2010 ANNUAL REPORT

C I T Y O F H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Commissioners: Francis J. Hoey, III Robert H. Griffin Raymond H. Feyre Manager: gas | electric | steam | telecom James M. Lavelle

To the Honorable Mayor, Members of the City Council, and our Valued Customers:

Submitted herewith is the One Hundred and Eighth Annual Report of the City of Holyoke Gas & Electric Department for the year ending December 31, 2010.

Holyoke Gas & Electric produced favorable operating results in 2010, in spite of a continued weak economy and increasing regulatory mandates.

This year, 68% of the Department's electric supply came from clean renewable sources, and was delivered at rates that were significantly lower than those from utilities in neighboring communities.

This powerful combination of low-cost renewable power played a critical role in the attraction of a high performance computing center project to the City. This $168 million project is being developed by a consortium of higher education institutions and private industries, and will harness the City's low cost green energy to run powerful super computing systems.

The Department continues to upgrade its fleet of hydroelectric generators and is exploring other clean energy solutions to produce additional low cost energy.

In September 2010, HG&E experienced a significant reduction in sales, resulting from the loss of several large steam customers, and steam distribution operations were shut down. HG&E assisted remaining steam customers with the conversion to on-site gas-fired solutions to replace the district steam.

In 2010, the electric division continued to modernize the Department's distribution system for increased reliability of electric services to the City of Holyoke, which included the upgrade of six sections of primary cable. Additionally, many new services were installed for new homes and businesses.

We thank the City officials and Department employees for their continued faithful service to HG&E, and we will continue to work diligently to provide our customers with reliable utility services at competitive rates, backed by an unprecedented dedication to customer service.

Respectfully,

Francis J. Hoey III, Commission Chairman Robert H. Griffin, Commission Treasurer Raymond H. Feyre, Commission Secretary James M. Lavelle, Manager

City of Holyoke Gas & Electric Department Tel: 413.536.9300 • Fax: 413.536.9315

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T 1 gNew Services as Other Preventative Maintenance - In 2010, the Department installed 88 services lines to Corrosion Mitigation new customers - 48 in Holyoke and 40 in The Gas Division continued its aggressive program to Southampton. The Department also replaced a record mitigate corrosion on its coated steel piping systems. 103 existing services in Holyoke by burying new In 2010, professional inspections were made of all plastic pipe or inserting it through older existing steel 64 of the cathodically protected systems, and the 26 lines. The Department abandoned 51 service lines in coated steel services longer than 100 feet. At year's Holyoke that were no longer needed. end 78% of the systems exceeded the federal requirements for corrosion control, with the rest New and Replacement Mains requiring some remedial action in 2010. Additionally, In Holyoke, gas main construction continues for 47 isolated steel gas services (less than 100 feet in replacing cast iron. In the Elmwood neighborhood the length) were inspected and maintained, and Department continued its reconstruction efforts and appropriate repairs are scheduled for 2010, along replaced a total of 2,300 feet of small diameter, with more inspections. wrought iron pipes with new plastic ones on Claremont, Woods, Florence, Edwin, and Sydney Gas Supply and Flow Control Avenues. Numerous smaller projects were completed The Gas Division continues to operate its Liquefied in the replacement of nearly 4,100 feet of cast iron Natural Gas storage and vaporizing system, providing and wrought iron pipe. The new plastic mains are the extra gas needed during the coldest winter days generally four or six inches in diameter. and as an emergency supply for the entire city if needed. The Gas Division continued to expand in Southampton by extending the gas main on Pomeroy Meadow Rd The Department also provided peaking service to Bay and installing a new gas main on Meadow Ln State Gas as part of a LNG supply and vapor preparing to potentially connect 18 customers. displacement contract. This arrangement has enabled the Department to better utilize its LNG The Holyoke/Southampton natural gas distribution assets, and has provided benefits for both system now consists of over 173 miles of mains companies. It is expected to be continued in 2011- 7,500 service lines and 12,000 gas meters. 2012.

Leak Surveys The Department helps ensure the safety and reliability Commercial of the gas distribution system through an extensive 36.6% series of compulsory and voluntary comprehensive leak surveys. Each year the Department conducts Industrial public building, mobile and walking flame ionization 11.2% patrols, special monthly winter patrols, and vegetation observation surveys. The full-length walking survey Municipal over each individual gas service covered more than 2.9% 3,750 lines in 2010, or about one-half of the service Department Sales pipes in the system. The combined surveys accounted Residential 7.1% for the detection of 70 mostly minor underground 39.8% leaks. All leaks were investigated and prioritized. A Sales for Resale total of 65 underground leaks were repaired in 2009, 2.4% and the remainder were monitored throughout the year or scheduled for repair. 2010 Gas Division Revenues (by Customer Class)

2 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T gas & steam Gas Works Production - Steam Facilities The Department operated its two tar removal In 2010, the electric station had a maximum steam systems during the year. The tailrace system, production load, during electrical generation, of which intercepts dense, non-aqueous phase liquid 2600,000 lbs/hr. The maximum steam production (DNAPL) coal tar before it can migrate beneath load for steam sales was non generation hourly load the river, collected 1,147 gallons of tar; bring the was 105,000 lbs/hr. year-to-date total to 6,619 gallons. The tar is collected and then sent offsite for disposal. The In 2010, The electric station produced second system is on the site itself, and pumps 158,592,000 lbs of steam. DNAPL in a similar fashion to the tailrace area recovery system. The onsite DNAPL only collected 32 gallons of tar in 2010 bringing the Operations - Steam Facilities total to 187 gallons. The tar is less mobile then As previously planned, the Steam Distribution anticipated, even with steam injection, and may operations were shut down in 2010 due to not need to be recovered. decreased sales. The distribution system ceased As part of Phase IV Redemption Plan for Old Gas operations in early September but the boilers Works, which was found to be contaminated with remained in standby for Sonoco Paper products as coal tar, a cap was installed over a raceway they commissioned their new boilers through the end adjacent to the Old Gas Works. Eliminating of the month. The department assisted the potentially significant risk to human and remaining steam customers to convert their steam ecological receptors, installation included a sand heating and processes needs to locally installed cap and a protective layer of rip rap, along with natural gas fired systems. The number of employees structures that will allow for future testing of cap at the station was reduced between an early integrity. The cap was completed in 2010, with retirement incentive, transfers and a single layoff. the exception of planting restoration, which will HG&E retains the ability to produce steam for electric be completed in 2011. generation at Cabot Street Station. Employees that have been transferred remain available to man the A bulkhead wall was installed adjacent to the Old boilers and turbines if the need for electric generation Gas Works along the tailrace bank to stop arises. migration of coal tar into the tailrace. During operations at Old Gas Works, coal tar was released into the environment causing an underground plume of tar that migrated towards the tailrace. At the bank of the tailrace, sheen has appeared on the surface water. The wall was installed to prevent the occurrence of the sheen and enhance subsurface tar recovery in the area. The wall consists of sheet piling that was installed from a depth of 2 feet below grade to bedrock preventing the sheen from appearing. The length of the wall is approximately 170 feet. In addition to the installation of the wall, contaminated soil between the bulkhead wall and the bank of the tailrace was excavated and removed offsite.

All work, including the cap, was completed in 2010, with the exception of planting restoration, which will be completed in 2011.

H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T 3 Boatlock Station: As part of the Canal electOptimizationr Plani, the hydroc division is working 2010 Fish Passage Counts towards a reduction in generators in conjunction The fishlift at HG&E’s Robert E. Barrett Fishway helps with increased capacity. A 2010 effort towards this migrating fish over the Holyoke Hydroelectric Dam. It was the first and most successful fish lift on the goal included the Boatlock Station Electrical Atlantic coast. It consists of two elevators or “lifts” Upgrade which included MCC Switchgear and Basler which carry migrating fish up and over the dam. Static Excitation systems, vacuum type breakers for protection and isolation of electrical machinery and In 2010, the facility attracted 6,789 human visitors during the 6-week public viewing period. In addition, the transformer, and station service equipment. the following quantities of monitored fish species were Hadley Station Unit 1: A major Dewatering observed utilizing the lift system this year: Inspection of Hadley Unit 1 was conducted in the Atlantic Salmon 41 summer of 2010 and included: wicket gate packing American Shad 164,439 replacement, gate alignment and shear pin replacement, a turbine bearing inspection, and Blueback Herring 76 thrust oil replacement. A plan major outage is being Sea Lamprey 39,782 considered for 2012/13. Striped Bass 298 Gizzard Shad 371 City 4 J Wheel: On-going rehabilitation of City 4 J Wheel included a Generator Rewind, Exciter Upgrade, and mechanical repairs to restore unit into service. Completion of work is scheduled for February 2011, it is estimated that the City 4 Production - Hydroelectric Facilities Station will generate approximately 997,000 A number of projects were completed which improved additional kWh per year. The rehabilitation of this or will contribute to future generation capacity and unit is important to increased efficiency of the water reliability of the Department's Hydroelectric facilities. flow from the first level canal to the second level These projects included: canal. The Department was the recipient of Mass Clean Energy Center (CEC) funding in the amount of Boatlock Station Unit 1: In 2010, HG&E installed a $309,825 for this project. replacement turbine which included a bottom ring, wicket gates, headcover, runner, operating linkages, Flood Protection Structures: Completed servomotor, and a new governor. This turbine installation of Flood Protection Structures at Hadley generator upgrade increased generation from 200 kW Falls and Riverside Stations. The Department was to 704 kW. HG&E was the recipient of a Clean awarded a Hazard Mitigation Grant through the Renewable Energy Bond (CREB) of $2.5 million Federal Emergency Management Agency (FEMA). dollars towards this project. The grant was used to reimburse the Department for 75% of the project cost. Grant funding in the A new galvanized Trash Rack structure was fabricated amount of $ 309,292.50 was received to offset the and installed at the Boatlock Unit 1 intake. The new cost of the flood control structures. intake arrangement included steel rack supports, galvanized steel handrails, and extruded HDPE trash Annual Spring and Fall Canal Inspections: racks anchored to the rack supports. Assessment of canals and canal walls including overflows, intakes, penstocks, powerhouses, and tailraces.

