energy east 2005AnnualReport

Annual Report 2005

Per Common Share 2005 2004 %Change

Earnings,basic $1.75 $1.57 11Earnings,diluted $1.74 $1.56 12DividendsPaid $1.115 $1.055 6

BookValueatYearEnd $19.45 $17.89 9PriceatYearEnd $22.80 $26.68 (15)

Other Common Stock Information (Thousands)

AverageCommonSharesOutstanding,basic 146,964 146,305 –AverageCommonSharesOutstanding,diluted 147,474 146,713 1CommonSharesOutstandingatYearEnd 147,701 147,118 –

Operating Results (Thousands)

TotalOperatingRevenues $5,298,543 $4,756,692 11TotalOperatingExpenses $4,605,388 $4,006,739 15NetIncome $256,833 $229,337 12EnergyDistribution: Megawatt-hours

RetailDeliveries 32,019 31,019 3 WholesaleDeliveries 9,466 7,855 21 Dekatherms

RetailDeliveries 204,677 208,444 (2) WholesaleDeliveries 883 1,593 (45)

Total Assets at Year End (Thousands) $11,487,708 $10,796,622 6

Financial Highlights

Energy East is a respected super regional

energy services and delivery company that our

customers can depend upon every day. We are a

motivated and skilled team of professionals

dedicated to creating shareholder value through

our focus on profitable growth, operational

excellence and strong customer partnerships.

Mission Statement

2 CEO Letter

March1,2006DearShareholders:

2005wasanotherexcellentyearintheexecutionofourstrategytoberecognizedasoneofthebestperformingenergydeliverycompaniesinthecountry.Earningswereup11%to$1.75pershareandthecommonstockdividendincreased6%.Ontheotherhand,itwasadisappointingyearforourstockpriceinlargepartduetoinvestorconcernsaboutthepotentialimpactofvolatileenergycommoditypricesandregulatoryuncertaintyregardinganelectricrateproceedinginNewYork,aboutwhichIwillcommentlateroninthisletter.

Inmylettertoyoulastyear,ImentionedthatachievingnewrateagreementsinConnecticut,MaineandNewYorkwereimportantprioritiesforbothshareholdersandcustomers.Iampleasedthatwearemakinggoodprogressinthisregard.WehaveanewnaturalgasrateplanforSouthernConnecticutGas,whichprovidesforsufficientrevenuestoimprovecashflowandearnings.WealsoreachedagreementwiththeOfficeofthePublicAdvocateandtheIndustrialEnergyConsumerGrouptoextendCentralMainePower’s(CMP)existingrateplananotherthreeyearsthrough2010.WehaverequestedapprovalofthisextensionfromtheMainePublicUtilitiesCommissionandexpectadecisioninthesecondquarterofthisyear.

InNewYork,NewYorkStateElectric&Gas(NYSEG)filedforasixyearrateplanextension.Specifically,werequestedan8.6%decreaseinoverallelectricdeliveryratestobeeffectiveinSeptember2006andwouldthenfixthoseratesforsixyears.Importantly,thefilingincludedtheextensionofthepopularVoiceYourChoiceprogram,whichprovidescustomerswithmanysupplyoptions,includingafixedpricefromNYSEG.Interestingly,butnotsurprisingintoday’svolatileenergymarkets,eightoutoftencustomerswhochooseanenergysupplyoption,choosethefixedpriceoptionfromNYSEG.OurVoiceYourChoiceprogramhasalsosavedcustomersover$100millionthroughearningssharing,whichinturnhasprovidedafundingsourceforourproposedratereduction.

2003

2004

2005

$1.45

$1.57

$1.75

Earnings per share, basic were up 11% to $1.75.

