EXHIBIT 13.5
                               1996 Annual Report

                       North Atlantic Energy Corporation

                                     Index


Contents                                                                   Page


Balance Sheets..........................................................   2-3

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................................    23

Management's Discussion and Analysis of Financial
  Condition and Results of Operations...................................    25

Selected Financial Data.................................................    32

Statistics..............................................................    32

Statements of Quarterly Financial Data..................................    32

                                       

    
NORTH ATLANTIC ENERGY CORPORATION

BALANCE SHEETS
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
At December 31,                                                   1996           1995
-----------------------------------------------------------------------------------------
                                                                 (Thousands of Dollars)
<S>                                                             <C>            <C>
ASSETS
------

Utility Plant, at original cost:
  Electric................................................   $    775,794   $    771,794

     Less: Accumulated provision for                        
            depreciation (Note 1F)     ...................        124,530         99,772
                                                             -------------  -------------
                                                                  651,264        672,022
  Construction work in progress...........................          8,887          7,616
  Nuclear fuel, net.......................................         31,765         27,482
                                                             -------------  -------------
      Total net utility plant.............................        691,916        707,120
                                                             -------------  -------------

Other Property and Investments:                              
  Nuclear decommissioning trusts, at market...............         19,744         15,312
  Other, at cost..........................................           -               222
                                                             -------------  -------------
                                                                   19,744         15,534
                                                             -------------  -------------
Current Assets:                                              
  Cash....................................................            299          8,313
  Special deposits (Note 1M)..............................          7,039             71
  Notes receivable from affiliated companies..............           -             2,500
  Receivables from affiliated companies...................         16,422         18,692
  Materials and supplies, at average cost.................         13,093         12,269
  Prepayments and other...................................          4,302          4,157
                                                             -------------  -------------
                                                                   41,155         46,002
                                                             -------------  -------------
Deferred Charges:                                            
  Regulatory assets (Note 1H).............................        259,881        239,896
  Unamortized debt expense................................          4,692          5,619
  Other...................................................           -               478
                                                             -------------  -------------
                                                                  264,573        245,993
                                                             -------------  -------------

      Total Assets........................................   $  1,017,388   $  1,014,649
                                                             =============  =============




</TABLE>
The accompanying notes are an integral part of these financial statements.



NORTH ATLANTIC ENERGY CORPORATION

BALANCE SHEETS
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
At December 31,                                                   1996           1995
-----------------------------------------------------------------------------------------
                                                                 (Thousands of Dollars)
<S>                                                             <C>            <C>
CAPITALIZATION AND LIABILITIES
------------------------------

Capitalization:                                              
  Common stock--$1 par value. Authorized                     
   and outstanding 1,000 shares in 1996 and 1995..........   $          1   $          1
  Capital surplus, paid in................................        160,999        160,999
  Retained earnings.......................................         53,749         59,677
                                                             -------------  -------------
           Total common stockholder's equity..............        214,749        220,677
  Long-term debt..........................................        495,000        540,000
                                                             -------------  -------------
           Total capitalization...........................        709,749        760,677
                                                             -------------  -------------


Current Liabilities:                                                       
  Notes payable to affiliated company.....................          2,500          8,000
  Long-term debt--current portion.........................         20,000         20,000
  Accounts payable........................................         20,714          6,135
  Accounts payable to affiliated companies................          5,073            143
  Accrued interest........................................          2,888          3,452
  Accrued taxes...........................................          3,486          1,346
  Other...................................................            271            270
                                                             -------------  -------------
                                                                   54,932         39,346
                                                             -------------  -------------

Deferred Credits:                                            
  Accumulated deferred income taxes (Note 1I).............        196,650        179,135
  Deferred obligation to affiliated company (Note 6)......         33,284         33,284
  Other...................................................         22,773          2,207
                                                             -------------  -------------
                                                                  252,707        214,626
                                                             -------------  -------------

Commitments and Contingencies (Note 7)            

                                                             -------------  -------------
           Total Capitalization and Liabilities...........   $  1,017,388   $  1,014,649
                                                             =============  =============





</TABLE>                                                                   
The accompanying notes are an integral part of these financial statements.


NORTH ATLANTIC ENERGY CORPORATION

STATEMENTS OF INCOME
<TABLE>
<CAPTION>

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


<S>                                                   <C>        <C>        <C>
Operating Revenues................................. $ 162,152  $ 157,183  $ 145,751
                                                    ---------- ---------- ----------
Operating Expenses:                                  
  Operation --                                       
     Fuel..........................................    15,013     12,030      7,144
     Other.........................................    34,356     36,737     37,929
  Maintenance......................................     9,154     12,442     14,951
  Depreciation.....................................    24,056     23,406     22,959
  Federal and state income taxes (Note 5)..........    12,341     10,187      8,027
  Taxes other than income taxes....................    12,343     10,987     11,791
                                                    ---------- ---------- ----------
        Total operating expenses...................   107,263    105,789    102,801
                                                    ---------- ---------- ----------
Operating Income...................................    54,889     51,394     42,950
                                                    ---------- ---------- ----------
Other Income:                                      
  Deferred Seabrook return--other 
    funds (Note 1K)................................     7,700      9,405     12,951
  Other, net.......................................     1,200      1,556      1,272
  Income taxes--credit.............................     5,052      2,776      3,970
                                                    ---------- ---------- ----------
        Other income, net..........................    13,952     13,737     18,193
                                                    ---------- ---------- ----------
        Income before interest charges.............    68,841     65,131     61,143
                                                    ---------- ---------- ----------
Interest Charges:                                    
  Interest on long-term debt.......................    52,414     62,721     64,022
  Other interest...................................      (697)      (519)      (280)
  Deferred Seabrook return--borrowed 
    funds (Note 1K)................................   (14,948)   (21,512)   (33,134)
                                                    ---------- ---------- ----------
        Interest charges, net......................    36,769     40,690     30,608
                                                    ---------- ---------- ----------
                                                     
Net Income......................................... $  32,072  $  24,441  $  30,535
                                                    ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.