4 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T Production - Hydroelectric Compliance Activities Operations - Electric Division The Hydro Division has a number of technical Work continued throughout the year on three capital agreements and environmental requirements improvement transmission level substation projects. At mandated through FERC and the Massachusetts Holyoke Substation all 115kV Air Break Switches Department of Environmental Protection (MADEP). identified with critical maintenance issues were eMajor compliancel issuese addressed in 2010c treplaced withr new equipment.i Fcive (5) 115kV relay include: packages were replaced, including the 1657 Line Primary and Backup Relays, and the 79BF reclosing Hadley Intake Racks: Design and evaluation of and breaker failure relays for the 52W-1T-2, 52W-2T- and stakeholder consultation pertaining to 2, and 17L-1T-2 circuit breakers. Finally, work downstream fish passage options for the Hadley continued on the project to replace Prospect Substation Falls intake at the Holyoke Dam. in multiple areas: (1) Needs analysis for the new Potential Failure Mode Analysis (PFMA): station was presented to and accepted by the ISO-NE Continued implementation of FERC Part 12 and on- Planning Advisory Committee (PAC), placing the project going efforts to update the FERC security plan. This on the ISO quarterly project list as a “conceptual” year's work continued to build upon previous PFMA project. (2) Engineering design was furthered resulting studies that have been in effect since 2008. in a change to 34.5kV to feed the proposed data center and other large loads, as well as Hadley Falls Deformation Monitoring Surveys: Geodetic generation, and possible future wind generation at Mt. surveys were completed of the South Hadley canal Tom. (3) Geotechnical borings at the “sand shed” site gatehouse, all four active Holyoke canal overflow revealed a sub-grade consisting of primarily rubble fill structures, and the Boatlock Station powerhouse. from when the original mill buildings were knocked This is the fourth year of five continuous yeas of down. In addition, a large tailrace structure from the observation data that is required for finalizing the original mill hydro system remains in place and was preliminary network design and in preparation of discovered to be flowing a considerable amount of structures for future monitoring on a five year cycle. water. Therefore, a reevaluation of the Riverside site adjacent to the 1525 Line is underway. Early Run of River Operations (ROR): HG&E indications suggest that this site appears less expensive completed a 3rd year of monitoring of modified ROR to build while having less environmental permitting operations. An extension of time was filed with concerns and less scheduling risk. FERC due to 2 out of 3 wetted study years. One additional year of monitoring is planned in 2011 Distribution level substation capital work included with plans to file a permanent modification to the completion of Highland Substation SCADA retrofit, Comprehensive Operation and Flow Plan. which enables the remote operation of the station. We also made significant progress on the recloser auto-loop Beebe Holbrook Station: The “A Wheel” unit was scheme. Eight (8) reclosers and controls have been retired as a result of a sink hole that occurred in the installed in the field, and the Distribution Automation tailrace, building, and parking lot in 2007. The Controller (DAC) was programmed and factory penstock was capped to prevent any further acceptance tested. In 2011, all reclosers will be cut occurrence of water from the 1st Level Canal from over to the new DAC which ties into SCADA system. entering into the sinkhole areas. As part of the Department's preventative maintenance (PM) plan, major maintenance and testing was performed on various substation and plant equipment throughout the year. In summary, testing was performed on ten (10) power transformers, ten (10) 15kV vacuum circuit breakers, four (4) 15kV air magnetic breakers, one (1) spare bushing, one (1) surge arrestor, and one (1) voltage regulator.

H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T 5 Operations Electric Division-Continued There were two areas that were converted from overhead Support for Electric Distribution during the year included to underground in the Highlands. Approximately 1,200' of electnew conduitr bank and iundergroundc cable, two new the preparation of forty seven (47) switching orders with thirty nine (39) clearances issued for planned and manholes, and three new padmount transformers were emergency high voltage work. Maintenance/repair installed on George Street to eliminate backyard primary operations were also performed as required on various wire in heavy tree growth area. At this time, customers distribution equipment including monthly inspections of were also transferred from the H1 4.8 kV circuit to the line recloser and capacitor switching controls. Support 36H1 13.8 kV circuit. Approximately 2,100' of new was again provided for the City owned Flood Control conduit bank and underground cable, five new manholes, Pumping Stations in the form of emergency maintenance and two new padmount transformers were installed and pumping operations as required. through the former Mountain Park complex to accommodate a new music venue. At this time, any Electric Distribution remaining 4.8 kV circuits were removed and the music System improvements in 2010 for increased reliability of venue and the Whiting Reservoir pump station were electric service to the City of Holyoke included the upgrade transferred to 13.8 kV. of six sections of primary cable: an 1,100' section of the 36H2 underground getaway cable along Northampton Work to eliminate the old paper insulated lead cable Street between Highland Sub and Hampden Street, a 600' (PILC) originating from Holyoke Substation continued in section of the 36H1 main line underground circuit along 2010. This is the second year of a multi-year project to Northampton Street between Allyn and Lincoln Streets, a replace all 50-60 year old PILC with ethylene propylene 1,700' section of aerial cable on the 17L5 circuit along rubber (EPR) insulated cable to improve reliability and Northampton Street between W. Franklin and Dwight eliminate the environmental issues associated with lead. Streets, a 550' section of the 32W3 main line underground The next circuits that were upgraded were the 17L9 and circuit along Cabot Street between Commercial and High 17L10 circuits that provide a 13.8 kV source at Walnut Streets, a 300' section of the 17L6 main line underground Substation to a 4.8 kV transformer supplying power to the circuit along Bowers Street near the intersection of Mosher surrounding substation area as well as the southern Street, and a 350' section of underground lateral cable on portion of the Highlands and three 13.8 kV distribution Lyman Street on the 32W2 circuit. Two padmounted circuits that feed the St. Kolbe Drive area as well as along switchgear and primary metering cabinets were replaced at Cabot Street between Commercial Street and Walnut the Waste Water Treatment Plant to update aging Street. In total, approximately two and a half miles of equipment. Three new above grade termination cabinets PILC was replaced with EPR cable. were also installed on St. Kolbe Drive and Arbor Way Seven new reclosers were installed in place of existing air which eliminated the use of feed thru devices inside the break switches at various tie points throughout the City. manholes while providing sectionalizing and isolation Two sets of three phase transformer banks were also capabilities should circuit issues arise. installed at each recloser which act as voltage sensing The second and final phase of revamping the Lynch & devices to the recloser controls which communicates to Autumn Drive area was completed eliminating any direct the recloser when it can close thereby picking up load buried primary cable in the area. This phase incorporated from the nearby circuit reducing and/or eliminating some of the customers located on Lynch Drive between potential customer downtime. These reclosers are part of Whiting Farms Road and Autumn Drive and Autumn Drive an effort to further automate the distribution system. between Whiting Farms Road and Lynch Drive. Approximately 400' of new conduit and 500' of new primary cable was installed.

6 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T Electric Distribution-Continued A number of preventative maintenance activities Preparation for the conversion of the O2 4.8 kV circuit continued throughout the year. Consulting Engineers originating from Oakdale Substation to 13.8 kV was Group and Three-C Electrical were hired to perform completed in 2010. This area included Beech Street testing of 70 new and used transformers. Annual ebetween Sargeantl Streete and Cabot Street andc Cabot tvisual inspectionsr were alsoi performedc by in-house Street between Walnut Street and Pleasant Street staff on all three transmission lines to meet ISO-NE including all connecting nearby laterals. Approximately OP3 requirements. Osmose was also hired to three circuit miles of wire were upgraded as part of the perform manhole inspections in the downtown and project. One additional sectionalizing device on Sargeant Highlands areas of the City. Infrared Analyzers was Street was also installed to assist with reducing the hired to perform infrared inspections while Exacter number of customers without power due to unscheduled was hired to perform RF inspections on all outages or required maintenance work. This work also distribution circuits throughout the City. Stray voltage included other reliability upgrades such as replacing all testing of approximately 10% of the City, porcelain hardware with polymer and installing new predominantly in the West Holyoke area, was also crossarms, insulators, connectors, and fault indicators. completed by in-house staff. Reliability statistics allow the Department to track its service reliability There were two multi-year State projects that were and compare them from year to year with other completed in 2010. The new bridge on route 202 south municipal and private utilities. There are five bound over the Pan Am Railways owned railroad tracks statistics used to define the length and frequency of was replaced with additional safety features and lighting. interruptions to customers, system availability, and Existing aluminum poles were reinstalled near and on the the number of customers impacted by outages. They bridge for lighting and new underground conduit was are defined as follows: installed across the bridge to maintain lighting connectivity to both sides of the bridge from the same source. The other State project was the replacement of Electric Distribution System Reliability Statistics the Lyman Street bridge over the Second Level Canal. A TYPICAL new 600' main line underground cable from the 24B5 MUNICIPAL PRIVATE HG&E 2010 HG&E 2009 circuit was extended from Canal Street to Gatehouse UTILITY UTILITIES Road to refeed existing customers with provisions for ASAI 99.991% 99.994% 99.989% 99.982% future backup capabilities to the 32W2 circuit. CAIDI 57.60 min 95.98 min 60 min 90 min Twelve services on Nonotuck Street, Sargeant Street, SAIDI 44.95 min 30.48 min 60 min 102.32 min Parker Street, Beacon Avenue, View Street, Camp Jahn Road, Sycamore Street, Taylor Street, and Magnolia SAIFI 0.78 outages 0.32 outages 1 outage 1.02 outages Avenue were relocated from heavily overgrown areas with MAIFI 1.43 events 1.68 events 2-4 events 3.13 events difficult accessibility to the street. This will provide these Average System Availability Index (ASAI) - represents customers with not only a more reliable electric service how much of the time a customer actually has service but also protection from potential safety hazards and available to them. safety code violations which will, in turn, reduce some of Customer Average Interruption Duration Index (CAIDI) the tree trimming and outage costs of the Department. represents the average time expected to take to restore service after a sustained interruption. System Average Interruption Duration Index (SAIDI) defines the average interruption duration per customer served. System Average Interruption Frequency Index (SAIFI) defines the average number of times that a customer's service is interrupted during a given year. Momentary Average Interruption Frequency Index (MAIFI) - defines the average number of momentary outages a customer may experience in a year.

H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T 7 Municipal Electric Distribution-Continued 5.4% eThree new lelectric serevices, Taco Bell onc Northampton tric Street, Racing Mart gas station complex on Main Street, and Mt. Park Music Venue at the former Mountain Park site, resulted in a net additional connected load of 825 Industrial kVA. There were also 6 new homes that required new 12.1% electric services resulting in a connected load of 30 Residential kVA. The new homes were constructed on available 34.1% lots along Briarwood Drive, Claren Drive, Elm Street, Line Road, Lower Westfield Road, and Samosett Street. In summary for 2010, HG&E set 79 poles and removed 68. A net 1,708 kVA connected load was installed on Commercial the distribution system. Some 37,682 circuit feet of 48.4% underground cable was installed while 15,429 was removed. Similarly, 57,434 circuit feet of overhead wire was installed while 16,640 was removed. Approximately 6.3 miles of conduit was installed including 33,222 feet of PVC and 140 feet of steel. 2010 Electric Division Revenues (by Customer Class) There was a net total of 4 contract lights removed from Signal output of all single phase residential and 200 the distribution system and no change in the total A polyphase commercial services was increased number of street lights. from 0.25 w to 1.0 w in order to increase network connectivity and reliability. There were 6,642 Metering meters retrofitted with a new register board The metering group continued to make progress in its accommodating this increase in signal output. In gas and electric automatic meter reading (AMR) addition to obtaining a further radio frequency signal migration as 98% of the entire City can now be read reach, these new registers also provide outage remotely. On the electric side, the group installed 46 management and load profiling capabilities. AMR meters in the field this year. There are now a total of 17,291 AMR electric meters installed, which A total of 10 transformer, station service, and represents approximately 97% of all electric meters. generation meters were tested to meet ISO-NE's OP- Most installations are predominantly single phase 18 metering requirements which include meters at residential and smaller three phase commercial Ingleside Substation and Boatlock, Cabot, City 4, customers. On the gas side, the metering group and Cobble Mountain generation stations. Two of installed a total of 1,082 AMR-enabled gas meter these meters at Boatlock were upgraded to indexes. Along with assistance from the gas service accommodate Ethernet connectivity. These meters department, the total number of AMR gas meters are tested by Electric Operations/Hydro personnel on installed is 11,800, which represents approximately a biannual basis through the use of the Department's 99% of all gas meters. own portable test unit. Forty seven commercial and industrial gas customers Throughout the year, the metering group continued with volume correcting instruments on their gas meters to support the Credit Department performing were retrofitted with a new Itron ERT. At these delinquent customer ons and offs, tagging locations, there are 67 meters that can now be read notifications, meter reads, and collections. In total, remotely each month via a handheld device and/or a 6,490 credit related duties were performed in 2010. fixed network infrastructure while ensuring its reading From spring 2009 to end of year 2010, physical accuracy. reads were performed at all metered locations in order to validate the AMR readings.

