 million, respectively,
       and the accumulated provision for depreciation included approximately
       $130.7 million and $116.1 million, respectively, for NAEC's share of
       Seabrook 1.  NAEC's share of Seabrook 1 expenses is included in the
       corresponding operating expenses on the accompanying Statements of
       Income.

    E. Depreciation
       The provision for depreciation is calculated using the straight-line
       method based on estimated remaining lives of depreciable utility
       plant-in-service, adjusted for salvage value and removal costs, as
       approved by the appropriate regulatory agency. Except for major
       facilities, depreciation rates are applied to the average plant-in
       service during the period.  Major facilities are depreciated from the
       time they are placed in service.  When plant is retired from service,
       the original cost of plant, including costs of removal, less salvage,
       is charged to the accumulated provision for depreciation. The costs
       of closure and removal of non-nuclear facilities are accrued over the
       life of the plant as a component of depreciation.  The depreciation
       rates for the several classes of electric plant-in-service are
       equivalent to a composite rate of 3.5 percent in 1998 and 1997, and
       3.4 percent in 1996. See Note 2, "Nuclear Decommissioning" for
       additional information on nuclear plant decommissioning.

    F. Seabrook Power Contracts
       PSNH and NAEC have entered into the Seabrook Power Contracts which
       obligate PSNH to purchase NAEC's 35.98 percent ownership of the
       capacity and output of Seabrook 1 for the term of Seabrook 1's
       Nuclear Regulatory Commission (NRC) operating license.  Under these
       contracts, PSNH is obligated to pay NAEC's cost of service during
       this period, regardless if Seabrook 1 is operating.  NAEC's cost of
       service includes all of its Seabrook-related costs, including
       operation and maintenance (O&M) expenses, fuel expense, income and
       property tax expense, depreciation expense, certain overhead and
       other costs and a return on its allowed investment.

       The Seabrook Power Contracts established the value of the initial
       investment in Seabrook (initial investment) at $700-million.  As
       prescribed by the 1989 rate agreement between NU, PSNH, the State of
       New Hampshire (Rate Agreement), as of May 1, 1996, NAEC phased into
       rates 100 percent of the recoverable portion of its investment in
       Seabrook 1. From June 5, 1992 (the date NU acquired PSNH and NAEC
       acquired Seabrook 1 from PSNH - the Acquisition Date) through
       November 1997, NAEC recorded $203.9 million of deferred return on its
       investment in Seabrook 1. At November 30, 1997, NAEC's utility plant
       included $84.1 million of deferred return that was transferred as
       part of the Seabrook plant assets to NAEC on the Acquisition Date.

       Beginning on December 1, 1997, the deferred return, including the
       portion transferred to NAEC began to be billed through the Seabrook
       Power Contracts to PSNH, and will be fully recovered from customers
       by May 2001. NAEC is depreciating its initial investment over the
       term of Seabrook 1's operating license (39 years), and any subsequent
       plant additions are depreciated on a straight-line basis over the
       remaining term of the Seabrook Power Contracts at the time the
       subsequent additions are placed in service.

       If Seabrook 1 is shut down prior to the expiration of the NRC
       operating license, PSNH will be unconditionally required to pay NAEC
       termination costs for 39 years, less the period during which Seabrook
       1 has operated.  These termination costs will reimburse NAEC for its
       share of Seabrook 1 shut-down and decommissioning costs, and will
       pay NAEC a return of and on any undepreciated balance of its initial
       investment over the remaining term of the Seabrook Power Contracts,
       and the return of and on any capital additions to the plant made
       after the Acquisition Date over a period of five years after shut
       down (net of any tax benefits to NAEC attributable to the
       cancellation).

    G. Regulatory Accounting and Assets
       The accounting policies of the company and the accompanying financial
       statements conform to generally accepted accounting principles
       applicable to rate-regulated enterprises and reflect the effects of
       the ratemaking process in accordance with SFAS 71, "Accounting for
       the Effects of Certain Types of Regulation." Assuming a cost-of-
       service based regulatory structure, regulators may permit incurred
       costs, normally treated as expenses, to be deferred and recovered
       through future revenues.  Through their actions, regulators also may
       reduce or eliminate the value of an asset, or create a liability.  If
       any portion of the company's operations were no longer subject to the
       provisions of SFAS 71, the company would be required to write off all
       of its related regulatory assets and liabilities unless there is a
       formal transition plan which provides for the recovery, through
       established rates, for the collection of these costs through a
       portion of the business which would remain regulated on a cost-of-
       service basis. At the time of transition, NAEC would be required to
       determine any impairment to the carrying costs of deregulated plant
       and inventory assets.

       The issue of restructuring the electric utility industry in New
       Hampshire is currently the focus of negotiations and proceedings
       within the federal and state legal systems. The outcome of these
       court proceedings will impact NAEC due to NAEC's contractual
       relationship with PSNH through the Seabrook Power Contracts.
       Management continues to believe that NAEC's use of regulatory
       accounting emains appropriate while this issue remains in
       litigation.

       For further information on NAEC's regulatory environment and the
       potential impacts of restructuring, see Note 7A, "Commitments and
       Contingencies - Restructuring," and Management's Discussion and
       Analysis of Financial Condition and Results of Operations (MD&A).