CEO Letter 3

TheregulatoryuncertaintysurroundingthisfilinghastodowiththeNewYorkStateregulator’sstancethatutilitiesshouldexittheenergysupplybusiness.Inadditiontohavingforcedutilitiesoutofthegenerationbusinessinthe1990s,theNewYorkregulatorythinkingnowincludestheexitofutilitiesfromprovidingabundleddeliveryandelectricsupplyoptionforitscustomers.Webelievethatthisisnotgoodpublicpolicyand,infact,goesagainstNewYorkregulator’soriginal1995objectivestoincreasecustomers’energysupplychoices.Ithasyettobeprovenhowcustomersbenefitfromexcludingutilitiesandnotofferingcustomersasmanysupplychoicesaspossible.WhiletheNewYorkStatePublicServiceCommissionhaspreviouslyapprovedtheVoiceYourChoiceprogramforbothNYSEGandourotherNewYorkutility,RochesterGas&Electric(RG&E),andhasstatedthatitisflexiblewithrespecttoitssupplymodel,financialanalystsareworriedthatregulatorswillnotcontinuethispopularcustomerprogramandthatNYSEG’sfutureearningswillbeadverselyaffected.Wehopetoresolvethisproceedinglaterthisyear.

Wearepleasedtoreportthatdespitethisturbulenttimeofskyrocketingenergysupplycosts,customerscontinuetoenjoysignificantdeliverypricereductionsfromourutilities.CustomersatCMP,NYSEGandRG&Ehaveseentheirelectricdeliveryratesdecline30%,13%and10%,respectively,duringthepastfiveyears,withoutfactoringintheimpactofinflation.Ourgasdeliveryrateshaveforthemostpartbeenfrozen.

Centraltooursuccessincontrollingcustomers’pricesandincreasingearningshasbeentheeffectiveintegrationofoursixoperatingutilities.Wehavenoweliminatedinexcessof$100millioninannualizedcostsoverthepastfouryears.These“mergerenabled”savingsweredirectlyrelatedtocombiningandintegratingoursixutilities.Importantly,thesesavingswerenotattheexpenseofreliability,safety,customerservice,andultimately,customersatisfaction.Indeed,EnergyEastcontinuestoberecognizedinindependentstudiesforitshighcustomersatisfactionandwehaveconsistentlymetorexceededserviceandreliabilitymeasuresestablishedbystateregulators.OurpeopleareveryproudthatJDPowerandAssociatesresidentialcustomersatisfactionsurveyrankedEnergyEast’selectricutilitiessecondoutof15utilitiesintheeasternUnitedStates.

Our people are very proud that JD Power and Associates residential customer satisfaction survey ranked Energy East’s electric

utilities second out of 15 utilities in the eastern United States.

4 CEO Letter

Aswelooktothefuture,wewillcontinuetoinvestinourutilityinfrastructuretofurtherensureasafe,secureandreliablesystemthroughoutupstateNewYorkandNewEngland.Weexpecttoinvestnearly$2billioninutilityinfrastructureoverthenextfiveyears,includingapproximately$450millionin2006.IncreasedinvestmentsinthetransmissiongridinbothMaineandupstateNewYorkareatoppriority.Oneofthebiggestimpedimentstofosteringcompetitiontodayisthelackoftransmissiontomovecompetingelectricitysuppliestowheretheyareneeded.Totheircredit,federalregulatorshaverecognizedthisandarenowprovidingattractivefinancialincentivesfortransmissioninvestments.Wehaveanumberofmajortransmissioninvestmentopportunitiesthatareeligiblefortheseincentiveswhichalsomeetbothourgrowthandreliabilitycriteria.

Inclosing,Iwanttoremindyouofourstrongcommitmenttobestpracticesincorporategovernance.EnergyEastcontinuestoberankedbyindependentsurveysnearthetop5%ofStandard&Poor’s400companiesonexcellenceincorporategovernance.Corporategovernanceisanimportantpartofourtraditionandcultureandnotjustsomethingwedoforposturingsurveyresults.ThisyearyourBoardofDirectorsapprovedtwochangesinthisregard.Whilewehavehadrotatingpresidingdirectorsconductthenon-managementexecutivesessionsofBoardmeetings,theBoardhasdecidedtoappointaleaddirector.Also,atthisyear’sAnnualMeeting,theBoardwillrecommendtoshareholdersthattheCompany’sCertificateofIncorporationbeamendedtoremovesupermajorityvotingprovisions,sothatinthefutureallmatterssubmittedforshareholdervotewouldrequireasimplemajority.