NORTH ATLANTIC ENERGY CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
For the Years Ended December 31,                                   1996        1995        1994
--------------------------------------------------------------------------------------------------
                                                                      (Thousands of Dollars)
<S>                                                             <C>         <C>         <C>
Operating Activities:
  Net Income.................................................. $   32,072  $   24,441  $   30,535
  Adjustments to reconcile to net cash                          
   from operating activities:
    Depreciation..............................................     24,056      23,406      22,959
    Amortization of nuclear fuel..............................     11,668       9,183       5,050
    Deferred income taxes and investment tax credits, net.....     15,749      46,114      34,449
    Deferred return - Seabrook................................    (22,648)    (30,917)    (46,085)
    Sale of Seabrook 2 steam generator........................     20,931        -           -
    Loss on reacquired debt...................................       -        (31,886)       -
    Other sources of cash.....................................      9,175       2,957       1,753
    Other uses of cash........................................     (2,582)     (3,375)     (2,842)
  Changes in working capital:                                   
    Receivables...............................................      2,270      (4,709)      9,998
    Materials and supplies....................................       (824)     (2,233)     (2,683)
    Accounts payable..........................................     19,509       2,167      (2,277)
    Accrued taxes.............................................      2,140         (93)      1,312
    Other working capital (excludes cash).....................     (7,675)    (12,161)      4,029
                                                               ----------- ----------- -----------
Net cash flows from operating activities......................    103,841      22,894      56,198
                                                               ----------- ----------- -----------

Financing Activities:
  Issuance of long-term debt..................................       -        225,000        -
  Net increase (decrease) in short-term debt..................     (5,500)      8,000        -
  Reacquisitions and retirements of long-term debt............    (45,000)   (225,000)       -
  Cash dividends on common stock..............................    (38,000)    (24,000)    (10,000)
                                                               ----------- ----------- -----------
Net cash flows used for financing activities..................    (88,500)    (16,000)    (10,000)
                                                               ----------- ----------- -----------

Investment Activities:                                          
  Investment in plant:                                          
    Electric utility plant....................................     (5,921)     (6,906)    (11,256)
    Nuclear fuel..............................................    (15,752)    (16,609)     (1,227)
                                                               ----------- ----------- -----------
  Net cash flows used for investments in plant................    (21,673)    (23,515)    (12,483)
  NU System Money Pool........................................      2,500      26,250     (28,750)
  Investment in nuclear decommissioning trusts................     (4,404)     (3,824)     (3,315)
  Other investment activities, net............................        222           0        (223)
                                                               ----------- ----------- -----------
Net cash flows used for investments...........................    (23,355)     (1,089)    (44,771)
                                                               ----------- ----------- -----------
Net Increase (Decrease) In Cash For The Period................     (8,014)      5,805       1,427
Cash - beginning of period....................................      8,313       2,508       1,081
                                                               ----------- ----------- -----------
Cash - end of period.......................................... $      299  $    8,313  $    2,508
                                                               =========== =========== ===========

Supplemental Cash Flow Information:                            
Cash paid (received) during the year for:                      
  Interest, net of amounts capitalized........................ $   46,322  $   73,923  $   64,056
                                                               =========== =========== ===========
  Income taxes................................................ $  (13,160) $  (36,679) $  (34,988)

                                                              =========== =========== ===========



</TABLE>
The accompanying notes are an integral part of these 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, 1994 ............. $       1  $ 160,999  $ 38,701  $ 199,701
                                        
    Net income for 1994.................                         30,535     30,535
    Cash dividends on common stock......                        (10,000)   (10,000)
                                         ---------- ---------- --------- ----------
                                        
Balance at December 31, 1994............         1    160,999    59,236    220,236
                                        
    Net income for 1995.................                         24,441     24,441
    Cash dividends on common stock......                        (24,000)   (24,000)
                                         ---------- ---------- --------- ----------

Balance at December 31, 1995............         1    160,999    59,677    220,677

    Net income for 1996.................                         32,072     32,072
    Cash dividends on common stock......                        (38,000)   (38,000)
                                         ---------- ---------- --------- ----------

Balance at December 31, 1996............ $       1  $ 160,999  $ 53,749  $ 214,749
                                         ========== ========== ========= ==========








</TABLE>
(a) All retained earnings are available for distribution, plus an allowance of 
    $10 million.




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


                                                                          

                                                                                
North Atlantic Energy Corporation
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 system) and are wholly-owned by
       Northeast Utilities (NU).

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

       Other wholly owned subsidiaries of NU provide support services for the
       system companies and, in some cases, for other New England utilities.
       Northeast Utilities Service Company (NUSCO) provides centralized
       accounting, administrative, information resources, engineering,
       financial, legal, operational, planning, purchasing, and other services
       to the system companies.  North Atlantic Energy Service Corporation
       (NAESCO) acts as agent for NAEC and CL&P and has operational
       responsibilities for the Seabrook 1 (Seabrook) nuclear generating
       facility.  Northeast Nuclear Energy Company (NNECO) acts as agent for
       CL&P, PSNH, and WMECO in operating the Millstone nuclear generating
       facilities.

                                       


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

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

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

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

     D.NEW ACCOUNTING STANDARDS
       The Financial Accounting Standards Board (FASB) has issued Statement of
       Financial Accounting Standards (SFAS) 121, "Accounting for the
       Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
       Of," which established accounting standards for evaluating and recording
       asset impairment.  The company adopted SFAS 121 as of January 1, 1996.
       See Note 1H, "Summary of Significant Accounting Policies - Regulatory
       Accounting and Assets" for further information on the regulatory impacts
       of the company's adoption of SFAS 121.

       See Note 7B, "Commitments and Contingencies - Environmental Matters,"
       for information on a newly issued accounting and reporting standard
       related to this area.

     E.JOINTLY OWNED ELECTRIC UTILITY PLANT
       NAEC has a 35.98 percent joint-ownership interest in Seabrook 1, a
       1,148-megawatt nuclear generating unit, including 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 share of the power generated by Seabrook 1 to PSNH
       under two long-term contracts (the Seabrook Power Contracts).  As of
       December 31, 1996 and 1995, plant-in-service  included approximately
       $718.7 million and $715.7 million, respectively, and the accumulated
       provision for depreciation included approximately $102.0 million and
       $82.2 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.

       For more information regarding Seabrook, see Note 10, "Nuclear
       Performance."

     F.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 depreciation rates for
       the several classes of electric plant-in-service are equivalent to a
       composite rate of 3.4 percent in 1996 and 3.3 percent in 1995 and 1994.
       See Note 2, "Nuclear Decommissioning," for additional information on
       nuclear plant decommissioning.