       Based on a current evaluation of the various factors and conditions
       that are expected to impact future cost recovery, management
       continues to believe it is probable that the operating companies,
       including NAEC, will recover their investments in long-lived assets,
       including regulatory assets. The components of NAEC's regulatory
       assets are as follows:


       At December 31,                               1998        1997
                                                  (Thousands of Dollars)
        
       Deferred costs-Seabrook 1 
         (Note 1J)...........................      $147,169    $199,753
       Income taxes, net (Note 1H)...........        39,472      48,736
       Recoverable energy costs (Note 1I)....         1,878       2,057
       Unamortized loss on reacquired
         debt................................        11,363      18,938
                                                   $199,882    $269,484

    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 ratemaking
       treatment of the applicable regulatory commissions. See Note 5,
       "Income Tax Expense" for the components of income tax expense.

       The tax effect of temporary differences, including timing differences
       accrued under previously approved accounting standards, which give
       rise to the accumulated deferred tax obligation is as follows:
       
       
       At December 31,                               1998        1997    
                                                  (Thousands of Dollars)

       Accelerated depreciation and
         other plant-related differences.....      $182,170    $159,251
       Regulatory assets - income tax
         gross up............................        13,640      17,094
       Other.................................        13,824      40,356
                                                   $209,634    $216,701

    I. Recoverable Energy Costs
       Under the Energy Policy Act of 1992 (Energy Act), NAEC is assessed
       for its proportionate share of the costs of decontaminating and
       decommissioning uranium enrichment plants owned by the United States
       Department of Energy (D&D assessment).  The Energy Act requires that
       regulators treat D&D assessments as a reasonable and necessary
       current cost of fuel, to be fully recovered in rates, like any other
       fuel cost.  NAEC is currently recovering these costs through the
       Seabrook Power Contracts. As of December 31, 1998, NAEC's total D&D
       deferral was approximately $1.9 million.

    J. Deferred Cost - Seabrook 1
       Under the Rate Agreement, the plant costs of Seabrook were phased
       into rates over a seven-year period beginning May 15, 1991.  Total
       costs deferred under the phase-in plan were approximately $288
       million.  This plan is in compliance with SFAS 92, "Regulated
       Enterprises - Accounting for Phase-In Plans."  These deferred costs
       are being billed to PSNH by NAEC through the Seabrook Power Contracts
       beginning December 1, 1997, and will be fully recovered from PSNH by
       NAEC through the Seabrook Power Contracts beginning December 1, 1997,
       and will be fully recovered from PSNH's customers by May 2001.  See
       Note 1F, "Summary of Significant Accounting Policies - Seabrook
       Power Contracts," for terms of Seabrook 1's phase-in. See Note 7A,
       "Commitments and Contingencies - Restructuring" for the possible
       impacts of the NHPUC's decision related to industry restructuring.

    K. Market Risk-Management Policies
       NAEC utilizes market risk-management instruments to hedge well-
       defined risks associated with variable interest rates.  To qualify
       for hedge treatment, the underlying hedged item must expose the
       company to risks associated with market fluctuations and the market
       risk-management instrument used must be designated as a hedge and
       must reduce the company's exposure to market fluctuations throughout
       the period.

       Amounts receivable or payable under interest-rate management
       instruments are accrued and offset against interest expense. For
       further information, see Note 8, "Market Risk-Management."

2.  NUCLEAR DECOMMISSIONING

    The Seabrook 1 nuclear power plant has a service life that is expected to
    end in the year 2026.  Upon retirement, this unit must be decommissioned.
    A current decommissioning study concluded that complete and immediate
    dismantlement at retirement continues to be the most viable and economic
    method of decommissioning Seabrook 1. Decommissioning studies are
    reviewed and updated periodically to reflect changes in decommissioning
    requirements, costs, technology and inflation.

    NAEC's 35.98 percent ownership of the estimated costs of decommissioning
    Seabrook 1, in year-end 1998 dollars, is $175.9 million. Seabrook 1
    decommissioning costs will be increased annually by an escalation rate.
    Nuclear decommissioning costs are accrued over the expected service life
    of the unit and are included in depreciation expense on the Statements of
    Income. Nuclear decommissioning costs amounted to $4.7 million in 1998,
    $4.5 million in 1997 and $3.5 million in 1996.  Nuclear decommissioning,
    as  a cost of removal, is included in the accumulated provision for
    depreciation on the Balance Sheets.  At December 31, 1998 and 1997, the
    balance in the accumulated reserve for depreciation amounted to $25.6
    million and $21.1 million, respectively.

    Under the terms of the Rate Agreement, PSNH is obligated to pay NAEC's
    share of Seabrook 1's decommissioning costs, even if the unit is shut
    down prior to the expiration of its operating license. NAEC's portion
    of the cost of decommissioning Seabrook 1 is paid to an independent
    decommissioning financing fund managed by the state of New Hampshire.
    Funding of the estimated decommissioning costs assumes escalated
    collections for Seabrook 1 and after-tax earnings on the Seabrook
    decommissioning fund of 6.5 percent.