OnbehalfoftheBoardofDirectors,wethankyouforyourinvestmentinEnergyEast.

WesleyW.vonSchackChairman,President&ChiefExecutiveOfficer

Energy East continues to be ranked by independent surveys near the top 5% of Standard & Poor’s 400 companies

on excellence in corporate governance.

MD&A 5

Financial Review

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

Overview

EnergyEast’sprimaryoperations,ourelectricandnaturalgasutilityoperations,aresubjecttorateregulationestablishedpredominatelybystateutilitycommissions.Theapprovedregulatorytreatmentonvariousmatterssignificantlyaffectsourfinancialposition,resultsofoperationsandcashflows.Wehavelong-termrateplansforNYSEG,RG&E,CMPandBerkshireGasthatcurrentlyprovideforsharingofachievedsavingsamongcustomersandshareholders,allowforrecoveryofcertaincostsincludingstrandedcosts,andprovidestableratesforcustomersandrevenuepredictability.CNGiscurrentlyoperatingunderexistingratesfromanincentiverateplanthatexpiredinSeptember2005,withnoearningssharing.SCGreceivedapprovalfornewratesthatbecameeffectiveJanuary1,2006.AsofJanuary31,2006,EnergyEasthad6,114employees.

Wecontinuetofocusourstrategiceffortsintheareasthathavethegreatesteffectoncustomersatisfactionandshareholdervalue.Indoingthis,managementhasimplementedacompany-widerestructuringeffortthatfocusesonefficientlyprovidingutilitysupportservices.In2004weformedUtilitySharedServicesCorporationtoconsolidatesupportservicesfunctionsforouroperatingutilities.

Thecontinuinguncertaintyintheevolutionoftheutilityindustry,particularlytheelectricutilityindustry,hasresultedinseveralfederalandstateregulatoryproceedingsthatcouldsignificantlyaffectoperations,althoughtheiroutcomesaredifficulttopredict.Thoseproceedings,whicharediscussedbelow,couldaffectthenatureoftheelectricandnaturalgasutilityindustriesinNewYorkandNewEngland.

5 MD&AandResultsofOperations

31 ConsolidatedStatementsofIncome

32 ConsolidatedBalanceSheets

34 ConsolidatedStatementsofCashFlows

35 ConsolidatedStatementsofChangesinCommonStockEquity

36 NotestoConsolidatedFinancialStatements

61 ReportofIndependentRegisteredPublicAccountingFirm

63 EnergyEastManagement’sAnnualReportonInternalControlOverFinancialReporting

63 RequiredCertifications

64 Glossary

66 SelectedFinancialData

67 EnergyDistributionStatistics

68 BoardofDirectorsandEnergyEastOfficers

70 ShareholderServices

6 MD&A

ThecontinuedevolutionoftheelectricutilityindustryisevidencedbytherecentenactmentoftheEnergyPolicyActof2005,whichrepealedthePublicUtilityHoldingCompanyActof1935(PUHCA).WiththerepealofPUHCA,theFERCandstateutilitycommissionshavenewauthoritytoregulateandmonitor,amongotherthings,intercompanycostallocationsofholdingcompaniessuchasEnergyEast.

Weengageinvariousinvestingandfinancingactivitiestomeetourstrategicobjectives.Ourprimarygoalforinvestingactivitiesistomaintainareliableenergydeliveryinfrastructure.Wefundourinvestingactivitiesprimarilywithinternallygeneratedfunds.Weplantoinvestnearly$2billioninourenergydeliveryinfrastructureduringthenextfiveyears,includingapproximately$900milliondedicatedtoelectricreliability.Wefocusourfinancingactivitiesonmaintainingadequateliquidityandcreditqualityandminimizingourcostofcapital.