8 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T Metering-Continued months of 2010. The Department's net position In summary, there were a net total of 1 electric meter during this time was that it paid $473,730. Since removed, 6,862 electric meters replaced, and 252 there is more generation than load in New England, electrice meters retired havingl an averagee age of 33.87 cthe cost for tload is greaterr at roughly $6.01/kWic- years. A total of 13,096 electric meters were tested month. 40% of this net cost was primarily due to the and calibrated, 64 voltage tests, 2,455 electric termination of the Masspower contract effective successions performed, and 135 no or low September 1, 2007, where final outcome of two consumption reports investigated for metering litigations are still uncertain pending appeal. And 10% problems and/or theft of service. A net total of 12 of this net was due to forced outages at Cabot 8 and current transformers were installed and 210 current 50% of this net was due approximately to being 32 transformer rated services were tested. On the gas MW per month short of capacity. side, 1,309 meters were removed and tested, 1,444 meters were installed, another 1,450 meters were The Forward Capacity Market (FCM) began on June 1, sealed, and 100 meters were retired. 2010 and capacity revenues for generation were set by auction at $4.50/kW-month then pro-rated to Wholesale Power $4.25/kW-month for the last seven (7) months of A total of 241,279 MWh of net generation was 2010. Additional Peak Energy Rent payments produced from the Department-owned hydro resources resulted in rates between $3.72/kW-month and which continued to help drive down the overall cost of $4.07/kW-month. The Department chose to Self power. During 2010, the hydro preference power Supply its Generation against its Capacity credits to our residential customers remained at Requirement which resulted in a net gain to the 1.2¢/kWh throughout the year which generated total Department of $43,819. Under this market, ISO-NE savings of $1,251,744, $656,174 from Department- procures only the capacity it needs. The cost for load owned hydro and $595,600 from NYPA entitlements. started at $4.14/kW-month and ended at $3.85/kW- month. The Department's net capacity position for Cabot 6 & 8 had 1,144 MWh of output during 2010, this period was that it paid $694,954. 82% of this primarily due to ISO-NE market energy shortage net cost was primarily due to the de-rating of the events. The steam turbines were dispatched by the Department's hydro generation based on median pool thirteen (13) times during the year. calculations of the summer and winter reliability hours. The Department's annual net capacity position The Department made small incremental energy for 2010 was $1,168,684. purchases each month in 2010 until meeting our desired hedge target of 36,900 MWh for the summer period. In this manner, we progressively decreased our risk of rising prices and increased the stability of our future energy cost. This approach achieved an average cost of power of $1.86M or $50.44/MWh. Nuclear Benchmarked against the Day-Ahead Mass Hub 16.99% Locational Marginal Price (LMP) resulted in a net gain to the Department of $238,988. 68% of this energy Renewable was during on-peak hours where the Department is 68.1% most exposed due to the volatility of the energy markets. Throughout the year, the Department System Power purchased under contract 917 MWh of energy from 9.86% the Open Square canal hydro unit. Spot Market 4%

The capacity market under the Transition Period which Oil/Gas 0.6% started on December 1, 2006 set capacity revenues 2010 Sources of Annual Electric Supply for generation at $4.10/kW-month for the first five (5)

H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T 9 Wholesale Power-Continued With the beginning of FCM and effective May 31, 2010 Annual Carbon Footprint electricCO2 EMISSIONS 2010, all reliability must run (RMR) agreements were FUEL TYPE ENERGY (MWh) TONS lbs CO2 / MWh terminated resulting in a net gain of approximately $216,700 to the Department. Transmission Oil 1,078 1,018 Regional Network Service (RNS) rates increased 8% Renewable 254,904 0 from $59.94701/kW-year to $64.82884/kW-year in Nuclear 63,596 0 June 2010. The Department's RNS annual charge of Spot Market 16,687 9,011 $3,910,006 was offset by 9.17 circuit miles of Pool Transmission Facility revenues of $1,814,516, Gas 1,144 572 reducing the Department's annual RNS charge to System Power 36,900 19,926 $2,095,490. Total 374,309 30,527 163lbs/MWh

Effective February 2010, the Department resolved Wholesale Power - Renewable Energy under a Settlement Agreement certain disputes and In 2009, the City of Holyoke received $175,000 outstanding issues with NU Companies. In addition for the upgrade of two boilers in City owned to resolving these matters, the parties additionally buildings along with the development of a city-wide executed an Asset Demarcation Agreement and Energy Efficiency Conservation Strategy through a Equipment Rental Agreement which allowed the Federal Energy Efficiency and Conservation Block Department to obtain connection of its Prospect Grant. In January of 2010, HG&E received Clean Substation in Chicopee directly at RNS hence Renewable Energy Bonds for a Hydroelectric and avoiding any local network service charges or direct Wind project for $18.1M and $19.3M respectively. assignment charges from NU. Later in June 2010, Along with 35 other cities and towns, Holyoke was the Department sold 11.885 acres of excess land in designated a Green Community in July of 2010 Chicopee to NU's affiliate, Western Massachusetts and was awarded $321,000 for the upgrade of Electric Company (WMECO), for $420,000. LED traffic lights, LED road lights, and insulation for City Hall. The Department executed several contracts for the sale of renewable certificates through the Nepool-GIS As a member of the Massachusetts Clean Energy market system. These transactions brought in Center (MassCEC), formerly Massachusetts $28,952 of revenues through selling CT Class 2 and Technology Collaborative (MTC), HG&E paid ME respective renewable portfolio standard market $61,829 in 2009 and $154,244 in 2010 into the requirements. Remaining 2010 calendar year Renewable Energy Trust (RET) through an added certificates were banked to allow for sale during $0.00050/kWh Renewable Energy Charge in each 2011. rate class. By joining the RET, HG&E – and all of its customers - are eligible to receive grant money for Wholesale Power - Green Power renewable energy projects. In 2010, through the 68.10% of the Department's 2010 generation is from Commonwealth Hydro Initiative, HG&E received renewable resources and 85.09% of its generation is $309,825 for the refurbishment of its Holyoke 4-J carbon free (renewable hydro and nuclear). The hydroelectric wheel and $135,000 for the following graph summarizes the Department's proposed Overflow #3 Siphon Hydro Units. The resource mix by energy type. Note that System Siphon Units also received a $75,000 grant from Power represents short-term bilateral contracts that the American Public Power Association's were procured during the summer time frame. Demonstration of Energy-Efficient Developments program.

10 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T supply

2 0 1 0 P O W E R S U P P L Y R E S O U R C E S

CONTRACT CAPACITY (kW) PROJECT CONTRACT PROJECT NAME FUEL TYPE START DATE WINTER SUMMER END DATE

BASE UNITS NYPA FIRM HYDRO 1985 2,662 2,662 9/1/25 MILLSTONE 3 - MIX 1 NUCLEAR 1986 1,334 1,334 11/25/45 * MILLSTONE 3 - PROJ 3 NUCLEAR 1986 2,325 2,325 11/25/45 * SEABROOK - MIX 1 NUCLEAR 1990 147 147 3/31/30 * SEABROOK - PROJ 4 NUCLEAR 1990 3,306 3,306 3/31/30 * SEABROOK - PROJ 5 NUCLEAR 1990 408 408 3/31/30 *

INTERMEDIATE UNITS HYDRO QUEBEC 1 N/A 1986 1,189 1,189LOU ** HYDRO QUEBEC 2 N/A 1989 1,938 1,938LOU ** W.F. WYMAN 4 #2 OIL 1978 4,199 4,152 LOU * *** - Unit offline pending retirement PEAKING UNITS HOLYOKE #6 & #8 #2 OIL, #6 OIL, GAS 1951 18,605 18,605 OWNED * NYPA PEAK HYDRO 1985 578 578 9/1/25 STONYBROOK GT 2A #2 OIL 1982 2,476 1,910 LOU * STONYBROOK GT 2B #2 OIL 1982 2,413 1,850 LOU * capacity entitlement which continues for life of unit * - Investments continue for the life of unit (LOU)

HYDRO UNITS ** - After 8/31/01 there is no firm energy contract, only HADLEY FALLS 1&2 HYDRO 1949 33,400 33,400 OWNED * RIVERSIDE 8 HYDRO 1931 4,500 4,500 OWNED * RIVERSIDE 4-7 HYDRO 1921 3,435 3,435 OWNED * BOATLOCK HYDRO 1924 3,094 3,094 OWNED * (All capacity contracts follow the ISO New England calendar system) HOLYOKE HYDRO / CABOT 1-4 HYDRO 1923 3,147 3,147 OWNED * CHEMICAL HYDRO 1935 1,600 1,600 OWNED * BEEBE HOLBROOK HYDRO 1948 304 304 OWNED * SKINNER HYDRO 1924 280 280 OWNED * VALLEY HYDRO HYDRO 2004 790 790 OWNED * ALBION A HYDRO 2004 281 281 OWNED * ALBION D HYDRO 2004 395 395 OWNED * GILL D HYDRO 2004 330 330 OWNED * OPEN SQUARE HYDRO 2004 525 525 YR TO YR CROCKER AB HYDRO 2004 370 370 OWNED * *** CROCKER C HYDRO 2004 230 230 OWNED * *** GILL A HYDRO 2004 450 450 OWNED * *** MT. TOM HYDRO 2004 473 473 OWNED * *** NONOTUCK HYDRO 2004 472 472 OWNED * ***