    As of December 31, 1998, NAEC (including payments made prior to the
    Acquisition Date by PSNH) had paid approximately $25.6 million into
    Seabrook 1's decommissioning financing fund.  Earnings on the
    decommissioning financing fund increase the decommissioning trust
    balance and the accumulated reserve for depreciation.  Unrealize
    gains and losses associated with the decommissioning financing fund
    also impact the balance of the trust and the accumulated reserve
    for depreciation.  The fair value of the amounts in the external
    decommissioning trusts was $35.2 million as of December 31, 1998.

    Changes in requirements or technology, the timing of funding or
    dismantling, or adoption of a decommissioning method other than immediate
    dismantlement would change decommissioning cost estimates and the amounts
    required to be recovered.  PSNH attempts to recover sufficient amounts
    through its allowed rates to cover NAEC's expected decommissioning costs.
    Only the portion of currently estimated total decommissioning cost that
    has been accepted by regulatory agencies is reflected in PSNH's rates.
    Based on present estimates and assuming Seabrook 1 operates to the end of
    its licensing period, NAEC expects that the decommissioning financing
    fund will be substantially funded when Seabrook 1 is retired from
    service.

3.  SHORT-TERM DEBT

    The amount of short-term borrowings that may be incurred by NAEC is
    subject to periodic approval by either the SEC under the 1935 Act or by
    its state regulator.  Under the SEC restrictions, NAEC was authorized, as
    of January 1, 1999, to incur short-term borrowings up to a maximum of $60
    million.

    Money Pool:  Certain subsidiaries of NU, including NAEC, are members of
    the Northeast Utilities System Money Pool (Pool).  The Pool provides a
    more efficient use of the cash resources of the system, and reduces
    outside short-term borrowings.  NUSCO administers the Pool as agent for
    the member companies.  Short-term 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. However,
    borrowings based on loans from NU parent bear interest at NU parent's
    cost and must be repaid based upon the terms of NU parent's original
    borrowing. At December 31, 1998 and 1997, NAEC had no borrowings and
    $9.95 million, respectively, of borrowings outstanding from the Pool.
    The interest rate on borrowings from the Pool at December 31, 1998 and
    1997 was 5.8 percent, respectively.

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

4.  LONG-TERM DEBT

    Details of long-term debt outstanding are:

                                                     December 31,
                                                 1998            1997
                                                (Thousands of Dollars)
    First Mortgage Bonds:
      9.05% Series A, due 2002.............    $275,000        $295,000
    Notes:
      Variable - Rate Facility, due 2000...     200,000         200,000
    Less:  Amounts due within one year.....      70,000          20,000 
           Long-term debt, net.............    $405,000        $475,000


    Long-term debt maturities and cash sinking-fund requirements on debt
    outstanding at December 31, 1998 is $70 million for 1999, $270 million
    for 2000, $70 million for 2001, $65 million for 2002 and no requirements
    for the year 2003.

    Market risk-management instruments with financial institutions
    effectively fix the interest rate on NAEC's $200 million variable-rate
    bank note at 7.823 percent.  For more information on the interest-rate
    management instruments, see Note 8, "Market Risk- Management."

    The Series A Bonds are not redeemable prior to maturity except out of
    proceeds of sales of property subject to the lien of the Series A First
    Mortgage Bond Indenture (Indenture), at general redemption prices
    established by the Indenture, and out of condemnation or insurance
    proceeds and through the operation of the sinking fund. Essentially all
    of NAEC's utility plant is subject to the lien of its Indenture.


5.  INCOME TAX EXPENSE

    The components of the federal and state income tax provisions were
    charged as follows:


    For the Years Ended December 31,               1998      1997      1996
                                                    (Thousands of Dollars)
    Current income taxes:
      Federal................................    $15,206  $(11,889)  $(8,570)
      State..................................        600      (309)      110
        Total current........................     15,806   (12,198)   (8,460)

    Deferred income taxes, net:
      Federal................................      4,032    21,528    14,884
      State..................................      1,978     1,121       865
        Total deferred.......................      6,010    22,649    15,749

        Total income tax expense.............    $21,816   $10,451   $ 7,289

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


    For the Years Ended December 31,               1998      1997      1996    
                                                    (Thousands of Dollars)
    Income taxes charged to
      operating expenses.....................    $36,194   $14,845   $12,341
    Other income taxes.......................    (14,378)   (4,394)   (5,052)
      Total income tax expense...............    $21,816   $10,451   $ 7,289

    Deferred income taxes are comprised of the tax effects of temporary
    differences as follows:


    For the Years Ended December 31,               1998      1997      1996
                                                    (Thousands of Dollars)

    Depreciation.............................    $ 21,828  $20,823   $12,730
    Bond redemptions.........................      (2,824)  (2,351)   (2,359)
    Seabrook 1 deferred return...............     (14,233)   3,338     5,438
    Other....................................       1,239      839       (60)
      Deferred income taxes, net.............    $  6,010  $22,649   $15,749



    A reconciliation between income tax expense and the expected tax expense
    at the applicable statutory rate is as follows:
    
    For the Years Ended December 31,               1998      1997      1996    
                                                    (Thousands of Dollars)