     G.SEABROOK POWER CONTRACTS
       PSNH and NAEC have entered into two power contracts that 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 with 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 December 31, 1996, NAEC recorded $185.1
       million of deferred return on its investment in Seabrook 1.  In
       addition, NAEC's utility plant includes $84.1 million of deferred return
       that was transferred as part of the Seabrook plant assets to NAEC on the
       Acquisition Date. The total deferred return, will be recovered from PSNH
       with carrying charges beginning December 1, 1997, and will be fully
       recovered 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).

       See Note 11, "Subsequent Event" for the possible impacts on NAEC and its
       Seabrook Power Contracts with PSNH, of the NHPUC's decision related to
       industry restructuring.

     H.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 may also reduce or
       eliminate the value of an asset, or create a liability.  If any portion
       of the company's operations were no longer subject to the provisions of
       SFAS 71, as a result of a change in the cost-of-service based regulatory
       structure or the effects of competition, the company would be required
       to write off related regulatory assets and liabilities.  The company
       continues to believe that its use of regulatory accounting remains
       appropriate.

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

       The components of NAEC's regulatory assets are as follows:


       At December 31,                                     1996         1995

                                                         (Thousands of Dollars)

       Deferred costs-Seabrook 1
         (Note 1K) ................................    $185,078     $162,430
       Income taxes, net (Note 1I).................      47,185       43,231
       Recoverable energy costs (Note 1J)..........       2,217        2,349
       Unamortized Loss on Reacquired 
         Debt......................................      25,401       31,886

                                                       $259,881     $239,896



       For more information on the company's regulatory environment and the
       potential impacts of restructuring, see Note 7A, "Commitments and
       Contingencies - Restructuring," Note 11, "Subsequent Event" and
       Management's Discussion and Analysis of Financial Condition and Results
       of Operations (MD&A).

     I.INCOME TAXES
       The tax effect of temporary differences (differences between the periods
       in which transactions affect income in the financial statements and the
       periods in which they affect the determination of taxable income) is
       accounted for in accordance with the ratemaking treatment of the
       applicable regulatory commissions.  The adoption of SFAS 109,
       "Accounting for Income Taxes," in 1993 increased the company's net
       deferred tax obligation.  As it is probable that the increase in
       deferred tax liabilities will be recovered through the Seabrook Power
       Contracts, NAEC established a regulatory asset. See Note 5, "Income Tax
       Expense" for the components of income tax expense.

       See Note 11, "Subsequent Event" for the possible impacts on PSNH and
       NAEC of the NHPUC decision related to industry restructuring.

       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,                                   1996           1995

                                                        (Thousands of Dollars)

       Accelerated depreciation and
         other plant-related differences .........    $136,234       $115,074
       Regulatory assets - income tax
         gross up ................................      16,516         15,131
       Other .....................................      43,900         48,930

                                                      $196,650       $179,135




     J.RECOVERABLE ENERGY COSTS
       Under the Energy Policy Act of 1992 (Energy Act), NAEC is assessed for
       its proportionate shares 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, 1996, the company's total D&D deferral was
       approximately $2.2 million.

       See Note 11, "Subsequent Event" for the possible impacts of the NHPUC's
       decision related to industry restructuring.


 .    K.DEFERRED COST - SEABROOK 1
       As prescribed by the Rate Agreement as of May 1, 1996, NAEC phased into
       rates 100 percent of the recoverable portion of its investment in
       Seabrook 1.  This plan is in compliance with SFAS 92, "Regulated
       Enterprises - Accounting for Phase-In Plans."  See Note 1G, "Summary of
       Significant Accounting Policies - Seabrook Power Contracts," for terms
       of Seabrook 1's phase-in.

       See Note 11, "Subsequent Event" for the possible impacts of the NHPUC's
       decision related to industry restructuring.

     L.INTEREST RATE MANAGEMENT
       The company utilizes interest rate management instruments to manage well
       defined interest rate risks.  Amounts receivable or payable under
       interest-rate management instruments are accrued and offset against
       interest expense.  Any material unrealized gains or losses on interest
       rate management instruments will be deferred until realized.  For
       further information, see Note 8, "Interest Rate Management."

     M.SPECIAL DEPOSITS
       There is approximately $7.0 million and $71 thousand, at December 31,
       1996 and 1995, respectively, in special deposits that will be used to
       fund NAEC's share of future Seabrook operational costs.

2. NUCLEAR DECOMMISSIONING
   The Seabrook 1 nuclear power plant has a service life that is expected to
   end in 2026.  Upon retirement, this unit must be decommissioned.  A 1996
   Seabrook decommissioning study concluded that complete and immediate
   dismantlement at retirement is 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 1996 dollars, is $162.1 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 $3.5 million in 1996, $3.0
   million in 1995, and $2.7 million in 1994. Nuclear decommissioning, as  a
   cost of removal, is included in the accumulated provision for depreciation
   on the Balance Sheets.  At December 31, 1996, the balance in the accumulated
   reserve for decommissioning amounted to $19.7 million.

   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
   of 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 assume escalated collections for Seabrook 1
   and after-tax earnings on the Seabrook decommissioning fund of 6.5 percent.

   As of December 31, 1996, NAEC (including payments made prior to the
   Acquisition Date by PSNH) had paid approximately $16.6 million into Seabrook
   1's decommissioning financing fund.  Earnings on the decommissioning
   financing fund increase the decommissioning financing fund balance and the
   accumulated reserve for decommissioning.  Unrealized gains and losses
   associated with the decommissioning financing fund also impact the balance
   of the fund and the accumulated reserve for decommissioning.

   Changes in requirements or technology, the timing of funding or dismantling,
   or adoption of a decommissioning method other than 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.

   Proposed Accounting:  The staff of the SEC has questioned certain of the
   current accounting practices of the electric utility industry, including the
   company, regarding the recognition, measurement and classification of
   decommissioning costs for nuclear generating units in the financial
   statements.  In response to these questions, FASB agreed to review the
   accounting for removal costs, including decommissioning, and issued a
   proposed statement entitled "Accounting for Liabilities Related to Closure
   or Removal of Long-Lived Assets," in February, 1996.  If current electric
   utility industry accounting practices for decommissioning are changed in
   accordance with the proposed statement: (1) annual provisions for
   decommissioning could increase, (2) the estimated cost for decommissioning
   could be recorded as a liability with an offset to plant rather than as part
   of accumulated depreciation, and (3) trust fund income from the external
   decommissioning trusts could be reported as investment income rather than as
   a reduction to decommissioning expense.