11 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T Telecom Division Network Upgrades - Enterprise Network teIn 2010, the Telecoml Divisione continued its sales cIn additiono to provisioning andm maintaining retail internet growth in both fiber optic and wireless services and customers, the Telecom Division is also responsible for executed a business telephone partnership with OTT the design, operation and maintenance of the Communication. Department's internal network and Information Systems needs. A summary of work accomplished in 2010 The Division also continued its efforts to upgrade and follows below: maintain the HGE.net service network. A summary of the Division's major accomplishments follows: Completed a dual blade server system. This system will provide a centralized platform for the deployment of computing resources. In this system, server blades that Network Expansion - Service Provider Network are contained within a single chassis will replace In 2010 the Telecom Division aided the fiber plant multiple stand-alone PC servers, increasing reliability design for the Green High Performance Computing and simplifying management activities. Center, and enabled Cisco Smart + Connected Communities efforts. Continued its support for the Electric Division's NERC compliance, SCADA, and distribution system automation projects in 2010. Work under these initiatives included Network Upgrades - Service Provider Network the connection of numerous sectionalizers and A major fiber cable audit was completed on the reclosures to the fiber network. These devices allow the Division's Service Provider Network and a fiber cable Electric Division to remotely isolate and clear distribution system mapping project was 40% complete at the end system faults. of 2010. This network provides connectivity via fiber optic lines to business-class customers that are located Procured utility network and core switching in Holyoke, Chicopee and Downtown Springfield. Both equipment. the Department itself and the City receive services from this network. Consulting Services - City Network The Telecom Division has responsibility for ongoing All customers were migrated to MetroE Platform. The maintenance, installation and operation of applications division implemented Cisco ASR1002 Aggregation on the City's network. In 2010, the Division replaced all Routers as well as Alcate/Lucent 9700E MetroE periphery network switches, and conducted a switches. New equipment replaces a combination of substantial upgrade of the internet firewall system that ATM and Ethernet based equipment installed over the provides protection to both the City and the Holyoke last twelve years, and provides the Division with a solid Public Schools networks. standards-based platform to prepare it for future growth. Telecom Help Desk - Service Summary The Telecom Division administers a centralized help desk, accepting support calls from Department, City and retail internet customers. In 2010, the help desk closed: 959 requests from Department employees, 784 requests from City employees, and 371 requests from outside customers.

H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T 12 Community Goodwill Economic Development gCommunityo involvement is a centralo belief of In 2010,d the Department providedw $26,590 ill the public power philosophy, and the in additional discounts to businesses that Department is proud of the role it takes in have relocated or expanded within the City making Holyoke a better place to call home. under the Economic Development Discount Program. This program provides an In 2010, HG&E offered support to several additional 10% off their gas and electric bills major community events including the for a 3 year period. Hispanic Family Festival, the St. Patrick's Day Parade, and the Holyoke Fireworks, which is The Department also offers a similar underwritten by the department. In total, over program for residential customers, under $106,905 in sponsorships, and over $7,900 which first-time Holyoke homebuyers can in labor was provided for nonprofit causes. receive 10 percent off their first three years of gas and electricity bills. In 2010, the Neil J. Moriarty, Jr. Scholarship Department provided $78,150 in additional for Cadet Engineers discounts under this program. The Cadet Engineer program is dedicated in memory of our late Commission Chairperson, HG&E also promotes economic growth Neil J. Moriarty, Jr. He often noted that the through our Commercial and Residential admission of new students into the program Energy Conservation Programs. These plans was one of most rewarding actions that the offer interest-free financial assistance to our Commission made each year. customers, thus helping them make their homes or businesses more energy efficient. The program offered aid to 2 Holyoke students In 2009, the Department paid out over in 2010 who are pursuing a Bachelor of $1,084,233 in zero-interest assistance to Science in Engineering. The Commission voted Holyoke home and business owners. to admit Peter Lynch and Kevin Tierney as new participants to this program in 2010. Municipal Benefits The Department contributed $1,058,320 to the City of Holyoke's General Fund during Summary of Community Support 2010 as an in-lieu of tax payment. Payment Nonprofit Sponsorships $106,905 discounts of $318,913 were provided on the Nonprofit Labor $7,900 City's utility accounts. Cadet Engineer Program $63,750 Beyond these direct financial benefits, HG&E Payment in Lieu of Taxes $1,058,320 continues to provide other valuable services Municipal Payment Discounts 318,913 * to the City including: offering low-cost street Discounted Street Lighting 530,092 lighting, low-cost maintenance on city- Economic Dev. Discounts $26,590 owned gas and electric equipment, and low New Homeowner Discounts 78,150 municipal rates to City departments on their gas and electric accounts. Energy Conservation * Based on market average of 22.5¢/kWh vs. 10.59¢/kWh billed Assistance Programs $1,084,233 ** ** Programs that encourage conservation and economic development, assistance is paid back at zero interest over a number of years Total Community Support $3,274,697

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14 H O L Y O K E G A S & E L E C T R I C — 2 0 1 0 A N N U A L R E P O R T H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A1 This page intentionally left blank.

A2 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Balance Sheets — December 31, 2010 and 2009

ASSETS 2010 2009 Plant, Property and Equipment: Plant, property and equipment in service $169,463,325 $ 164,631,850 Construction in progress 3,671,706 3,386,026 173,135,031 168,017,876 Less accumulated depreciation 75,188,764 73,443,374 Total Plant, Property and Equipment 97,946,267 94,574,502 Restricted Assets: Funds required under bond indenture 12,803,318 15,316,632 Customers' deposits 576,237 573,458 Total Restricted Assets 13,379,555 15,890,090

Other Fund Reserves: Purchased Power Funds 2,729,765 2,803,181 Rate Stabilization Funds 30,644,699 35,403,446 Post employment benefit funds 2,013,458 Total Other Funded Reserves 35,387,922 38,206,627

Current Assets: Cash 20,170 20,132 Operating Cash Invested 1,066,947 1,604,990 Accounts receivable net of reserve for uncollectible accounts of $515,024 in 2010 and 2009 7,075,463 6,625,718 Accounts receivable - City of Holyoke 435,615 463,311 Materials and supplies 2,120,630 2,578,543 Fuel for electric generation and gas in storage 1,181,012 1,592,288 Prepaid expense 455,558 468,172 Other receivables 3,570,924 2,430,867 Total Current Assets 15,926,319 15,784,021

Other Assets: Other investments 222,772 234,529 Preliminary investigation charges 2,529,285 2,781,807 Intangible assets 3,344,803 3,996,449 Other receivables - after one year 2,694,391 2,013,564 Total Other Assets 8,791,251 9,026,349

TOTAL ASSETS $ 171,431,314 $ 173,481,589

LIABILITIES AND RETAINED EARNINGS 2010 2009

Long-Term Liabilities: Bonds payable - long-term $37,770,000 $38,988,333 Notes payable - long-term 1,828,030 2,435,346 Leases payable - long-term 86,862 48,749 Accrued compensated absences 2,400,382 2,533,986 Accrued environmental costs 745,443 Deferred rate stabilization costs 37,353,290 35,457,290 Total Long-Term Liabilities 79,438,564 80,209,147 Current Liabilities: Due to other funds 271,956 5,095,107 Accounts payable 7,402,898 4,974,880 Current portion bonds, notes and leases payable 1,863,357 1,791,841 Customers' deposits 523,625 555,662 Accrued liabilities 1,436,568 1,411,737 Accrued interest 161,232 166,164 Current portion - accrued compensated absences 203,896 189,387 Current portion - accrued environmental costs 169,627 367,059 Current portion - deferred rate stabilization costs 4,800,000 3,600,000 Deferred credits - current 227,412 519,825 Total Current Liabilities 17,060,571 18,671,662 Total Liabilities: 96,499,135 98,880,809 Retained Earnings: 74,932,179 74,600,780 See accompanying notes.

TOTAL LIABILITIES AND RETAINED EARNINGS $171,431,314 $173,481,589

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A4 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Statement of Revenues, Expenses and Changes in Retained Earnings December 31, 2010 and 2009

See accompanying notes.

Total 52,336 -93,928 -84,312 705,945 284,242 595,405 328,053 -191,853 -210,399 -207,932 3,138,009 6,910,665 1,592,673 8,909,888 4,670,987 1,403,823 1,697,514 5,264,347 4,206,183

-1,971,787 -1,651,001 66,870,486 70,394,597 $4,936,294 -1,058,164 $71,806,780 $74,600,780

3,138,009 4,449,603 1,068,796 6,348,461 3,717,815 41,464,622 $4,108,390 $45,573,012 Electric / Steam Telecommunications

Gas 523,877 $827,904 2,461,062 18,906,326 22,741,938 41,648,264 $26,233,768 2009 2,561,427 25,405,864 953,172

Total 63,193 -81,793 714,740 331,399 -154,235 -147,876 -503,770 3,133,377 6,968,099 1,023,252 9,313,223 4,844,039

1,337,266 1,608,563 1,389,719 -1,925,850 -1,909,906 63,941,710 -1,457,463 -1,079,746 -3,536,877 -1,058,320 38,659,720 74,600,780 $68,868,306

$4,926,596 $74,932,179

686,190 3,133,377 4,390,876 23,734,783 6,622,948 3,844,865 42,413,039 $3,695,894 $46,108,933 Electric / Steam Telecommunications

Gas 337,062 999,174 2,577,223 14,924,937 21,528,671 $1,230,702 $22,759,373 2,690,275 2010

Cost of power, gas water and steam sold Transmission Distribution Customer accounts General and administrative Depreciation plant and equipment Total Operating Expenses Investment income Net gain (loss) on investments Bond interest expense Other interest expense Miscellaneous income - net Amortization Impairment loss - Harris water rights Net loss - plant retirements Boiler demolition expense Net gain - merchandise jobbing Northeast Utilities settlement gain Refund of clean-up fund overpayment Mt. Tom property assessment expenses Taxes - others Total Other Revenues (Expenses) Payment in lieu of taxes - City Holyoke

Retained Earnings - Beginning of Year

Operating Revenues Operating Expenses: Operating Income Other Revenues (Expenses):

Income Before Operating Transfers Net Income (Loss) Retained Earnings - End of Year

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A6 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Statement of Cash Flows — December 31, 2010 and 2009

2010 2009

Cash Flows from Operating Activities: Cash received from customers $ 67,787,392 $ 76,467,677 Cash paid to suppliers -43,969,467 -47,847,561 Cash paid to employees -11,079,918 -10,898,971 In lieu of taxes paid -1,058,320 -1,058,164 Interest paid -17,260 -28,384 Net Cash Provided by Operating Activities 11,662,427 16,634,597

Cash Flows from Investing Activities: Proceeds from sale of investments 24,925,021 20,561,848 Purchase of investments -18,404,409 -16,010,785 Net transfer to restricted assets and other fund reserves 2,665,604 -467,348 Investment income 1,320,951 1,470,215 Decrease (increase) in invested cash -1,698,613 3,001,429 Net payments received advanced to customers -841,282 -422,708 Net Cash Provided by (Used in) Investing Activities 7,967,272 8,132,651

Net Cash Provided by Noncapital Financing Activities Increase (decrease) in due to other funds -4,823,151 -12,092,127

Cash Flows from Capital and Related Financing Activities: Investment in plant, property and equipment -10,489,423 -10,441,116 Proceeds from sale of plant, property and equipment 460,476 Proceeds from bonds and notes payable 2,500,000 Payments on bonds, notes and leases payable -1,812,783 -1,718,735 Interest paid on bonds, notes and leases payable -2,067,757 -2,138,385 Increase in preliminary investigation charges 252,522 -876,807 Investment in MGPHCC building project -1,149,545 ______Net Cash Used in Capital and Related Financing Activities -14,806,510 -12,675,043

Increase in Cash 38 78

Cash - beginning of year 20,132 20,054

Cash - End of Year $20,170 $20,132 See accompanying notes.