    Expected federal income tax
      at 35 percent of
      pretax income..........................    $17,959   $14,141   $13,776
    Tax effect of differences:
      Amortization of regulatory
        assets...............................      7,077      (319)     -
      Depreciation...........................        949    (1,049)   (1,343)
      Deferred Seabrook 1 return.............     (2,356)   (2,522)   (2,695)
      State income taxes,
        net of federal benefit...............      1,657       718       634
      Allocation of Parent
        Company's loss.......................     (3,874)     (615)     (578)
    Sale of Seabrook 2 steam
      generator..............................       -         -       (2,516)
    Other, net...............................        404        97        11
    Total income tax expense.................    $21,816   $10,451   $ 7,289


6.  DEFERRED OBLIGATION TO AFFILIATED COMPANY

    At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance
    with the phase-in under the Rate Agreement, it began accruing a deferred
    return on the unphased-in portion of its Seabrook 1 investment.  From
    May 16, 1991 to the Acquisition Date, PSNH accrued a deferred return
    of $50.9 million.  On the Acquisition Date, PSNH transferred the
    $50.9 million deferred return to NAEC as part of the Seabrook-related
    assets.

    At the time PSNH transferred the deferred return to NAEC, it realized,
    for income tax purposes, a gain that is deferred under the consolidated
    income tax rules.  Beginning December 1, 1997, this gain is being
    restored for income tax purposes as the deferred return of $50.9 million,
    and the associated income taxes of $33.2 million, are collected by NAEC
    through the Seabrook Power Contracts.  As NAEC recovers the $33.2 million
    in years eight through ten of the Rate Agreement, it will be obligated to
    make corresponding payments to PSNH.
 
    See Note 1F, "Seabrook Power Contracts" for further information on the
    phase-in of the Seabrook power plant and see Note 7A, "Commitments and
    Contingencies - Restructuring" for the possible impacts on NAEC from the
    NHPUC's decision related to industry restructuring.


7.  COMMITMENTS AND CONTINGENCIES

    A. Restructuring
       New Hampshire: In 1996, New Hampshire enacted legislation requiring a
       competitive electric industry beginning in 1998.  In February 1997,
       the NHPUC issued its restructuring order, which would have forced
       PSNH and NAEC to write off all of their regulatory assets, and
       possibly to seek protection under Chapter 11 of the bankruptcy laws.
       The amount of potential write-off which would have been triggered by
       the order is currently estimated to be in excess of $400 million,
       after taxes.

       Following  the issuance of these orders, PSNH immediately sought
       declaratory and injunctive relief on various grounds in federal
       district court and has received a preliminary injunction that freezes
       implementation of the NHPUC's restructuring orders.   Restructuring
       in New Hampshire has resulted in numerous subsequent proceedings
       within the federal and state legal systems.

       As the court proceedings are ongoing, PSNH continues to be involved
       in settlement discussions with representatives from the state of New
       Hampshire.  PSNH hopes to reach a settlement, which would include,
       among other things, recovery of regulatory assets and stranded
       costs, rate reductions, an auction of PSNH's generating units and
       securitization of PSNH's stranded costs.  If a settlement is not
       reached a trial is expected to begin mid to late 1999.
 
       As a result of the NHPUC decision and the potential consequences
       discussed above, the reports of our auditors on the individual        
       financial statements of PSNH and NAEC contain explanatory paragraphs.
       Those explanatory paragraphs indicate that a substantial doubt exists
       currently about the ability of PSNH and NAEC to continue as going
       concerns.

       Management believes that PSNH is entitled to full recovery of its
       prudently incurred costs, including regulatory assets and other
       stranded costs (such as its obligations to NAEC under the Seabrook
       Power Contracts).  It bases this belief both on the general nature of
       public utility industry cost-of-service based regulation and the
       specific circumstances of the resolution of PSNH's previous
       bankruptcy proceedings and its acquisition by NU, including the
       recoveries provided by the Rate Agreement and related agreements.

    B. Environmental Matters
       NAEC is subject to regulation by federal, state and local authorities
       with respect to air and water quality, the handling and disposal of
       toxic substances and hazardous and solid wastes, and the handling and
       use of chemical products.  NAESCO, on behalf of NAEC and the other
       Seabrook joint owners, has an active environmental auditing and
       training program and believes that it is in substantial compliance
       with current environmental laws and regulations.  However, the NU
       system is subject to certain pending enforcement actions and
       governmental investigations in the environmental area.  Management
       cannot predict the outcome of these enforcement actions and
       investigations.

       Environmental requirements could hinder future construction. Changing
       environmental requirements could also require extensive and costly
       modifications to NAEC's existing investment in Seabrook 1 and could
       raise operating costs significantly.  As a result, NAEC may incur
       significant additional environmental costs, greater than amounts
       included in cost of removal and other reserves, in connection with
       the generation of electricity and the storage, transportation, and
       disposal of by-products and wastes.  NAEC may also encounter
       significantly increased costs to remedy the environmental effects
       of prior waste handling activities. The cumulative long-term cost
       impact of increasingly stringent environmental requirements cannot
       be estimated accurately.

       NAEC cannot estimate the potential liability for future claims,
       including environmental remediation costs, that may be brought
       against it.  However, considering known facts, existing laws and
       regulatory practices, management does not believe the matters
       disclosed above will have a material effect on NAEC's financial
       position or future results of operations.