Strategy Wehavemaintainedaconsistentenergydeliveryandservicesstrategyoverthepastseveralyears,focusingonthesafe,secureandreliabletransmissionanddistributionofelectricityandnaturalgas.Wehavesoldamajorityofournoncorebusinessesandthelastofoursubstantialregulatedgenerationassetsandwecontinuetoinvestininfrastructurethatsupportsourelectricandnaturalgasdeliverysystems.Achievingoperatingexcellenceandefficienciesthroughoutthecompanyiscentraltoourstrategy.

Ourlong-termrateplanscontinuetobeacriticalcomponentofoursuccess.Whilespecificprovisionsmayvaryamongourpublicutilitysubsidiaries,ouroverallstrategyincludescreatingstablerateenvironmentsthatallowthecompaniestoearnafairreturnwhileminimizingpriceincreasesandsharingachievedsavingswithcustomers.

Electric Delivery Rate OverviewTheelectricindustryisregulatedbyvariousstateandfederalagencies,includingstateutilitycommissionsandtheFERC.Thefollowingisabriefoverviewoftheprincipalrateagreementsineffectforeachofourelectricutilities.

ElECtRIC RatE PlanSThecurrentNYSEGrateplanwasapprovedbytheNYPSCFebruary2002Order,whichprovidesforequalsharingofthegreaterofROEsinexcessof12.5%onelectricdelivery,or15.5%onthetotalelectricbusiness(includingcommodityearningsthatoverthetermoftherateplanwereestimatedtobe$25millionto$40milliononanannualbasisbasedonfutureenergypricesatthetimetheplanwasapproved)foreachoftheyears2003through2006.Forpurposesofearningssharing,NYSEGisrequiredtousethelowerofitsactualequityora45%equityratio.AtDecember31,2005,theequityNYSEGusesforearningssharingapproximates$740million,whichisbasedonthe45%equityratiolimitation.Earningslevelsweresufficienttogenerateestimatedpretaxsharingwithcustomersof$22millionin2005and$17millionin2004.

RG&E’scurrentrateswereestablishedbythe2004ElectricRateAgreement,whichaddressesRG&E’selectricratesthrough2008.KeyfeaturesoftheElectricRateAgreementincludefreezingelectricdeliveryratesthroughDecember2008,exceptfortheimplementationofaretailaccesssurchargeeffectiveMay1,2004,torecover$7millionannually.AnASGAwasestablishedthatisestimatedtobe$145millionattheendof2008andwillbeusedatthattimeforratemoderationorotherpurposesatthediscretionoftheNYPSC.TheElectricRateAgreementalsoestablishedanearnings-sharingmechanismtoallowcustomersandshareholderstoshareequallyinearningsabovea12.25%ROEtarget.Earningslevelsweresufficienttogenerate$23millionofpretaxsharingin2005.Therewasnosharingin2004.

NYSEG’sandRG&E’scurrentelectricrateplansoffertheirretailcustomerschoiceintheirelectricitysupplyincludingafixedrateoption,avariablerateoptionunderwhichratesvarymonthlybasedonthe

Energy East plans to invest nearly $2 billion in energy delivery infrastructure

during the next five years.

MD&A 7

marketpriceofelectricityandanoptiontopurchaseelectricitysupplyfromanESCO.RG&Ecustomersmaketheirsupplychoiceannually.NYSEGcustomersmaketheirelectioneverytwoyears,mostrecentlyinlate2004forthe2005and2006planyears.RG&EcustomerswhodonotmakeachoiceareservedunderRG&E’svariablepriceoption.NYSEGcustomerswhodonotmakeachoiceareservedunderthefixedrateoption.BothNYSEG’sandRG&E’scustomersalsopaynonbypassablewirescharges,whichincluderecoveryofstrandedcosts.Approximately45%ofNYSEG’sand75%ofRG&E’stotalelectricloadisnowprovidedbyanESCOoratthemarketprice.