Supplemental Cash Flow Information: Total interest paid $ 2,085,017 $ 2,166,769

Supplemental Noncash Financing Activity: Equipment acquired under capital lease $ 96,763 $ 19,000

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A8 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Schedule of Reconciliation of Operating Income to Net Cash Provided by Operating Activities — December 31, 2010 and 2009

2010 2009

Operating Income $ 4,926,596 $ 4,936,294

Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities Deprecation 4,844,039 4,670,987 Other interest expense -17,260 -28,384 Other income 887,433 869,777 Boiler demolition expense -1,457,463 -93,928 Mt. Tom property assessment expense -1,079,746 Payment in lieu of taxes and other property taxes -1,140,113 -1,142,476 Changes in operating assets and liabilities (Increase) decrease - accounts receivable -422,049 2,020,799 - materials and supplies -457,913 -206,837 - fuel for electric generation and gas in storage 411,276 1,475,214 - prepaid expense 12,614 -85,787 - other receivables 76,758 1,998,495 Increase (decrease) - accounts payable 2,428,018 -1,203,552 - customers’ deposits -32,037 59,157 - accrued liabilities 24,831 2,493 - accrued compensated absences -119,095 181,187 - deferred rate stabilization costs 3,096,000 3,096,000 - accrued environmental costs -942,875 208,191 - deferred credits -292,413 -123,033 See accompanying notes. Total Adjustments 6,735,831 11,698,303

Net Cash Provided by Operating Activities $ 11,662,427 $ 16,634,597

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A10 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

1.0 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business - The financial statements present information on the activities of the Gas and Electric Department (the Department), an Enterprise Fund of the City of Holyoke, Massachusetts (the City). The Department provides gas, electric, water, and telecommunications services to its customers, substantially all of whom are local residents and commercial and industrial businesses. The Department also provided steam services through September 30, 2010. Approximately 61% of the Department's revenues are derived from its electric division. The Department is subject to regulation by the Federal Energy Regulatory Commission (FERC), the Massachusetts Department of Public Utilities (DPU), and the Massachusetts Department of Telecommunication & Cable (DTC).

Accounting Method - The financial statements are prepared on the accrual basis. The Department applies all Governmental Accounting Standards Board (GASB) pronouncements as well as the Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements.

Expense Allocation - Expenses associated with a particular division are charged to that division. For the years ended December 31, 2010 and 2009, shared expenses including administrative and supporting costs are allocated to each division as follows:

Gas 35.0% Electric, Steam and Telecommunications 65.0%

Use of Estimates - 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 assets and 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.

Plant, Property and Equipment - Additions to and replacements of plant, property and equipment are recorded at cost. The cost of plant, property and equipment retired, less accumulated depreciation and salvage, is charged against revenue in the year retired. The cost of repairs and minor renewals is charged to maintenance expense.

Depreciation - Depreciation of $4,844,039 in 2010 and $4,670,987 in 2009 is computed using the straight- line method. The composite rate for 2010 and 2009 is 3% of depreciable property in service. The composite rate is in accordance with Massachusetts Department of Public Utilities regulations.

Preliminary Investigation Charges - This account represents expenditures for preliminary surveys, plans, investigations, etc. made for the purpose of determining the feasibility of utility projects under contemplation. At December 31, 2010 and 2009 the balance included costs associated with the Mt. Tom wind pre-permitting phase.

Materials, Supplies and Fuel - Materials, supplies and fuel are valued at average cost.

Revenue Recognition - Operating revenues are recognized on the basis of cycle billings rendered monthly, net of discounts. Revenues are not accrued for services delivered beyond such cycle billing dates. Discounts reported for the years ended December 31, 2010 and 2009 are as follows:

2010 2009 Gas $ 1,892,894 $ 2,254,773 Electric 3,599,184 3,548,217 Steam 12,861 25,725 Total $ 5,504,939 $ 5,828,715 Income Taxes - Income of the Department is excluded from taxation by Section 115 of the United States

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A11 Notes to Financial Statements — December 31, 2010 and 2009

1.0 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Internal Revenue Code.

Investments - Investments totaling $54,772 and $66,529 in 2010 and 2009, respectively, represent the Department's equity in New England Hydro-Transmission Corporation and New England Hydro- Transmission Electric Company. These investments represent .2653 percent of the issued common stock of these untraded companies.

In addition, the Department has invested $168,000 with the Public Utility Mutual Insurance Company (PUMIC). PUMIC was formed to provide general insurance to members of the Public Utility Risk Management Association (PURMA).

These investments are carried at original cost on the balance sheets. It was not practicable to estimate the fair value of these investments.

Investments in debt and equity securities are recorded at fair market value (See Note 5).

Interest Capitalized - The Department follows the policy of capitalizing interest as a component of the cost of plant, property and equipment in service constructed for its own use. During the years ended December 31, 2010 and 2009, the Department capitalized interest of $34,721 and $ 36,240, respectively.

Intangible Assets - Intangible assets are recorded at cost. Intangible assets subject to amortization include debt issue costs, customer contracts, the franchise area fee associated with the December, 2001 hydroelectric project purchase, and the FERC licenses associated with the hydroelectric generating facilities purchased in November, 2004. Debt issue costs are being amortized on a straight-line basis over the term of the issue. Customer contracts, franchise and FERC licenses are being amortized on a straight-line basis over the remaining lives of the respective licenses. Intangible assets not subject to amortization include water rights acquired with the hydroelectric generating facilities purchased in November, 2004. These costs are evaluated annually for impairment.

Cash - For purposes of the statement of cash flows, cash includes cash on hand and cash in the Department's checking and money market accounts..

Environmental Matters - Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities when the cleanup is probable and the cost can be reasonably estimated. Estimated liabilities are not discounted to present value.

Accounts Receivable - Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the valuation allowance based on its collection history and its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Advertising - The Department expenses the cost of advertising as incurred. Advertising expense was $45,609 and $46,680 for the years ended December 31, 2010 and 2009, respectively.

A12 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

2.0 PLANT, PROPERTY AND EQUIPMENT IN SERVICE:

Plant, property and equipment in service consists of the following:

2010 Electric/ Telecommunications Steam Gas Total

Land $ 3,412,358 $ 0 $ 288,804 $ 3,701,162 Plant Investment 124,511,721 0 32,330,920 156,842,641 Office Furniture and Equip. 2,473,466 0 1,186,231 3,659,697 Transportation Equip. 3,271,606 0 998,959 4,270,565 Other 704,689 0 284,571 989,260 Total $ 134,373,840 $ 0 $ 35,089,485 $ 169,463,325

2009

Electric/ Telecommunications Steam Gas Total

Land $ 3,035,537 $ 240,418 $ 408,845 $ 3,684,800 Plant Investment 105,462,244 16,493,735 30,857,786 152,813,765 Office Furniture and Equip. 2,056,821 24,580 998,345 3,079,746 Transportation Equip. 3,123,286 68,020 1,001,721 4,193,027 Other 669,432 18,510 172,570 860,512 Total $ 114,347,320 $ 16,845,263 $ 33,439,267 $ 164,631,850

3.0 CASH AND RESTRICTED ASSETS:

The Department participates in a cash and investment pool maintained by the City. In addition, the Department holds certain cash separately from the pool.

Custody and use of restricted assets are subject to requirements and restrictions imposed under contractual agreements, bond indentures, and the General Laws of the Commonwealth of Massachusetts, and are not available for normal operating purposes. Purchased power funds are on deposit with Massachusetts Municipal Wholesale Electric Company (MMWEC) to pay for energy and related services as required under existing agreements. Rate stabilization funds are amounts set aside to be used to stabilize current and future power costs.

4.0 DUE TO / FROM OTHER FUNDS:

"Due to/from other funds" represents the amount by which the Department's equity in pooled cash differs from the expenditures paid and receipts collected by the City.

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A13 Notes to Financial Statements — December 31, 2010 and 2009

5.0 INVESTMENTS IN DEBT AND EQUITY SECURITIES

The Department invests various funds in debt and equity securities which are held in the Department's name by Flynn Financial Partners Ltd. All investments must be made in securities or deposits as authorized by Massachusetts General Laws, Chapters 54 and 55.

Investments are stated at fair value, which is the amount at which an investment could be exchanged in a current transaction between willing parties. Fair values are based on quoted market prices.

Net unrealized loss on investments at December 31, 2010 and 2009 is $1,620,911 and $(447,564), respectively

Interest Rate Risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Department does not have a formal investment policy that limits investment maturities.

At December 31, 2010, the Department's investments were as follows:

Maturity in Years Fair Value 1-5 6-10 Over 10 Debt Securities: U.S. Agency Bonds $4,071,438 $1,020,084 $2,375,854 $675,500 Corporate Bonds 9,603,790 4,346,690 5,257,100 Municipal Bonds 337,195 99,709 237,486 Preferred Securities 440,300 440,300 14,495,723 $5,466,483 $7,870,440 $1,115,800

Other Investments: Equity Mutual Funds 7,310,616 Fixed Income Mutual Funds 11,474,393 Cash and Cash Equivalents 1,693,299 $34,974,031

At December 31, 2009, the Department's investments were as follows:

Maturity in Years Fair Value Less Than 1 1-5 6-10 Over 10 Debt Securities: U.S. Agency Bonds $7,540,919 $2,605,475 $449,033 $2,769,300 $1,717,111 Corporate Bonds and Notes 6,362,409 1,320,309 5,042,100 Preferred Securities 440,300 440,300 14,343,628 $2,605,475 $1,769,342 $7,811,400 $2,157,411

Other Investments: Equity Mutual Funds 5,904,350 Fixed Income Mutual Funds 5,833,593 Common Stock 105,910 Cash and Money Market Funds 114,253 $26,301,734

A14 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

5.0 INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED)

Credit Risk - Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The Department does not have a separate formal policy regarding credit risk.

As of December 31, 2010 and 2009, the Department's investments were rated as follows:

2010 2009 Standard & Moody’s Standard & Moody’s Poor’s Investment Service Poor’s Investment Service

U.S. Agency Bonds AAA to A AAA to AA2 AAA to A AAA to AA2 Corporate Bonds and Notes AAA to BBB- AAA to BAA2 A to BBB- A1 to BAA3 Municipal Bonds AA to AA+ AA2 to AA3 Preferred Securities A- to BB+ BAA2 A- to BBB A3 to BAA2

Custodial Credit Risk

Deposits - Custodial credit risk is the risk that the Department's deposits may not be returned to the Department. As of December 31, 2010 and 2009, $1,693,299 and $114,253, respectively, were uninsured and uncollateralized and subject to custodial credit risk.

Investments - For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Department will not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. The Department's investment policy addresses credit risk by defining allowable investments.