    C. Spent Nuclear Fuel Disposal Costs
       Under the Nuclear Waste Policy Act of 1982, NAEC must pay the United
       States Department of Energy (DOE) for the disposal of spent nuclear
       fuel and high-level radioactive waste. The DOE is responsible for the
       selection and development of repositories for, and the disposal of,
       spent nuclear fuel and high-level radioactive waste.  Fees for
       nuclear fuel burned on or after April 7, 1983, are billed currently
       to customers and paid to the DOE on a quarterly basis.
 
       The DOE was originally scheduled to begin accepting delivery of spent
       fuel in 1998.  However, delays in identifying a permanent storage
       site have continually postponed plans for the DOE's long-term storage
       and disposal site.   Extended delays or a default by the DOE could
       lead to consideration of costly alternatives.  The company has
       primary responsibility for the interim storage of its spent nuclear
       fuel.  Current capability to store spent fuel at Seabrook 1 is
       expected to have spent fuel storage capacity until at least 2010.
       Meeting spent fuel storage requirements beyond this period could
       require new and separate storage facilities, the costs for which have
       not been determined.

       In November 1997, the U.S. Court of Appeals for the D.C. Circuit
       ruled that the lack of an interim storage facility does not excuse
       the DOE from meeting its contractual obligation to begin accepting
       spent nuclear fuel no later than January 31, 1998.  The 1997 ruling
       by the appeals court said, however, that the 1982 federal law could
       not require the DOE to accept waste when it did not have a suitable
       storage facility.  The court directed the plaintiffs to pursue relief
       under the terms of their contracts with the DOE.  Based on this
       ruling, since the DOE did not take the spent nuclear fuel as
       scheduled, it may have to pay contract damages.

       In May 1998, the same court denied petitions from 60 states and state
       agencies, collectively, and 41 utilities, including the company,
       asking the court to compel the DOE to submit a program, beginning
       immediately, for disposing of spent nuclear fuel.  The petitions were
       filed after the DOE defaulted on its January 31, 1998 obligation to
       begin accepting the fuel.  The court directed the company and other
       plaintiffs to pursue relief under the terms of their contracts with
       the DOE.

       In a petition filed in August 1998, the court's May 1998 decision was
       appealed to the U.S. Supreme Court.  In November 1998, the Supreme
       Court declined to review the lower court ruling that said utilities
       should go to court and seek monetary damages from the DOE.  The
       ultimate outcome of this legal proceeding is uncertain at this time.

    D. Nuclear Insurance Contingencies
       Under certain circumstances, in the event of a nuclear incident at
       one of the nuclear facilities in the country covered by the federal
       government's third-party liability indemnification program, an owner
       of a nuclear unit could be assessed in proportion to its ownership
       interest in each of its nuclear units up to $83.9 million.  Payments
       of this assessment would be limited to, in proportion to its
       ownership interest in  each of its nuclear units, $10.0 million in
       any one year per nuclear incident. In addition, if the sum of all
       claims and costs from any one nuclear incident exceeds the maximum
       amount of financial protection, the owner would be subject to an
       additional five percent or $4.2 million, in proportion to its
       ownership interests in each of its nuclear units. Based upon its
       ownership interest in Seabrook 1, NAEC's maximum liability, including
       any additional assessments, would be $31.3 million per incident, of
       which payments would be limited to $3.6 million per year.

       Insurance has been purchased to cover the primary cost of repair,
       replacement or decontamination of utility property resulting from
       insured occurrences at Seabrook station.  NAEC is subject to
       retroactive assessments if losses exceed the accumulated funds
       available to the insurer. The maximum potential assessment against
       NAEC with respect to losses arising during the current policy year
       is approximately $2.0 million.

       Insurance has been purchased to cover certain extra costs of repair,
       replacement or decontamination or premature decommissioning of
       utility property resulting from insured occurrences.  NAEC is subject
       to retroactive assessments if losses exceed the accumulated funds
       available to the insurer. The maximum potential assessment against
       NAEC with respect to losses arising during current policy years is
       approximately $3.2 million. The cost of a nuclear incident could
       exceed available insurance proceeds.

       Insurance has been purchased aggregating $200 million on an industry
       basis for coverage of worker claims.

       Under the terms of the Seabrook Power Contracts, any nuclear
       insurance assessments described above would be passed on to PSNH as
       a "cost of service."

    E. Seabrook 1 Construction Program
       The construction program for Seabrook 1 is subject to periodic review
       and revision by management.  NAEC currently forecasts construction
       expenditures for its share of Seabrook 1 to be $27.3 million for the
       years 1999-2003, including approximately $8.2 million for 1999.  In
       addition, NAEC estimates that its share of Seabrook 1 nuclear fuel
       requirements will be approximately $53.7 million for the years 1999-
       2003, including $1.6 million for 1999.

8.  MARKET RISK-MANAGEMENT

    NAEC uses swap instruments with financial institutions to hedge against
    interest-rate risk associated with its $200 million variable rate bank
    note.  The interest-rate management instruments employed eliminate the
    exposure associated with rising interest rates, and effectively fix the
    interest rate for this borrowing arrangement.  Under the agreements, NAEC
    exchanges quarterly payments based on a differential between a fixed
    contractual interest rate and the three-month LIBOR rate at a given time.
    As of December 31, 1998, NAEC had outstanding agreements with a total
    notional value of $200 million and a negative mark-to-market position of
    approximately $2.3 million.