InMarch2000theNYPSCinstitutedtheCollaborativeonEndStateofEnergyCompetitionproceedingtoaddressthefutureofcompetitiveelectricandnaturalgasmarkets,includingtheroleofregulatedutilitiesinthosemarkets.Otherobjectivesoftheproceedingincludeidentifyingandsuggestingactionstoeliminateobstaclestothedevelopmentofthosecompetitivemarketsandprovidingrecommendationsconcerningprovideroflastresortandrelatedissues.NYSEGandRG&EbelievethattheNYPSCshouldnotadoptasingleend-statevisionforNewYorkandshouldmaintainflexibilitybyaddressingeachutilityinthecontextofthatutility’suniquecircumstances.

InAugust2004theNYPSCissuedaPolicyStatementrecommendingthatallpotentiallycompetitiveutilityfunctionsbeopenedtocompetition.Whileitisnotpossibletodeterminewhenmarketswillbecomeworkablycompetitive,allutilitieswererequiredtoprepareplanstofosterthedevelopmentofretailenergymarkets.TheplansvarybyindividualutilityandNYSEGandRG&Edonotexpectthestatementofpolicytoaffecttheircommodityserviceoptionsundertheircurrentelectricrateplans,whichextendthroughDecember31,2006,forNYSEGandDecember31,2008,forRG&E.

NYSEGandRG&EfiledtheirretailaccessplanswiththeNYPSConApril14,2005.Aspartofitsfiling,NYSEGproposedtocontinueofferingitscurrentcommodityoptionstocustomers,withnewtwo-yearcommodityofferingsbeginningJanuary1,2007,thatarethesameasitscurrentprogramexceptfortheadditionofaprogramtofacilitateESCOmarketparticipationbyallowingNYSEGtobillandcollectfromESCOcustomersdirectly.InJuneandJuly2005partiesfiledcommentsbothinsupportofandinoppositiontoNYSEG’sandRG&E’sretailaccessplans.NYSEG’sproposalisconsistentwiththecommodityoptionsincludedinitsrecentlyfiledElectricRatePlanExtension.

NYSEGandRG&EbelievethattheircurrentcommodityoptionprogramsarethemostcomprehensiveinNewYorkState,providingafullmenuofelectricsupplychoices,includingafixedpriceoptionforcustomerswhodonotwanttobesubjectedtovolatilewholesaleelectricityprices.Experiencehasshownthatthevastmajorityofcustomerswanttheirutilitytoremainasupplyoptionandpreferafixedpriceoption.NYSEGandRG&EbelievethattheirprogramsarealsoamongthemostsuccessfulofanyretailaccessplansinNewYorkStateintermsofactiveparticipationandcustomermigration.Inaddition,theirprogramshaveproduced$100millionincustomerbenefitsthrough2005.

CMP’sdistributioncostsarerecoveredundertheARP2000,whichbecameeffectiveJanuary1,2001,andcontinuesthroughDecember31,2007,withpricechanges,ifany,occurringonJuly1.CMP’sannualdeliveryrateadjustmentsarebasedoninflationwithproductivityoffsetsof2.75%in2005and2006and2.9%in2007.Priceadjustmentshaveresultedinratedecreasesineachyearthattheagreementhasbeenineffectsince2002.

CMPusesformularatesfortransmissionthatareFERCregulated.TheformularatesprovidefortherecoveryofCMP’scostofowning,operatingandmaintainingitslocalandregionaltransmissionfacilitiesandlocalcontrolcenter,includingaFERC-recommendedbaselevelROEof10.72%,plusa50basispointadderforregionalfacilities.TheformularatesareupdatedannuallyinafilingtotheFERConJune1st.CMP’stransmissionratesincreasedapproximately$15millionfortheyeareffectiveJuly1,2005.TheincreaseenablesCMPtorecoveritsshareofISONewEnglandregionaltransmissioncostsanditslocaltransmissioncosts.

8 MD&A

PursuanttoMainestatutes,CMPrecoverstheabove-marketcostsofitspurchasedpoweragreements,aswellascostsincurredtodecommissionanddismantlethenuclearfacilitiesinwhichCMPhasanownershipshare,throughitsstrandedcostrates.InJanuary2005theMPUCapprovednewstrandedcostratesforthethree-yearperiodendingFebruary2008.Anydifferencebetweenactualandprojectedstrandedcostsisdeferredforfuturerefundorrecovery.CMPisprohibitedbystatelawfromprovidingcommodityservicetoitscustomers.