Concentration of Credit Risk - Concentration of credit risk is the risk of loss attributed to the magnitude of the Department's investment in a single issuer.

At December 31, 2009, the Department's investment portfolio was concentrated as follows: Percentage of Portfolio Issuer Investment Type 2009

Federal Home Loan Bank U.S. Government & Agency Bonds 14.81%

There were no such concentrations at December 31, 2010.

The investments are included on the Balance Sheet as follows:

2010 2009

Funds required under bond indenture $3,000,000 $3,000,000 Customers' deposits 564,408 520,211 Rate stabilization funds 28,329,218 21,176,533 Post employment benefit funds 2,013,458 Operating cash invested 1,066,947 1,604,990 $34,974,031 $26,301,734

In addition, rate stabilization funds of $2,315,481 at December 31, 2010 and $14,226,913 at December 31, 2009 are on deposit with and are invested through the Massachusetts Municipal Wholesale Electric Company (MMWEC). These funds are reported on the Balance Sheet at fair value.

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A15 Notes to Financial Statements — December 31, 2010 and 2009

6.0 OTHER RECEIVABLES

Other receivables consist of the following:

2010 2009 Hi-Lite Program - receivable from customers for loans used to make energy efficient improvements to the customers property, secured by municipal liens $3,766,142 $2,924,860 Accrued interest receivable 175,911 159,596 MGPHCC building project 1,149,545 Miscellaneous other receivables 1,173,717 1,359,975 6,265,315 4,444,431 Less - amount due in one year 3,570,924 2,430,867

Other Receivables - After One Year (Hi-Lite Program) $ 2,694,391 $ 2,013,564

7.0 INTANGIBLE ASSETS

Amortized Intangibles: 2010 2009 Life in Gross Carrying Accumulated Gross Carrying Accumulated Years Amount Amortization Amount Amortization

Debt issue costs 30 $1,297,211 $391,326 $1,297,211 $348,085 Customer contracts and franchise fees 30 2,000,000 603,333 2,000,000 536,667 License fees 8 90,000 48,769 90,000 10,800 $3,387,211 $1,043,428 $3,387,211 $895,552

Unamortized Intangibles: 2010 2009 Fair Value Fair Value

Water rights $1,001,020 $1,504,790

Aggregate amortization expense was $147,876 and $210,399 for the years ended December 31, 2010 and 2009, respectively. Estimated aggregate amortization expense is $130,522 for each of the next two years and $109,907 for the following three years.

In accordance with generally accepted accounting principles, water rights were tested for impairment by comparing their fair value to their carrying value. The fair value was established based upon a combination of the discounted cash flows, projected output, and projected market value of output. Using this procedure, the carrying value of the water rights exceeded its fair value creating an impairment loss of $503,770 and $1,651,001 for the years ended December 31, 2010 and 2009, respectively, which is shown separately on the Statement of Revenues, Expenses and Changes in Retained Earnings.

A16 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

8.0 DEFERREDELECTRIC POWER RATE STABILIZATION PURCHASES COSTS

Electric Power Purchases were as follows: 2010 2009

Masspower MWEC $416,958 $371,207 NYPA MWEC 164,359 185,995 Wyman No. 4 274,031 361,459 MWEC -Nuclear Mix No. 1 2,828,587 2,814,325 MWEC -Nuclear Project No. 3 2,804,811 3,019,155 MWEC - Stony Brook/Peaking 98,593 190,232 MWEC- Special Project 2006A 34,455 46,445 EPEX - net of sales 2,067,139 -1,302,501 Open Square 75,554 73,979 Sonoco 52,544 Short-term power supply - net of Hydro sales 3,001,415 3,612,923 $11,765,902 $9,425,763

8.09.0 DEFERRED RATE STABILIZATION COSTS

During 2003, the Department began to set aside funds which will be used for rate stabilization in the development of future rates and allow the Department to remain competitive when (it) deregulation goes into effect. In addition, the Department set aside funds received from the buyout of a power contract from Select Energy during 2005. These funds will be used to stabilize future power costs.

Amounts set aside are as follows:

2010 2009

Balance - beginning of year $39,057,290 $35,961,290 Current year's expense set aside 3,096,000 3,096,000

Balance - end of year $42,153,290 $39,057,290

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A17 Notes to Financial Statements — December 31, 2010 and 2009

10.0 BONDS PAYABLE:

2010 2009 Revenue Bonds- Bond payable - 2001 Series A Date of issue: December 13, 2001 Interest rates: 2002-2008 4.00% 2009-2010 5.00% 2011-2018 5.375% 2019-2031 5.00% $36,905,000 $37,865,000 Clean Renewable Energy Bond Boatlock Hydroelectric Station Project - 2009 Series A Date of issue: January 15, 2009 Interest rate: 1.5% Secured by revenues of the Department (subject to existing pledge of revenues under the Revenue Bonds 2001 Series A) 2,083,333 2,291,667 38,988,333 40,156,667 Less - amount due within one year 1,218,333 1,168,334 Bonds Payable - Due After One Year $ 37,770,000 $ 38,988,333 Principal maturing and interest payments are anticipated to be as follows:

Principal Interest Total

2011 $ 1,218,333 $ 1,909,010 $ 3,127,343 2012 1,268,333 1,851,409 3,119,742 2013 1,328,333 1,790,918 3,119,251 2014 1,388,333 1,727,282 3,115,615 2015 1,453,333 1,660,396 3,113,729 2016-2020 8,331,668 7,178,789 15,510,457 2021-2025 9,340,000 5,072,583 14,412,583 2026-2030 11,910,000 2,482,375 14,392,375 2031 2,750,000 126,042 2,876,042

$38,988,333 $23,798,804 $62,787,137

A18 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

10.0 BONDS PAYABLE (CONTINUED)

The Department is required to satisfy certain bond covenant requirements in connection with the bonds payable. The following funds are required as part of the Bond agreements:

2010 2009

2001 Series A -

Debt Service Fund: The debt service fund represents amounts held by a trustee to provide for debt service payments. $ 535,992 $ 535,992

Debt Service Reserve Fund: The debt service reserve fund represents amounts held by a trustee in order to provide a reserve for the payment of the principal or redemption price and interest on the Bonds. 2,900,913 2,900,913

Operating Expense Fund: The operating expense fund is held by the City of Holyoke and represents an amount sufficient to pay only the operating expenses of the Department for the next succeeding month. 6,115,046 6,862,419

Operation and Maintenance Reserve Fund: The operation and maintenance reserve fund is invested with other funds as described in Note 5. 3,000,000 3,000,000

2009 Series A -

Debt Service Fund: The debt service reserve fund represents amounts held by the Bond owner in an amount equal to one year's principal and interest payment. 251,367 249,421

Bond Proceeds Fund: The bond proceeds are deposited in an account with the Bond owner and represents funds to be used as project expenses are incurred. 0 1,767,887

$12,803,318 $15,316,632

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A19 Notes to Financial Statements — December 31, 2010 and 2009

11.0 NOTES PAYABLE

2010 2009 Note payable to bank, secured by revenues of the Department (subject to existing pledge of revenues under the Revenue Bonds 2001 Series A), monthly payments of $20,587 including interest at 5.25% for the period November, 2008 through March, 2013, monthly payments and interest rate to be adjusted thereafter to $20,868 and 5.75%, through maturity date of matures October, 2018 $1,579,409 $1,737,790 Note payable to bank, secured by revenues of the Department (subject to existing pledge of revenues under the Revenue Bonds 2001 Series A), monthly payments of $39,123 including interest at 4.39%, matures November, 2012 855,936 1,277,099 2,435,345 3,014,889 Less -Amount due within one year 607,315 579,543 Notes Payable - Due After One Year $1,828,030 $2,435,346 Principal maturing and interest payments are anticipated to be as follows:

Principal Interest Total 2011 $607,315 $109,203 $716,518 2012 591,562 80,364 671,926 2013 184,118 65,149 249,267 2014 194,170 56,208 250,378 2015 205,797 44,581 250,378 2016-2018 652,383 57,022 709,405 $2,435,345 $412,527 $2,847,872

12.0- CAPITAL LEASES PAYABLE

2010 2009

Capital lease payable to John Deere Credit in annual installments of $20,908 including interest at 3.95%, secured by equipment, matures April, 2014 $75,855 Capital lease payable to IBM Credit LLC in monthly installments of $2,166 including interest at 4.3%, secured by equipment, matures December, 2010 0 25,408 Capital lease payable to Municipal Services Group, Inc. in monthly installments of $18,140 including interest at 4.42%, secured by equipment, matures December, 2012 34,009 49,953 Capital lease payable to Neopost in quarterly installments of $1,496 including interest at 20.43%, secured by equipment, matures June, 2014 14,707 17,352 124,571 92,713 Less - amount due within one year 37,709 43,964 Lease Payable - Due After One Year $86,862 $48,749

A20 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

12.0 CAPITAL LEASES PAYABLE (CONTINUED)

The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2010: 2011 $ 44,556 2012 44,537 2012 26,377 2013 23,365 138,835 Less - amount representing interest 14,264

Present value of future minimum lease payments $124,571

Leased assets recorded under plant, property and equipment include: Mail Machine $ 19,000 IBM Server 95,361 Dump truck 79,813 Backhoe 96,763 290,937 Less - accumulated depreciation 99,904 $191,033

13.0 OPERATING LEASES

In March, 2006, the Department entered into a four year lease on a copier. Monthly payments are $329. The lease expires February, 2010 and has a fair market value purchase option.

In January, 2009, the Department entered into a five year lease for three copiers. Monthly payments are $537. The lease expires December, 2013 and has a fair market value purchase option.

In December, 2009, the Department entered into a four year equipment lease which begins February, 2010. Monthly payments to be made in accordance with the rental agreement. The lease expires January, 2014 and may be extended for additional one year periods. The Department has the option to purchase the equipment at any time for the net book value of the equipment.

Lease expense for the years ended December 31, 2010 and 2009 was $78,371 and $10,720, respectively. Future minimum lease payments are as follows:

2011 82,823 2012 81,325 2013 79,836 2014 6,106 $250,090

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A21 Notes to Financial Statements — December 31, 2010 and 2009

14.0 DISCONTINUED OPERATIONS

As of September, 2010, the Department discontinued providing steam services to its customers. The Department provided assistance to its customers to obtain replacement heating systems. Through September 30, 2010, the steam division had revenue of $2,146,751 and a loss of $986,135 from operations. For the year ended December 31, 2009, the steam division had revenue of $3,249,749 and a loss of $1,204,446 from operations. Plant, property and equipment, net of accumulated depreciation, which has been written off as part of the discontinued operations, totaled $1,822,748. Expenses associated with the plant removal were $1,457,463 and $93,928 for the years ended December 31, 2010 and 2009, respectively.

15.0 RETIREMENT PLANS (CONTINUED)

Contributory Plan - Substantially all full-time employees participate in the Holyoke Contributory Retirement System, a cost sharing multiple employer public employee retirement system. The system is partially funded by employee contributions.