    Credit Risk:  These agreements have been made with various financial
    institutions, each of which is rated "A3" or better by Moody's rating
    group.  NAEC will be exposed to credit risk on its respective market
    risk-management instruments if the counterparties fail to perform their
    obligations. However, management anticipates that the counterparties will
    be able to fully satisfy their obligations under the agreements.

9.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

    Cash and cash equivalents:  The carrying amounts approximate fair value
    due to the short-term nature of cash and cash equivalents.

    Nuclear decommissioning trust:  The investments held in NAEC's nuclear
    decommissioning fund were adjusted to market by approximately $2.3
    million as of December 31, 1998 and by approximately $1.5 million as
    of December 31, 1997 with corresponding offsets to the accumulated
    provision for depreciation.  The amounts adjusted in 1998 and 1997
    represent cumulative gross unrealized holding gains.  The cumulative
    gross unrealized holding losses were immaterial for 1998 and 1997.

    Long-term debt:  The fair value of NAEC's fixed-rate security is based
    upon the quoted market price for that issue or similar issue. The
    adjustable rate security is assumed to have a fair value equal to its
    carrying value.

    The carrying amounts of NAEC's financial instruments and the estimated
    fair values are as follows:


                                             Carrying        Fair
    At December 31, 1998                      Amount         Value
                                             (Thousands of Dollars)

    First mortgage bonds.................    $275,000       $284,543
    Other long-term debt.................    $200,000       $200,000
    
    
                                             Carrying        Fair
    At December 31, 1997                      Amount         Value
                                             (Thousands of Dollars)

    First mortgage bonds.................    $295,000       $301,599
    Other long-term debt.................    $200,000       $200,000
    


    The fair values shown above have been reported to meet the disclosure
    requirements and do not purport to represent the amounts at which those
    obligations would be settled.


10. NUCLEAR PERFORMANCE

    For information on nuclear performance related to the Seabrook nuclear
    power plant, see the MD&A.




To the Board of Directors
  of North Atlantic Energy Corporation:


We have audited the accompanying balance sheets of North Atlantic Energy
Corporation (a New Hampshire corporation and a wholly owned subsidiary of
Northeast Utilities) as of December 31, 1998 and 1997, and the related
statements of income, common stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998.  These financial
statements are the responsibility of the company's management.  Our
responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North Atlantic Energy
Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
company will continue as a going concern.  As discussed in Note 7A, on
February 28, 1997, the State of New Hampshire Public Utilities Commission
(the NHPUC) issued an order outlining its final plan to restructure the
electric utility industry.  The final plan announced a departure from cost-
based ratemaking for Public Service Company of New Hampshire (PSNH).  PSNH
is the sole customer of the company.  The final plan, if implemented, would
require PSNH to discontinue the application of Financial Accounting Standard
No. 71, "Accounting for the Effects of Certain Types of Regulation," (FAS
71). The effects of such a discontinuation would cause PSNH and the company
to be in technical default under their current financial covenants, which
would, if not waived or renegotiated, give rise to the rights of lenders to
accelerate the repayment of approximately $516 million of PSNH's indebtedness
and approximately $475 million of the company's indebtedness.  These conditions
raise substantial doubt about the company's ability to continue as a going
concern.  The financial statements referred to above do not include any
adjustments that might result from the outcome of this uncertainty.




                                                 /s/ ARTHUR ANDERSEN LLP

                                                     ARTHUR ANDERSEN LLP


Hartford, Connecticut
February 23, 1999




North Atlantic Energy Corporation

Management's Discussion and Analysis of Financial
Condition and Results of Operations


This section contains management's assessment of North Atlantic Energy
Corporation's (NAEC or the company) financial condition and the principal
factors having an impact on the results of operations. The company is a
wholly-owned subsidiary of Northeast Utilities (NU).  This discussion should
be read in conjunction with the company's financial statements and notes to
financial statements.

FINANCIAL CONDITION

Earnings Overview

NAEC's net income for 1998 was essentially unchanged. NAEC had net income of
approximately $29 million in 1998 compared to approximately $30 million in
1997.

The company's only assets are Seabrook and other Seabrook-related assets and
its only source of revenues are the power contracts between PSNH and the
company. PSNH's obligations under the Power Contracts are solely its own and
have not been guaranteed by NU. The Power Contracts contain no provisions
entitling PSNH to terminate its obligations. If, however, PSNH were to fail
to perform its obligation under the Power Contracts, the company would be
required to find other purchasers for Seabrook power.

Liquidity and Capital Resources

Net cash flows from operations totaled approximately $129 million in 1998,
up sharply from $56 million in 1997.  The increase resulted from the
recovery of the Seabrook deferred nuclear costs beginning in December 1997.
Approximately $54 million of net cash flow was used for investment activities,
including construction expenditures, investments in the NU system money pool
and investments in nuclear decommissioning trusts, compared with $18 million
in 1997.  Another  $45 million was used to pay common dividends, compared
with $25 million in 1997.  The balance of cash used for financing activities,
approximately $30 million, was used to pay off long-term and short-term debt.
In 1997 net debt and preferred stock levels were reduced by only $13 million.
     