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, 1997, to incur short-term borrowings up to a maximum of $50 million.

   Money Pool:  NAEC is a limited participant in the Northeast Utilities System
   Money Pool (Pool).  As a limited participant, NAEC is limited to borrowing
   funds provided by NU parent.  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.  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, 1996 and 1995, NAEC had $2.5 million and $8.0 million,
   respectively  of borrowings outstanding from the Pool.  The interest rate on
   borrowings from the Pool at December 31, 1996 was 6.3 percent.
    
   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,

                                                           1996      1995

                                                      (Thousands of Dollars)
   First Mortgage Bonds:
    9.05% Series A, due 2002 ...................         $315,000     $335,000
   Notes:
     Variable - Rate Facility, due 2000 ........          200,000      225,000
   Less:  Amounts due within one year ..........           20,000       20,000

          Long-term debt, net ..................         $495,000     $540,000



   Long-term debt maturities and cash sinking-fund requirements on debt
   outstanding at December 31, 1996 for the years 1997 through 2001 are $20
   million annually for 1997-1998, $70 million in 1999, $270 million in 2000,
   and $70 million in 2001.

   Interest rate management instruments with financial institutions effectively
   fix the interest rate on NAEC's $200 million variable-rate bank note at 7.07
   percent as of February 21, 1997.   For more information on the interest-rate
   instruments, see Note 8, "Interest Rate 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 charged to
   operations are:



   For the Years Ended December 31,        1996        1995      1994 


                                               (Thousands of Dollars)
   Current income taxes:
     Federal .........................  $(8,570)    $(38,703)     $(30,553)
     State ...........................      110         -              161

       Total current .................   (8,460)     (38,703)      (30,392)
                                     
   Deferred income taxes, net:
    Federal ..........................   14,884       41,885        34,449
    State ............................      865        4,229          -
                                                                               
       Total deferred ................   15,749       46,114        34,449


       Total income tax expense ......  $ 7,289     $  7,411      $  4,057



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



   For the Years Ended December 31,        1996        1995           1994


                                               (Thousands of Dollars)
   Income taxes charged to operating
     expenses ......................... $12,341      $10,187      $  8,027
   Other income taxes .................  (5,052)      (2,776)       (3,970)

     Total income tax expense ........  $ 7,289      $ 7,411      $  4,057
                                        

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



   For the Years Ended December 31,        1996        1995           1994


                                               (Thousands of Dollars)
                                       
   Depreciation .....................   $12,730     $24,444        $22,783
   Alternative minimum tax ..........      -          -                 73
   Bond redemptions .................    (2,359)     12,087          -
   Seabrook 1 return ................     5,438       8,109         11,597
   Other ............................       (60)      1,474             (4)

       Deferred income taxes, net ...   $15,749     $46,114        $34,449




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


   For the Years Ended December 31,        1996        1995           1994


                                               (Thousands of Dollars)


   Expected federal income tax
     at 35 percent of
     pretax income  ................    $13,776     $11,148        $12,107
   Tax effect of differences:
     Depreciation ..................     (1,343)     (2,159)        (2,087)
     Deferred Seabrook 1 return ....     (2,695)     (3,292)        (4,533)
     State income taxes,
       net of federal benefit ......        634       2,749            104
   Sale of Seabrook 2 steam
     generator .....................     (2,516)       -              -
   Other, net ......................       (567)     (1,035)        (1,534)

   Total income tax expense ........    $ 7,289     $ 7,411        $ 4,057



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.  This gain will be restored for income tax purposes when 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.
   When NAEC recovers the $33.2 million in years eight through ten of the Rate
   Agreement, it is obligated to make corresponding payments to PSNH.

   See Note 11, "Subsequent Event" for the possible impacts on NAEC of the
   NHPUC's decision related to industry restructuring.

7. COMMITMENTS AND CONTINGENCIES

   A.RESTRUCTURING
       New Hampshire:  The 1996 restructuring legislation that the NHPUC is
       charged with implementing provides that the NHPUC may not adopt a
       restructuring plan that imposes a severe financial hardship on a
       utility.  NU management has testified that the implementation of certain
       methodologies would result in a significant loss to PSNH.  If these
       losses were to result in the triggering of acceleration rights that
       PSNH's creditors have and, if any single significant creditor demanded
       payment because of the triggering of acceleration rights, all other
       major creditors would immediately follow and PSNH and NAEC bankruptcy
       filings would be unavoidable.

       Management believes that PSNH is entitled to full recovery of its
       prudently incurred costs, including regulatory assets and stranded
       costs.  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.

       See Note 11, "Subsequent Event" for the possible impacts on NAEC of the
       NHPUC's decision related to industry restructuring.

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

       Environmental requirements could hinder 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 accurately be
       estimated.

       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.

       On October 10, 1996, the American Institute of Certified Public
       Accountants issued Statement of Position 96-1, "Environmental
       Remediation Liabilities" (SOP).  The principal objective of the SOP is
       to improve the manner in which existing authoritative accounting
       literature is applied by entities to specific situations of recognizing,
       measuring and disclosing environmental remediation liabilities.  The SOP
       became effective January 1, 1997.  The company believes that the
       adoption of this SOP will not have a material impact on the company's
       financial position or results of operations.

     C.NUCLEAR INSURANCE CONTINGENCIES
       Under certain circumstances, in the event of a nuclear incident at one
       of the nuclear facilities covered by the federal government's third-
       party liability indemnification program, the company could be assessed
       in proportion to its ownership interest in its nuclear unit.  Seabrook 1
       could be assessed up to $75.5 million, not to exceed $10.0 million per
       nuclear unit in any one year. Based on its ownership interest in
       Seabrook 1, NAEC's maximum liability, including any additional potential
       assessments, would be $28.5 million per incident.  Payments for NAEC's
       ownership interest would be limited to a maximum of $3.6 million per
       incident per year.

       Insurance has been purchased to cover the excess cost 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 assessments against NAEC with
       respect to losses arising during current policy years are approximately
       $5.3 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. All participating reactor operators
       insured under this coverage are subject to retrospective assessments of
       $3.0 million per reactor.  The maximum potential assessment against NAEC
       with respect to losses arising during the current policy period is
       approximately $1.1 million.