The plan provides pension benefits, deferred allowances and death and disability benefits. A member may retire after reaching age 55 with 10 years of creditable service, or with no age requirement after 20 years of service. Members become vested after ten full years of creditable service.

Retirement allowance is based on the following factors: age, length of creditable service, level of salary, and group classification. Age at retirement and group classification determine a benefit rate. This rate, multiplied by the length of creditable service, is multiplied by the average of the three highest (consecutive) years' compensation. Percentages are specified in Chapter 32 of the Massachusetts General Laws. Participants may elect to receive their retirement in one of three optional forms of payment.

Member employers are required by state statutes to make contributions to the plan. Contributions are determined by the Commonwealth of Massachusetts Division of Public Employee Retirement Administration (PERA). The Department's contributions charged to expense for the years ended December 31, 2010, 2009 and 2008 are $2,731,102, $2,678,264 and $2,348,650, respectively. The total contribution figure represents approximately 23%, 23% and 21% of covered payroll for the years ended December 31, 2010, 2009 and 2008, respectively. Total payroll for the same periods was approximately $11,904,003, $11,536,866 and $11,448,753, respectively. The Department's contributions for the years ended December 31, 2010, 2009 and 2008 was 19.4%, 19.9% and 19.3%, respectively, of the total contributions for all employers covered by the plan.

Covered employees are required by state statute to contribute a fixed percentage of their earnings into the plan. The percentage varies from 5 to 9 percent depending upon date of hire. All employees hired after January 1, 1979 contribute an additional 2% on all gross regular earnings over $30,000 per year. Employee contributions for the years ended December 31, 2010, 2009 and 2008 are $829,237, $936,942 and $895,811, respectively.

The plan issues a publicly available financial report that includes financial statements and required supplementary information. This report may be obtained by writing or calling the plan as follows:

Attn: Daniel Owens, Executive Director Holyoke Retirement Board City Hall Annex - Room 207 Holyoke, Massachusetts 01040 (413) 534-2179

Noncontributory Plan - Employees hired prior to January 1, 1938, participate in the noncontributory pension plan. The Department is required by state statutes to pay benefits as the obligation arises. Benefits are established by state statutes. The Department's contributions for the years ended December 31, 2010, 2009 and 2008 are $21,427, $21,081 and $20,745, respectively.

A22 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

16.0 OTHER POST-RETIREMENT BENEFITS

Plan Description - The Department's policy is to provide certain health care and life insurance benefits to eligible retirees, their dependents, or their survivors, which constitute another postemployment benefit (OPEB) plan in accordance with GASB Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. These benefits are provided through the City of Holyoke's cost-sharing multiple-employer postemployment welfare benefit plan.

Funding Policy - The Department is not required to provide funding for OPEB, other than the pay-as-you go amount necessary to provide current benefits to retirees and eligible beneficiaries/dependents. The cost of providing these benefits was $583,014 for 112 retirees in 2010 and $558,359 for 112 retirees in 2009.

Annual OPEB Cost and Net OPEB Obligation - The Department's annual OPEB cost (expense) is calculated based on the annual required contribution (ARC) of the employer, an amount that was actuarially determined in accordance with the parameters of GASB Statement No. 45. The projected unit credit method was used in the actuarial valuation prepared as of June 30, 2007, which is the basis for the 2010 and 2009 ARC calculation.

The following table shows the elements of the Department's annual OPEB cost as of the City of Holyoke's fiscal 2010 and 2009 years, the amounts actually contributed, and changes in the Department's net OPEB obligation as of June 30, 2010 and 2009:

2010 2009 Annual OPEB cost $2,111,783 $2,011,904 Payments -583,014 -558,359 Net OPEB obligation - beginning 34,583,437 33,129,892 Net OPEB obligation - ending $36,112,206 $34,583,437

The Department's annual OPEB cost, the percentage of annual OPEB cost contributed, and the net OPEB obligation for the City of Holyoke's fiscal years ended June 30, 2010, 2009 and 2008 were as follows:

Annual % of Annual OPEB Net OPEB OPEB Cost Cost Contirbuted Obligation June 30, 2010 $2,111,783 27.61% $36,112,206 June 30, 2009 $2,011,904 27.75% $34,583,437 June 30, 2008 $1,915,163 28.32% $33,129,892

Funded Status and Funding Progress - As of June 30, 2007, the most recent actuarial valuation date, the cost was 0.0% funded. The actuarial accrued liability for benefits was $31,757,028, and the actuarial value of assets was $0, resulting in an unfunded actuarial accrued liability (UAAL) of $31,757,028.

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A23 Notes to Financial Statements — December 31, 2010 and 2009

16.0 OTHER POST-RETIREMENT BENEFITS (CONTINUED)

Actuarial Methods and Assumptions - Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future, such as assumptions about future employment, mortality and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the Department are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and the employees to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short- term volatility in actuarial accrued liabilities, consistent with the long-term perspective of the calculations.

The actuarial methods and significant assumptions used to determine the annual required contribution are detailed in the City of Holyoke Actuarial Valuation and Review of Other Postemployment Benefits (OPEB) Report as of June 30, 2007. The report is available in the City Auditor's office, City Hall Annex - Room 101, Holyoke, MA 01040.

The schedule of funding progress, shown as required supplementary information below, presents the results of OPEB valuations as of June 30, 2007, and looking forward, the schedule will eventually provide multiyear trend information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Required Supplementary Information (unaudited)

Schedule of Funding Progress

Actuarial Percentage Valuation Value of Accrued Unfunded AAL Funded Covered of Covered Date Assets Liability (AAL) (UAAL) Ratio Payroll Payroll June 30, 2007 $ -0- $31,757,028 $31,757,028 $ -0- N/A N/A

17.0 CONCENTRATIONS OF CREDIT RISKS:

At December 31, 2010 and 2009, the Department had amounts on deposit with a bank which exceeded FDIC insurance limits by $5,880,843 and $4,679,910, respectively.

In the ordinary course of business, the Department extends unsecured credit to its regular customers. Amounts outstanding at December 31, 2010 and 2009 were $8,026,282 and $7,604,233, respectively.

Sources of Labor Supply - Sixty-four percent of the Department's labor force is covered under a collective bargaining agreement between the City of Holyoke Gas and Electric Department and the Holyoke Municipal Gas, Light & Power Guild, Inc. The agreement was extended through March 31,2013.

The Department had one customer that accounted for 73% and 58% of steam sales in 2010 and 2009, respectively.

A24 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

18.0 RELATED PARTY TRANSACTIONS

The Department provides gas, electric and steam sales and service, as well as, telecommunication services to the City ofHo1yoke: Total sales were $3,779,393 and $3,777,619 for the years ending December 31, 2010 and 2009, respectively. Amounts due from the City totaled $435,615 and $463,311 at December 31, 2010 and 2009, respectively.

The Department has also recorded contributions in lieu of taxes to the City of Holyoke of $1,058,320 and $1,058,164 for the years ended December 31, 2010 and 2009, respectively.

19.0 COMMITMENTS AND CONTINGENCIES:

Purchased Power Contracts:

Masspower - During 1989, a contract was signed with Masspower, through MMWEC, for approximately 9.157 MW during the winter and 7.781 MW during the summer per year starting in 1993 until July 31, 2013. Annual charges were to be approximately $5 million depending on level of dispatch of the facility. During 2006, MMWEC filed a civil action against Masspower. The court ruled in favor of Masspower and MMWEC appealed this decision, which was later affirmed by the Massachusetts Appeals Court. In addition, in July, 2007, MMWEC terminated the contract for material breach. Masspower filed a civil action against MMWEC and in January, 2008 the court ruled in favor of MMWEC. Masspower appealed this decision. In January, 2011, the court ruled in favor of MMWEC in three of the four counts. In March, 2011 both Masspower and MMWEC filed notices of appeal relating to the January, 2011 ruling. It is unknown at this time how the outcome of this litigation will affect future contract terms (including pricing). During 2007, the Department started recognizing a liability for the potential estimated losses that could be incurred as a result of the lawsuits by and against Masspower. The total amount included in deferred rate stabilization costs as of December 31, 2010 and 2009 is $10,288,000 and $7,192,000, respectively.

Short-term power - On a continuing basis, the Department also enters into several short-term power supply contracts for either the purchase or sale of capacity, energy, renewable certificates or ancillary services with various suppliers.

MMWEC Special Project 2006A - In August, 2006, the Department executed a Participation Acknowledgement Certificate and Project Development Agreement (PDA) with MMWEC for all pre- development costs associated with its share of a new generating facility to meet a projected future need of baseload energy and capacity. Under the PDA, the Department's share of project development costs were $428,100 and no further costs within this phase are expected. It is expected that this plant will be operational by June, 2014.

Telecommunications Contracts - The Department has entered into long-term contracts for dedicated point-to-point data lines and Internet Access services from several companies. These contracts have five to ten year terms. In addition the Department has entered into one-year contracts with two companies for frame relay lines, dialup help desk support and dedicated line monitoring services.

In 2006, the Department entered into an agreement with the City of Chicopee Electric Light Department (CEL) to offer and provide telecommunication services to Chicopee residents and businesses. This agreement is for an initial term of six years.

In 2002, the Department entered into a lease with Fiber Technologies Networks, LLC (Fibertech) for use of the Department's fiber optic lines. The lease provides for an annual payment per route mile for 20 years with an option to renew for an additional five years.

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A25 Notes to Financial Statements — December 31, 2010 and 2009

19.0 COMMITMENTS AND CONTINGENCIES: (CONTINUED)

MMWEC - General -The Department is a Participant in certain Projects of the Massachusetts Municipal Wholesale Electric Company (MMWEC), a public corporation and a political subdivision of the Commonwealth of Massachusetts. Currently, the Department is a member of MMWEC on a month to month basis. Any decision regarding membership status will have no effect on the Department's commitments and contingencies on MMWEC projects in existence prior to the Department's membership termination.

MMWEC was created as a means to develop bulk power supply for its Members and Project Participants. MMWEC is authorized to construct, own or purchase ownership interests in and to issue revenue bonds to finance electric facilities (Projects). MMWEC has acquired ownership interests in electric facilities operated by other utilities and also operates its own electric facilities. MMWEC sells all of the capability of each of its Projects to its Members and other utilities (Project Participants) under Power Sales Agreements (PSAs). Among other things, the PSAs require each Project Participant to pay its pro rata share of MMWEC's costs related to the Project, which costs include debt service on bonds issued by MMWEC to finance the Project, plus 10% of MMWEC's debt service to be paid into a Reserve and Contingency Fund. In addition, should any Project Participant fail to make any payment, other Project Participants may be required to increase (step-up) their payments and correspondingly their Participants' share of Project Capability to an additional amount not to exceed 25% of their original Participants' share of the Project Capability. Project Participants have covenanted to fix, revise and collect rates at least sufficient to meet their obligations under the PSAs.

The Department has entered into Power Sales Agreements (PSAs) and Power Purchase Agreements (PPAs) with MMWEC. Under both the PSAs and PPAs, the Department is required to make certain payments to MMWEC payable solely from the Department's revenues. Under the PSAs, each participant is unconditionally obligated to make payments due to MMWEC whether or not the Project(s) is completed or operating and notwithstanding the suspension or interruption of the output of the Project(s).