PSNH Restructuring

Restructuring efforts in New Hampshire have resulted in numerous proceedings
within the federal and state court systems. The New Hampshire Public
Utilities Commission's (NHPUC) 1997 restructuring orders have been prevented
from being implemented as a result of various court actions pending the
outcome of a full trial in the U.S. District Court.  The 1997 orders would
have forced PSNH and NAEC to write off substantially  all of their regulatory
assets.  A trial is expected to begin in mid to late 1999.

In January 1999, the NHPUC issued an order stating that it intends to reopen
restructuring hearings.  PSNH has requested the federal court to enforce its
preliminary injunction barring the NHPUC from proceeding with restructuring
efforts pending the court's decision on the merits after trial.  The NHPUC
has agreed to delay this new proceeding until the federal court has had an
opportunity to rule on PSNH's enforcement motion.

The litigation has caused New Hampshire to fall behind several other
Northeast states in implementing industry restructuring.  PSNH hopes to
reach a settlement that would include, among other things, substantial rate
reductions, customer choice, an auction of PSNH's generating units and
securitization of PSNH's stranded costs.  PSNH believes that a negotiated
resolution of outstanding restructuring and rate issues would be in the best
interests of the state, PSNH and customers.

Seabrook Performance

Seabrook operated at a capacity factor of 82.8 percent through December 1998,
compared to 78.3 percent for the same period in 1997. The unit operated well,
except for two unplanned outages, one in late 1997 through early 1998 and the
other in mid-1998, to repair control building's air conditioning system.
Seabrook is scheduled to begin a refueling outage in March 1999.

Seabrook Decommissioning

NAEC's estimated cost to decommission its share of Seabrook is approximately
$175.9 million in year-end 1998 dollars.   These costs are being recognized
over the life of the unit with a portion currently being recovered through
PSNH's rates.  PSNH is obligated to pay NAEC's share of Seabrook's
decommissioning costs even if the unit is shut down prior to the expiration
of its license.  As of December 31, 1998, the market value of the
contributions already made to the decommissioning trusts, including their
investment returns, was approximately $35.2 million.

See the "Notes to Consolidated Financial Statements," Note 2, for further
information on nuclear decommissioning.

Year 2000 Issue

The NU system has established an action plan by which identified processes
must be completed by certain dates in order to ensure its operating systems,
including nuclear systems, and reporting systems are able to properly
recognize the year 2000.  This action plan has three phases: the inventory
phase, the detailed assessment phase and the remediation phase. The inventory
phase, which has been completed, identified operating and reporting systems
which may need to be fixed. The detailed assessment phase, which has been
completed, determined exactly what needed to be done in order to ensure that
the systems identified during the inventory phase are able to recognize
properly and process the year 2000. The final phase is the remediation phase.
By the end of this phase, mission critical systems   (systems that are
related to safety, keeping the lights on, regulatory requirements, and other
systems that could have a significant financial impact) will be year 2000
ready; that is, these systems will perform their business functions properly
in the year 2000.  This phase includes making modifications, testing and
validating changes and verifying that the year 2000 issues have been
resolved.

Although the identification and detailed assessment phases are complete,
newly identified items, such as new software purchases, are added to the
inventory as they are identified and are subject to detailed assessment
and, if needed, remediation.  NU system purchasing policies require newly
purchased software and devices to be year 2000 compliant. None of these
newly identified items are expected to materially impact completion of
the remediation phase.

The NU system has identified and inventoried 2,497 computer systems
(software) and over 24,000 devices (hardware) broken down into 3,450 device
types containing date-sensitive computer chips. As of December 31, 1998, 77
percent of the software systems and 81 percent of the hardware at Seabrook
were year 2000 ready.

The remaining items are in various stages of modification or testing.
Management anticipates the remediation phase for mission critical systems
to be completed by mid-1999.

In addition, the NU system has been contacting its key suppliers and
business partners to determine their ability to manage the year 2000
problem successfully. The NU system is adjusting its inventories, working
with suppliers to provide backup inventories, and changing suppliers as
needed to provide for an adequate supply of materials needed to conduct
business into the year 2000.

The NU system has utilized both internal and external resources to identify,
assess, test and reprogram or replace the computer systems for year 2000
readiness.  The current projected total cost of the Year 2000 Program to the
NU system is $30 million. The total estimated remaining cost is $18 million,
which is being funded through operating cash flows. The majority of these
costs will be expensed as incurred in 1999. Since 1996, the NU system has
incurred and expensed approximately $12 million related to Year 2000
readiness efforts. Total expenditures related to the year 2000 are not
expected to have a material effect on the operations or financial condition
of the NU system.

The costs of the project and the date on which the NU system plans to
complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third-
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those plans. If the NU system's remediation plans or
those of third parties are not successful, there could be a significant
disruption of the NU system's operations.   The most likely worst case
scenario is a limited number of localized interruptions to electric service
which can be restored within a few hours.  As a precautionary measure, NU is
formulating contingency plans that will evaluate alternatives that could be
implemented if our remediation efforts are not successful. The contingency
plans are being developed by enhancing existing emergency operating
procedures to include year 2000 issues.  In addition, the NU system plans
to have staff available to respond to any year 2000 situations that might
arise.  The contingency plan is expected to be available by July 30, 1999.

The NU system is committed to assuring that adequate resources are available
in order to implement any changes necessary for its nuclear and other
operations to be compatible with the new millennium.