       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."
       
     D.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 $34.0 million for the
       years 1997-2001, including $9 million for 1997.  In addition, NAEC
       estimates that its share of Seabrook 1 nuclear fuel requirements will be
       $59.4 million for the years 1997-2001, including $15.3 million for 1997.

8. INTEREST RATE MANAGEMENT

   The company utilizes various financial instruments to manage well-defined
   interest rate risks.  The company does not use them for trading purposes.

   NAEC uses interest-rate management instruments with financial institutions
   to hedge against interest-rate risk associated with its $200 million
   variable-rate bank note.  Interest-rate management instruments minimize
   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, 1996, NAEC had outstanding agreements with a total
   notional value of approximately $200 million and a positive mark-to-market
   position of approximately $1.6 million.

   These agreements have been made with various financial institutions, each of
   which are rated "BBB+" or better by Standard & Poor's rating group.  NAEC is
   exposed to credit risk on the interest-rate management instruments if the
   counterparties fail to perform their obligations.  However, NAEC 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, special deposits, and nuclear decommissioning trust:  The carrying
   amounts approximate fair value.

   SFAS 115, "Accounting for Certain Investments in Debt and Equity
   Securities," requires investment in debt and equity securities to be
   presented at fair value.  As a result of this requirement, the investments
   held in NAEC's nuclear decommissioning trusts were adjusted to market by
   approximately $0.3 million as of December 31, 1996 and adjusted to market by
   approximately $0.3 million as of December 31, 1995, with corresponding
   offsets to the accumulated provision for depreciation.  The amounts adjusted
   in 1996 and 1995 represent cumulative gross unrealized holding gains. The
   cumulative gross unrealized holding losses were immaterial for 1996 and
   1995.

   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 amount.

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


   
                                                        Carrying       Fair
   At December 31, 1996                                  Amount       Value

                                                        (Thousands of Dollars)

   First Mortgage Bonds ...........................      $315,000    $316,197
   Other long-term debt ...........................      $200,000    $200,000




                                                        Carrying       Fair
   At December 31, 1995                                  Amount       Value

                                                        (Thousands of Dollars)

   First Mortgage Bonds .............................    $335,000    $336,575
   Other long-term debt .............................    $225,000    $225,000


   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

   The three Millstone units are managed by NNECO. Millstone 1, 2, and 3 have
   been out of service since November 4, 1995, February 21, 1996 and March 30,
   1996, respectively, and are on the Nuclear Regulatory Commission's (NRC)
   watch list. NU has restructured its nuclear organization and is currently
   implementing comprehensive plans to restart the units.
                           
   Based upon management's current plans, it is estimated that one of the units
   will be ready for restart in the third quarter of 1997 with the other two
   units being ready for restart during the fourth quarter of 1997 and the
   first quarter of 1998, respectively.  Management cannot estimate when the
   NRC will allow any of the units to restart, but hopes to have at least one
   unit will be operating in the second half of 1997.

   On October 9, 1996, the NRC issued a request for information concerning all
   nuclear plants in the United States, excluding the three Millstone units
   which had previously received such requests. Such information  will be used
   to verify that these facilities are being operated and maintained in
   accordance with NRC regulations and the unit's specific licenses.  The NRC
   has indicated that the information will be used to determine whether future
   inspection or enforcement activities are warranted for any plant. NAESCO has
   submitted its response to the NRC's request with respect to Seabrook.
   Seabrook's operations have not been restricted by the request.  The NRC's
   April 1996 comprehensive review found Seabrook to be a well-operated
   facility without any major safety issues or weaknesses and noted that it
   would reduce its future inspections in a number of areas as a result of its
   findings.

11.SUBSEQUENT EVENT

   New Hampshire Restructuring:  On February 28, 1997, the NHPUC issued its
   decision related to restructuring the state's electric utility industry and
   setting interim stranded cost charges for PSNH pursuant to legislation
   enacted in New Hampshire in 1996.

   In the decision, the NHPUC announced a departure from cost-based ratemaking
   and instead adopted a market-priced approach to ratemaking and stranded cost
   recovery as advocated by the NHPUC's consultants.  Accordingly, unless the
   litigation described below results in a stay, or necessary modifications to
   the final plan are made, that leads management to conclude that the rates in
   the NHPUC's restructuring decision will not go into effect, PSNH will be
   required to discontinue accounting under SFAS 71.  That would result in PSNH
   writing off from its balance sheet, as early as the quarter ending March 31,
   1997, substantially all of its regulatory assets.  The amount of the
   potential write-off which is triggered by the order  is currently estimated
   at over $400 million, after taxes.  PSNH does not believe that under the
   decision, it would be required to recognize any additional loss resulting
   from the impairment of the value of its other long-lived assets under the
   provisions of SFAS 121.

   The decision also contains rulings on numerous other issues that may have a
   substantial effect on the operations of PSNH.  Included among these rulings
   are assertions that the Rate Agreement by and between PSNH's parent company,
   NU and the state of New Hampshire, which was an integral part of NU's
   acquisition of PSNH in 1992, is not binding on the state; the requirement
   that PSNH divest within two years from the inception of competition all of
   its owned-generation and all of its wholesale power contracts (including its
   contracts with NAEC for Seabrook output); a prohibition on the remaining
   distribution company and its affiliates from engaging in retail marketing or
   load aggregation services in New Hampshire; and a mandate for the filing of
   tariffs with the FERC for the provision of unbundled retail transmission
   service.

   On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining
   order, preliminary and permanent injunctive relief, and for declaratory
   judgment in the Federal District Court for New Hampshire.  The case was
   subsequently transferred to Rhode Island. On March 10, 1997, the Chief Judge
   of the Rhode Island federal court issued a temporary restraining order which
   stayed the NHPUC's February 28, 1997, decision to the extent it established
   a rate setting methodology that is not designed to recover PSNH's costs of
   providing service and would require PSNH to write off any regulatory assets.
   A hearing regarding the system plaintiffs' request for a preliminary
   injunction will be held in the same court on March 20, 1997.

   PSNH also intends to pursue claims against the state of New Hampshire for
   damages in State Court in New Hampshire for abrogation of the 1989 Rate
   Agreement.  The damage claims will be in the hundreds of millions of
   dollars.