MMWEC operates the Stony Brook Intermediate Project and Stony Brook Peaking Project fossil-fueled power plants, (the latter which the Department has a 4.818 MW share). In addition, MMWEC has a 3.7% interest in the W.F. Wyman Unit No. 4 plant owned and operated by FPL Energy Wyman IV, an indirect subsidiary of NextEra Energy Resources LLC and a 4.8% ownership interest in the Millstone Unit 3 nuclear unit operated by Dominion Nuclear Connecticut, Inc. (DNCI) a subsidiary of Dominion Resources, Inc. In addition to Millstone Unit 3, DNCI also is the owner of Millstone Unit 2. DNCI requested and received an exemption from the Nuclear Regulatory Commission (NRC) enabling them to submit an application earlier than 20 years before the expiration of the operating license for Unit 3 so that DNCI could submit its application for license renewal for Unit 2 and Unit 3 at the same time. In November, 2006, the NRC renewed the operating licenses for Unit 2 and Unit 3 for an additional twenty years. The license for Unit 2 was extended to July 31, 2035 and the license for Unit 3 was extended to November 25, 2045.

A substantial portion of MMWEC's plant investment and financing program is an 11.6% ownership interest in the Seabrook Station nuclear generating unit operated by NextEra Energy Seabrook, LLC, an indirect subsidiary of NextEra Energy Resources LLC. In December, 2005, the NRC issued an amendment to the operating license that extends the expiration date from October, 2026 to March, 2030 to recapture the period from 1986 to 1990 during which time Seabrook Station had an operating license but did not operate. NextEra Energy Seabrook, LLC intends to request an extension of the Seabrook Station operating license beyond March, 2030. Pursuant to the PSAs, the MMWEC Seabrook and Millstone Project Participants are liable for their proportionate share of the costs associated with decommissioning the plants, which is being funded through monthly Project billings. The Project Participants are also liable for their proportionate share of the uninsured costs of a nuclear incident that might be imposed under the Price-Anderson Act. In July, 2005, as part of the Energy Policy Act of 2005, Congress extended the Price-Anderson Act through the end of 2025.

MMWEC represents certain municipal light plants, including the Department, with respect to the Hydro Quebec-Phase II project (Project). The Department is an equity participant in the Project. The agreements which comprise the Project include requirements that the participant make equity contributions, provide credit support and furnish certain guarantees. In addition, the Project contains a step-up mechanism which requires participants to assume obligations of other participants who are in default, subject to certain limitations. The Department's potential liability cannot be reasonably estimated at this time.

A26 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Notes to Financial Statements — December 31, 2010 and 2009

19.0 COMMITMENTS AND CONTINGENCIES: (CONTINUED)

As of December 31, 2010, total capital expenditures by MMWEC amounted to $1,573,048,000 of which $45,284,000 represents the amount associated with the Department's Project Capability. MMWEC's debt outstanding for the Projects includes Power Supply System Revenue Bonds totaling $444,255,000 of which $14,500,000 is associated with the Department's share of Project Capability. As of December 31, 2010, MMWEC's total future debt service requirement on outstanding Bonds issued for the Projects is $491,543,000, of which $15,643,000 is anticipated to be billed to the Department in the future.

The estimated aggregate amount of the Department's required payments under the PSAs and PPAs, exclusive of the Reserve and Contingency Fund billings, to MMWEC at December 31, 2010 and estimated for future years is shown below:

For the years ended December 31, 2011 $ 2,885,000 2012 2,889,000 2013 2,765,000 2014 2,382,000 2015 2,155,000 2016-2019 2,567,000

$15,643,000 In addition, the Department is required to pay its share of the operation and maintenance (O&M) costs of the Projects in which they participate. The Department's total O&M costs including debt service under the PSAs were $6,326,000 and $6,470,000 for the years ended December 31, 2010 and 2009, respectively.

Deregulation - In 1997, legislation was passed mandating retail wheeling of electricity for private electric utilities. If the Department opts to open its borders, it will no longer have a franchise area and all utilities may have the ability to enter into contracts to provide electricity generation to any customer. The potential impact on the Department's revenue from retail competition cannot be reasonably estimated at this time.

Hydroelectric Facility - As part of the Department's purchase of hydroelectric generating assets and a distribution franchise in 2001, FERC required certain modifications to the hydroelectric facility. The cost of these modifications over the next several years is likely to exceed ten million dollars.

Self Insurance - For general liability purposes, the Department is self-insured up to $50,000, has self-insurance trust coverage in the amount of $400,000 and general liability insurance for $50,000 to $10,000,000 per occurrence. The Department is also self insured for workers compensation up to $250,000 per occurrence. A policy is in effect for excess workers compensation.

Environmental Protection and Other Issues - In 1990, the Massachusetts Department of Environmental Protection (MDEP) sent a notice of responsibility to the Department and other parties regarding the presence of coal tar on property known as the gas works, adjacent to the Connecticut River. An investigation of the site has revealed concentrations of contaminants on the site and MDEP classified the area as a priority site. A second notice of responsibility was issued in September, 1993 for gas tar deposits in the Connecticut River, effectively separating the gas works into a land site and a river site.

Effective February, 2003, the Department increased the gas rates in order to collect additional dollars for clean- up of the gas works site and is accruing amounts, based on management's best estimate of the probable and reasonably estimable costs related to this clean-up. The current estimate for the clean-up of the land site is approximately $914,000. No estimate is currently available for the river site. The measurement of the accrual for remediation costs is subject to uncertainty, including the evolving nature of environmental regulations and the difficulty in estimating the extent and type of remediation activity that will be utilized.

H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A27 Notes to Financial Statements — December 31, 2010 and 2009

19.0 COMMITMENTS AND CONTINGENCIES: (CONTINUED) Environmental Protection and Other Issues (continued) - During 2009, a Department contractor brought suit in federal and state court alleging civil rights and discrimination violations. In addition, an individual is alleging injuries incurred during 2010 while working as a Department contractor. The Department denies liability and is vigorously defending these suits.

In July, 2009, a “preliminary non-public investigation” was initiated by the Office of Enforcement, Division of Investigations of the Federal Energy Regulatory Commission. The investigation concerns the reporting by the Department to ISO New England, Inc. of certain unit outages during 2008. The investigation remains pending and it is not reasonable to estimate whether any penalties or charges might be imposed on the Department (or its employees), as a result of the investigation. The Department's management has been cooperating fully in all stages of the investigation.

Construction Programs - The Department has budgeted construction expenditures of approximately $10 million to be incurred during 2011.

20.0 PRIOR PERIOD RECLASSIFICATION

Prior year's financial statements have been reclassified to conform with the current year's presentation. The reclassification has no effect on the previously reported net income for the year ended December 31, 2009.

21.0 SUBSEQUENT EVENT

The Department has evaluated events that have occurred subsequent to December 31, 2010, through April 7, 2011, the date these financial statements were available to be issued and has determined there were no material events requiring recognition or disclosure.

A28 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T A29 Schedule of Operating Revenues and Expenses — December 31, 2010 and 2009

GAS DIVISION

2010 2009

Operating Revenues: Residential $ 9,050,499 $10,699,101 Commercial 8,793,287 9,229,413 Industrial 2,082,905 2,425,854 Municipal 655,995 746,649 Department sales 1,629,812 2,204,751 Sales for resale 546,875 928,000

Total Operating Revenues $ 22,759,373 $ 26,233,768

Cost of Gas Sold: Purchases - natural gas $13,550,669 $16,913,408 Liquid natural gas processed 568,746 1,174,147 Environmental response 575,250 575,250 Supplies and expenses 230,272 243,521

Total Cost of Gas Sold $14,924,937 $18,906,326

Distribution: Salaries and wages - system control and load dispatch $253,781 $245,226 - supervision and engineering 275,644 292,852 - customer installation 428,834 405,398 - operation 448,200 443,557 - maintenance 476,408 465,192 Supplies and expenses 694,356 608,837

Total Distribution $2,577,223 $2,461,062

Customer Accounts: Salaries and wages - meter reading $69,214 $ 66,407 - accounting and collection 139,708 144,762 Supplies and expenses 13,453 16,046 Uncollectible accounts 114,687 296,662

Total Customer Accounts $337,062 $523,877

General and Administrative: Salaries $696,042 $ 674,029 Pensions and benefits 1,309,917 1,326,546 Insurance 122,880 113,944 General supplies and expenses 561,436 446,908

Total General and Administrative $2,690,275 $2,561,427

A30 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T Schedule of Operating Revenues and Expenses — December 31, 2010 and 2009

ELECTRIC, STEAM AND TELECOMMUNICATIONS DIVISIONS Operating Revenues: Electric Sales- 2010 2009 Residential $ 13,845,075 $12,515,829 Commercial 19,948,711 19,717,009 Industrial 4,910,511 4,768,308 Municipal 2,698,002 2,622,142 Interdepartmental 439,016 480,067 Water 6,312 5,734 Cobble Mountain operation - net 294,857 389,673 Steam sales 2,146,751 3,249,749 Telecommunication sales 1,819,698 1,824,501

Total Operating Revenues $46,108,933 $45,573,012

Cost of Electricity/Steam/Water Sold: Purchases - electricity $11,765,902 $9,425,763 Replacement power 3,096,000 3,096,000 Fuel for electric generation 173,195 113,133 Salaries and wages - production 1,517,953 1,479,129 - maintenance 1,341,062 1,441,240 Supplies and expenses 2,846,234 2,844,840 Cost of water sold 445,127 700,160 Cost of steam sold 2,549,310 3,641,673

Total Cost of Electricity Sold $23,734,783 $22,741,938

Electric Transmission: Salaries and wages $443,811 $434,649 Supplies and expenses 56,579 106,034 Transmission by others 2,632,987 2,597,326

Total Electric Transmission $3,133,377 $3,138,009

Distribution: Electric- Salaries and wages - lines, equipment and street lights $1,670,206 $1,548,868 - customer installations 193,229 194,727 Supplies and expenses 1,431,519 1,543,526 Steam Distribution 119,711 122,536 Telecommunications distribution 976,211 1,039,946

Total Distribution $4,390,876 $4,449,603

Customer Accounts: Electric- Salaries and wages - meter reading $116,302 $114,962 - accounting and collection 259,377 268,844 Supplies and expenses 24,217 27,129 Uncollectible accounts 275,642 541,264 Steam customer accounts 7,962 114,816 Telecommunications customer accounts 2,690 1,781

Total Customer Accounts $686,190 $1,068,796

General and Administrative: Electric- Salaries $ 1,203,739 $ 1,090,516 Pensions and benefits 2,469,657 2,321,156 Insurance 425,282 432,001 General supplies and expenses 1,637,346 1,531,980 Steam general and administrative 455,903 575,170 Telecommunications general and administrative 431,021 397,638

Total General and Administrative $6,622,948 $6,348,461

A31 H O L Y O K E G A S & E L E C T R I C D E P A R T M E N T