Risk-Management Instruments

NAEC uses swaps to manage the market risk exposures associated with changes
in variable interest rates.  NAEC uses these instruments to reduce risk by
essentially creating offsetting market exposures. Based on the derivative
instruments which currently are being utilized by NAEC to hedge some of its
interest rate risks, there will be an impact on earnings upon adoption of
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, which management cannot
estimate at this time.  For more information on NU's use of risk-management
instruments, see the "Notes to Consolidated Financial Statements," Notes 1K
and 8.

NEAC holds a variable-rate long-term note, exposing the company to interest
rate risk.  In order to hedge some of this risk, interest rate risk-
management instruments have been entered into on NAEC's $200 million
variable-rate note, effectively fixing the interest on this note at 7.823
percent. As of December 31, 1998, NAEC had outstanding agreements with a
total notional value of approximately $200 million and a negative mark-to-
market position of approximately $2.3 million.

Environmental Matters

NAEC is potentially liable for environmental cleanup costs at a number
of sites inside and outside of its service territory. To date, the future
estimated environmental remediation liability has not been material with
respect to the earnings or financial position of the company.  See the "Notes
to Consolidated Financial Statements," Note 7B, for further information on
environmental matters.



RESULTS OF OPERATIONS

                                         Income Statement Variances
                                             Increase/(Decrease)
                                             Millions of Dollars

                                  1998 over/(under)1997   1997 over/(under)1996
                                     Amount   Percent        Amount   Percent

Operating revenues                    $84       44%           $30       19%

Other operation and
  maintenance expense                $(12)     (20%)          $20       45%
Amortization of Regulatory
  Assets, net                        $ 79        (a)          $ 6       (a)
Federal and State Income Taxes       $ 11        (a)          $ 3       43%   
Other, net                           $ (8)       (a)          $(2)      (a)


(a)  Percent greater than 100.

Operating Revenues

Operating revenues represent amounts billed to PSNH under the terms of the
Power Contracts and billings to PSNH for decommissioning expense.

Operating revenues increased in 1998 primarily due to amounts billed to PSNH
for the amortization of the Seabrook deferred return which began in December
1997.

Operating revenues increased in 1997 primarily due to higher operation and
maintenance expenses and the increased return associated with the phase-in of
the final 15 percent of the Seabrook plant investment in May, 1996.

Other Operation and Maintenance Expense

Other operation and maintenance expenses decreased in 1998 primarily due to
lower costs associated with Seabrook outages in 1998.

Other operation and maintenance expenses increased in 1997 primarily due to
higher costs associated with a planned refueling and unplanned  Seabrook
outages in 1997.

Amortization of Regulatory Assets, net

Amortization of Regulatory Assets, net increased in 1998 and 1997 primarily
due to the amortization of the Seabrook deferred return which began in
December 1997.

Federal and State Income Taxes

Federal and State income taxes increased in 1998 primarily due to higher
taxable income.

Federal and State income taxes increased in 1997 primarily due to deferred
tax benefits in 1996 associated with proceeds from the sale of the Seabrook
Unit 2 steam generators.

Other, net

Other, net income decreased in 1998 primarily due to the amortization of the
taxes associated with the Seabrook-phase-in costs which began in December
1997.

Other, net income decreased in 1997 primarily due to lower income from
temporary cash investments and the amortization of the Seabrook deferred
charges associated with the taxes on the purchased return.



North Atlantic Energy Corporation
                                                                               
SELECTED FINANCIAL DATA (a)    1998       1997       1996       1995     1994
                                             (Thousands of Dollars)

Operating Revenues.........  $276,685 $  192,381 $  162,152 $  157,183 $145,751

Operating Income...........  $ 54,057 $   57,061 $   54,889 $   51,394 $ 42,950

Net Income.................  $ 29,494 $   29,953 $   32,072 $   24,441 $ 30,535

Cash Dividends on
  Common Stock.............  $ 45,000 $   25,000 $   38,000 $   24,000 $ 10,000

Total Assets...............  $945,153 $1,014,639 $1,017,388 $1,014,649 $963,579

Long-Term Debt (b).........  $475,000 $  495,000 $  515,000 $  560,000 $560,000


STATISTICS (Unaudited)         1998       1997       1996       1995     1994
Gross Electric Utility
  Plant at December 31,
(Thousands of Dollars).....  $784,113 $  811,140 $  816,446 $  806,892 $792,880

kWh Sales (Millions) for
  the twelve month period
  ending December 31,......     3,018      2,859      3,542      3,016    2,229


STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) (Thousands of Dollars)
                                         Quarter Ended (a)
1998                         March 31   June 30    Sept. 30   Dec. 31

Operating Revenues.........  $68,169    $69,627    $69,087    $69,802

Operating Income...........  $13,648    $13,365    $13,159    $13,885

Net Income.................  $ 6,909    $ 8,303    $ 7,170    $ 7,112


1997

Operating Revenues.........  $41,976    $50,128    $45,943    $54,334

Operating Income...........  $14,406    $14,183    $14,124    $14,348

Net Income.................  $ 7,240    $ 6,958    $ 8,086    $ 7,669



(a)  Reclassifications of prior data have been made to conform with the current
     presentation.
(b)  Includes portion due within one year.