   PSNH and NAEC are parties to a variety of financing agreements providing
   that the credit thereunder can be terminated or accelerated if they do not
   maintain specified minimum ratios of common equity to capitalization (as
   defined in each agreement). In addition, PSNH and NAEC are parties to a
   variety of financing agreements providing in effect that the credit
   thereunder can be terminated or accelerated if there are actions taken,
   either by PSNH or NAEC or by the state of New Hampshire, that deprive PSNH
   and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power
   Contracts.

   If the NHPUC's February 28, 1997 decision becomes effective, it would,
   unless waived by the respective lenders, result in (i) write-offs that would
   cause PSNH's common equity to fall below the contractual minimums, (ii)
   reductions in income that would cause PSNH's income to fall below the
   contractual minimums, (iii) potential violation of the contractual
   provisions with respect to actions depriving PSNH and NAEC of the benefits
   of the Rate Agreement, and (iv) the potential for cross defaults to other
   PSNH and NAEC financing documents.  Substantially all of PSNH's and NAEC's
   debt obligations ($686 million of PSNH debt and $515 million of NAEC debt)
   would be affected.  For these actions to be avoided, management believes
   that it is essential that the March 10, 1997, temporary restraining order
   issued by a federal court judge be extended and made applicable to the
   foregoing issues.

   If these events transpired and the requested court relief is not
   forthcoming, and if the creditors holding PSNH and NAEC debt obligations
   decide to exercise their rights to demand payment and not to forebear while
   the litigation is pending, then either creditors or PSNH and NAEC could
   initiate proceedings  under Chapter 11 of the bankruptcy laws.

   PSNH and NAEC Report Considerations:  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. The accounts of PSNH and NAEC are included in the consolidated
   financial statements of NU on the basis of a going concern.  While the
   effect of the implementation of that decision would have a material adverse
   impact on NU's financial position, results of operations and cash flows, it
   would not result in defaults under borrowing or other financial agreements
   of NU or its other subsidiaries.




  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




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, 1996 and 1995, 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, 1996.  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, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with 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 11, 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) effective January 1, 1998.  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 $686 million of PSNH's indebtedness and
approximately $515 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 this uncertainty.





                                        /s/ ARTHUR ANDERSEN LLP
                                            ARTHUR ANDERSEN LLP


Hartford, Connecticut

February 21, 1997 (except with respect to the matter discussed in Note 11, as to
which the date is March 10, 1997)





MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This section contains management's assessment of NAEC's (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 footnotes.

FINANCIAL CONDITION

EARNINGS OVERVIEW
Public Service Company of New Hampshire (PSNH) and NAEC have entered into two
power contracts that unconditionally obligate PSNH to purchase NAEC's 35.98
percent ownership of the capacity and output of Seabrook unit 1 (Seabrook or the
plant) for a period equal to the length of the Nuclear Regulatory Commission
(NRC) full-power operating license for Seabrook (through 2026) whether or not
Seabrook is operating and without regard to the cost of alternative sources of
power (the Power Contracts). In addition, PSNH will be obligated to pay
decommissioning and project cancellation costs after the termination of the
operating license. NAEC does not have any employees of its own and does not
operate Seabrook. North Atlantic Energy Service Corporation (NAESCO) is the
managing agent and represents the Seabrook joint owners, including NAEC, in the
operation of the plant.

The company's cost-of-service includes all of its prudently incurred Seabrook-
related costs, including operation and maintenance expense, fuel expense,
property tax expense, depreciation expense, certain overhead and other costs and
a phased-in return on its Seabrook investment.

The company's only assets are Seabrook and other Seabrook-related assets and its
only source of revenues are the Power Contracts. 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.

On February 28, 1997, the New Hampshire Public Utilities Commission (NHPUC)
issued its orders for restructuring the state's electric utility industry,
including setting interim stranded cost charges for PSNH. If the orders are
implemented without modification, PSNH would be required to recognize write-offs
of over $400 million, after taxes. PSNH filed for and received a temporary
restraining order from the United States District Court, which stayed certain
portions of the NHPUC's orders. If PSNH is unable to keep this stay in effect,
receive another appropriate court action, or otherwise modify the orders, the
write-off triggered by the orders would result in defaults which, if not waived
or renegotiated, would give creditors the right to accelerate the repayment of
over $1.2 billion of PSNH and NAEC indebtedness. If the NHPUC's orders are
implemented and the financial covenant defaults are not waived, there would be
substantial doubt about the company's ability to continue as a going concern.
See "Restructuring" for further information on the impact of the NHPUC's orders.

NAEC had net income of approximately $32 million in 1996, compared to
approximately $24 million in 1995. The increase in net income was due to a 1995
one-time adjustment to the deferred Seabrook return balance and deferred tax
benefits associated with the proceeds from the sale of the Seabrook Unit 2 steam
generators.

RESTRUCTURING

GENERAL
The movement toward electric industry restructuring continues to gain momentum
nationally as well as within PSNH's jurisdiction.  Factors that are driving the
move toward restructuring, in the Northeast in particular, include legislative
and regulatory actions and relatively high electricity prices. These actions
will impact the way that PSNH has historically conducted its business. Although
PSNH continues to operate under cost-of-service based regulation, recent actions
taken by the NHPUC have created uncertainty with respect to PSNH's ability to
meet its obligation to NAEC under the Power Contracts and the recovery of
strandable investments. Strandable investments are regulatory assets or other
assets that would not be economical in a competitive environment. PSNH has
exposure to strandable investments for its contractual obligation to NAEC for
the Seabrook nuclear generating facility, state mandated purchased power
arrangements that are priced above the market, significant regulatory assets
that represent costs deferred by state regulators for future recovery and costs
incurred and assets created in connection with the bankruptcy reorganization of
PSNH and NU's acquisition of PSNH. PSNH's exposure to strandable investments and
purchased power obligations exceeds its shareholder's equity. PSNH's ability to
compete in a restructured environment would be negatively affected unless PSNH
was able to recover substantially all of its past investments and commitments.
Management believes that it is entitled to full recovery of its prudently
incurred costs, including regulatory assets and other strandable investments,
based on the general nature of public utility industry cost-of-service based
regulation and PSNH's rate agreement that was entered into by NU, PSNH and the
state of New Hampshire in 1989 (the Rate Agreement).

FEBRUARY 28, 1997 NHPUC ORDERS
On February 28, 1997, the NHPUC issued its orders for restructuring the state's
electric utility industry and setting interim stranded cost charges for PSNH
pursuant to legislation enacted in New Hampshire in 1996 (the Final Plan). The
Final Plan would implement retail choice for all customers by January 1, 1998.

The Final Plan would replace the traditional cost-of-service based regulation
with a regional average rate approach to rate setting and recovery of strandable
investments. Accordingly, unless the litigation described below results in a
stay that leads management to conclude that the ratemaking approach in the
NHPUC's restructuring orders will not go into effect, PSNH will be required to
discontinue accounting under Statement of Financial Accounting Standards (SFAS)
71, "Accounting for the Effects of Certain Types of Regulation." This would
result in PSNH writing off from its balance sheet, as early as the quarter
ending March 31, 1997, substantially all of its regulatory assets. The amount of
the potential write-off which is triggered by the Final Plan is currently
estimated at over $400 million, after taxes. Management believes that under the
Final Plan, PSNH would not be required to recognize any additional loss
resulting from impairment of the value of its other long-lived assets under the
provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of."

The Final Plan also contains rulings on numerous other issues that would, if put
into effect, have a substantial effect on PSNH's operations.  Included among
these rulings are the requirement that PSNH divest within two years of the
initiation of competition all of its owned generation and all of its wholesale
power purchase contracts (including its contract with NAEC for Seabrook output);
a prohibition on the remaining distribution company and its affiliates from
engaging in retail marketing or load aggregation services; a mandate for the
filing of tariffs with the Federal Energy Regulatory Commission (FERC) for the
provision of unbundled retail transmission service; and assertions that the Rate
Agreement, which was an integral part of NU's acquisition of PSNH, is not
binding on the state. The company will challenge these assertions.

On March 3, 1997, PSNH, NU, NAEC and Northeast Utilities Service Company filed
for a temporary restraining order, preliminary and permanent injunctive relief
and for declaratory judgment in the United States District Court for New
Hampshire. The case was subsequently transferred to Rhode Island. On March 10,
1997, the court issued a temporary restraining order, which stayed the NHPUC's
February 28, 1997, orders to the extent they established a rate setting
methodology that is not designed to recover PSNH's costs of providing service
and would require PSNH to write off any regulatory assets under SFAS 71. An
evidentiary hearing regarding the system plaintiffs' request for a preliminary
injunction will be held on March 20, 1997. PSNH also intends to pursue claims
for damages against the state of New Hampshire in the New Hampshire state court
for abrogation of the 1989 Rate Agreement.  The damage claims will be in the
hundreds of millions of dollars. Management cannot predict the ultimate outcome
of these actions.

If PSNH is unable to keep this stay in effect, or receive another appropriate
court action, or otherwise modify the Final Plan, the write-off triggered by the
Final Plan would result in defaults which, if not waived or renegotiated, would
give creditors the right to accelerate the repayment of approximately $686
million of PSNH indebtedness and $515 million of NAEC indebtedness. These
circumstances could force PSNH and NAEC to seek bankruptcy protection under
Chapter 11 of the bankruptcy laws.

POTENTIAL ACCOUNTING IMPACTS
NAEC follows accounting principles in accordance with SFAS 71, that allows the
economic effects of rate regulation to be reflected. Under these principles,
regulators may permit incurred costs for certain events or transactions, which
would be treated as expenses by nonregulated enterprises, to be deferred as
regulatory assets and recovered through revenues at a later date.

If future competition or regulatory actions cause any portion of its operations
to no longer be subject to SFAS 71, NAEC would no longer be able to recognize
regulatory assets and liabilities for that portion of its business unless those
costs would be recoverable by a portion of the business remaining on cost-of-
service based regulation. Under its current regulatory environment, management
believes that NAEC's use of SFAS 71 remains appropriate.

At December 31, 1996, NAEC's regulatory assets totaled approximately $260
million and included approximately $185 million, related to the deferred return
associated with its investment in Seabrook. As of December 31, 1996, NAEC has
included in rates 100 percent of its Seabrook investment. In addition, NAEC's
utility plant includes approximately $84 million of deferred return. The
deferred return will be recovered under NAEC's Power Contracts with PSNH over
the period December 1997 through May 2001.

If events create uncertainty about the recoverability of any of NAEC's remaining
long-lived assets, NAEC would be required to determine the fair value of its
long-lived assets, including regulatory assets, in accordance with SFAS 121. The
implementation of SFAS 121 did not have a material impact on the company's
financial position or results of operations as of December 31, 1996. Management
believes it is probable that NAEC will recover its investments in long-lived
assets through future revenues. This conclusion may change in the future as
competitive factors influence wholesale and retail pricing in the electric
utility industry or if the cost-of-service based regulatory structure were to
change.

See the "Notes to Financial Statements" Note 1H, for further information on
regulatory accounting.

NUCLEAR PERFORMANCE
Seabrook operated at a capacity factor of 96.8 percent through December 1996,
compared to 83.2 percent for the same period in 1995. The higher 1996 capacity
factor was primarily the result of the planned refueling and maintenance outage
in 1995 and the lack of an outage in 1996. The plant has a 49-day refueling
outage scheduled to begin May 10, 1997.

Subsequent to its January 31, 1996, announcement that the three Millstone Units
(Millstone) had been placed on its watch list, the NRC has stated that the units
cannot return to service until independent, third-party verification teams have
reviewed the actions taken to improve the design, configuration and employee
concerns issues that prompted the NRC to place the units on its watch list. Upon
successful completion of these reviews, the NRC must approve the restart of each
unit through a formal commission vote. Management took several key steps toward
improving NU's nuclear program during 1996 and will continue to place a high
priority on its recovery in 1997.

In October, 1996, the NRC issued a request for information concerning all
nuclear plants in the United States, except Millstone, which had previously
received such a request. Such information will be used to verify that these
facilities are being operated and maintained in accordance with NRC regulations
and their specific licenses. NAESCO has filed its response to the NRC's request,
with respect to Seabrook. Seabrook's operations were not restricted by the
request. The NRC's April, 1996, inspection found Seabrook to be a well-operated
facility and found no major safety issues or weaknesses and noted that it would
reduce its future inspections in a number of areas as a result of its findings.

ENVIRONMENTAL MATTERS
NAEC is potentially liable for environmental cleanup costs at a number of sites
inside and outside its service territory. NAEC cannot estimate the potential
liability for these costs or 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 that
these costs will have a material effect on NAEC's financial position or future
results of operations.

See the "Notes to Financial Statements" Note 7B, for further information on
environmental matters.

NUCLEAR DECOMMISSIONING
NAEC's estimated cost to decommission its share of Seabrook is approximately
$162 million in year end 1996 dollars. These costs are being recognized over the
life of the unit and a portion is 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.

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

LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased by approximately $81 million in 1996,
primarily due to proceeds from the sale of Seabrook unit 2 steam generators,
increased cash return associated with the phase-in of additional Seabrook plant
and expenses for a 1995 debt redemption. Cash flows from operations were also
impacted by a sharp increase in the level of accounts payable caused principally
by purchases in anticipation of the upcoming Seabrook outage. Cash used for
financing activities increased by approximately $73 million in 1996, primarily
due to higher reacquisitions and retirements of long-term debt, net of
issuances; higher dividend payments on common stock; and higher repayment of
short-term debt. Cash used for investments, increased by approximately $22
million in 1996, primarily due to a decrease in loan repayments from other
system companies under the NU system Money Pool.

In March, 1997, Standard & Poor's Ratings Group (S&P) and Moody's Investors
Service (Moody's) downgraded NU, PSNH and NAEC securities as a result of recent
restructuring activities in New Hampshire. None of PSNH's and NAEC's securities
are rated at investment grade. S&P and Moody's are reviewing all NU system
securities for further downgrades. These actions will adversely affect the
availability and cost of funds for NAEC.


RISK MANAGEMENT INSTRUMENTS
NAEC uses interest-rate management instruments to reduce interest-rate risk
associated with its $200 million variable-rate bank note. These instruments are
not used for trading purposes. The differential paid or received as interest
rates change is recognized in income when realized. As of December 31, 1996,
NAEC had outstanding interest-rate management instruments with a total notional
value of approximately $200 million. The settlement amounts associated with the
instruments increased interest expense by approximately $1.0 million for NAEC
during 1996. NAEC's interest-rate management instruments effectively fix its
variable-rate bank note at 7.82 percent as of March 10, 1997.

See the "Notes to Financial Statements" Note 8, for further information on
interest-rate management instruments.


RESULTS OF OPERATIONS

                                Income Statement Variances
                                   (Millions of Dollars)

                    1996 over/(under) 1995   1995 over/(under) 1994
                     Amount       Percent     Amount       Percent


Operating revenues     $5            3%        $11            8%

Fuel expenses           3           25           5           68
Other operation        (2)          (7)         (1)          (3)
Maintenance            (3)         (26)         (3)         (17)
Federal and state
  income taxes          -            -           3           83
Deferred Seabrook
  return (other
  and borrowed
  funds)               (8)         (27)        (15)         (33)
Interest on
  long-term debt      (10)         (16)         (1)          (2)

Net income              8           31          (6)         (20)


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 1996, primarily due to the increased return
associated with the phase-in of the final 15 percent of Seabrook plant's Initial
Investment in May, 1996, and the 1995 phase-in, partially offset by lower return
due to lower debt costs.

Operating revenues increased in 1995, primarily due to the increased return
associated with the phase-in of an additional 15 percent of the Seabrook plant's
Initial Investment in May, 1995, and May, 1994.

FUEL EXPENSES
Fuel expenses increased in 1996 and 1995, primarily due to higher Seabrook
capacity factors.

OTHER OPERATION AND MAINTENANCE
Other operation and maintenance expenses decreased in 1996, primarily due to the
planned refueling and maintenance outage in 1995.

Other operation and maintenance expenses decreased in 1995, primarily due to the
unplanned and extended Seabrook outages in 1994.

FEDERAL AND STATE INCOME TAXES
Although the change in 1996 was not significant, federal and state income taxes
increased in 1995, despite a decrease in income, primarily due to higher state
taxes as a result of a one-time adjustment to the deferred income tax provision.

DEFERRED SEABROOK RETURN
Deferred Seabrook return decreased in 1996, primarily due to the additional
Seabrook investment phased into rates in May, 1996, and May, 1995, partially
offset by a one-time adjustment in June, 1995, to the deferred Seabrook return
balance.

Deferred Seabrook return decreased in 1995, primarily due to additional Seabrook
investment phased into rates in May, 1995, and May, 1994, and a one-time
adjustment of approximately $5 million in 1995 to correct the deferred Seabrook
return balance.

INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased in 1996 and 1995 primarily due to the 1995
refinancing of its $205 million 15.23-percent variable-rate bank note.












North Atlantic Energy Corporation

SELECTED FINANCIAL DATA (a)     1996       1995       1994      1993      1992*

                                                    (Thousands of Dollars)

Operating Revenues......  $  162,152  $  157,183   $145,751  $125,408  $ 78,444



Operating Income........  $   54,889  $   51,394   $ 42,950  $ 33,718  $ 16,122



Net Income............... $   32,072  $   24,441   $ 30,535  $ 25,998  $ 12,703



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



Total Assets............  $1,017,388  $1,014,649   $963,579  $900,821  $818,123



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






STATISTICS                      1996       1995       1994      1993     1992(c)

Gross Electric Utility
  Plant at December 31,
(Thousands of Dollars)...  $816,446    $806,892   $792,880  $789,127   $774,920



kWh Sales (Millions) for
  the twelve month period
  ending December 31,.....    3,542       3,016      2,229     3,218      1,268





STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) (Thousands of Dollars)

                                                   Quarter Ended (a)


1996                        March 31      June 30        Sept. 30       Dec. 31


Operating Revenues.......    $36,663      $39,107        $41,565        $44,817



Operating Income.........    $12,075      $13,786        $14,639        $14,389



Net Income...............    $ 7,190      $ 7,356        $ 9,918        $ 7,608




1995


Operating Revenues.........  $33,984      $36,362        $39,696        $47,141



Operating Income...........  $10,974      $12,752        $13,795        $13,873



Net Income...............    $ 7,501      $ 3,280        $ 6,914        $ 6,746



(a)  Reclassifications of prior data have been made to conform with the
     current presentation.
(b)  Includes portion due within one year.
(c)  The company began commercial operations on June 5, 1992.  Information
     presented in 1992 covers the period June 5, 1992 through December 31, 1992.

*The company began commercial operations on June 5, 1992. Information
presented for 1992 covers the period June 5, 1992 through December 31, 1992.