Electric Delivery Business Developments

nYSEG ElECtRIC RatE Plan ExtEnSIOnOnSeptember30,2005,NYSEGfiledasix-yearElectricRatePlanExtensionwiththeNYPSC,tocommenceonJanuary1,2007,whichisthedayaftertheendofitscurrentrateplan.Aspartofitsfiling,NYSEGproposedtodecreasecustomers’billspriortothecommencementoftheElectricRatePlanExtensionbyimplementingabillcredittocustomerseffectiveforthefour-monthperiodfromSeptember1,2006throughDecember31,2006.Inparticular,NYSEGproposedtoreturntoitselectriccustomers$23.7millionfromitsASGA,whichwasinitiallycreatedasaresultofthesaleofNYSEG’sgeneratingstations.TheASGAhasbeenenhancedduringNYSEG’scurrentrateplanwiththecustomers’shareofexcessearnings.BeginningonJanuary1,2007,NYSEGalsoproposedtoreduceitsnonbypassablewireschargeby$162.8millionandincreasedeliveryratesby$91.6million,thusmaintaininganannualizedoverallelectricitydeliveryratedecreaseofapproximately$71.2million,or9.5%.NYSEGproposedtoaccomplishthereductioninthenonbypassablewirescharge,whichwouldmorethanoffsettheincreaseindeliveryrates,byacceleratingbenefitsfromtheexpirationofcertainabove-marketNUGcontractsandcappingtheamountofabove-marketNUGcostsoverthetermoftherateplanextension,alsoknownasNYSEG’sNUGlevelizationproposal.NYSEGalsoproposedtoincreaseitsequityratiofrom45%to50%.Inaddition,NYSEG’sproposalwouldallowcustomerstocontinuetobenefitfrommergersynergiesandsavings.

OnOctober28,2005,NYSEGfiledamotionwiththeNYPSCaskingthatthechairmanoftheNYPSCrecusehimselffromanyconsiderationofNYSEG’sElectricRatePlanExtensionfilingandofNYSEG’sproposedRetailAccessPlanfiledinApril2005.Themotionmaintainedthatthechairman’srecusalisnecessarybecausehispublicstatementsdemonstratethatheisbiasedagainstNYSEGanditsVoiceYourChoiceprogram,inviolationofNYSEG’sdueprocessrightsforafairandimpartialadjudication.ThechairmandeniedthemotiononDecember7,2005.

OnJanuary9,2006,NYSEGfiledwiththeNYPSCrevisionsandupdatestoitsSeptember30,2005filing.Bythisfiling,NYSEGproposedtofurtherreduceitsnonbypassablewireschargebyanadditional$5millionforatotalreductionof$167.8million,andproposedtofurtherincreaseitsdeliveryratesbyanadditional$12millionforatotalincreaseof$103.6million.Asaresultoftheserevisionsandupdates,NYSEG’sproposedannualizedoverallelectricitydeliveryratedecreasewasreducedby$7million,to$64.2million,or8.6%.TheserevisionsandupdatesdidnotchangetheoverallframeworkofNYSEG’sElectricRatePlanExtensionproposal.

OnJanuary16,2006,twoESCOssubmittedamotiontotheALJtodismisstheportionofNYSEG’sratefilingrequestingNYPSCapprovalofthecommodityoptionprogram.TheConsumerProtectionBoardandthePublicUtilityLawProjectopposedthatmotionintheirresponsesfiledwiththeNYPSConJanuary19and30,2006,respectively.NYSEGfileditsoppositiontothemotionwiththeNYPSConJanuary25,2006.NYSEGstatedinitsfilingthatthemotionisnotsupportedbylaw,woulddenyNYSEGdueprocess,includinganevidentiaryhearing,anddistortstheevidencepresentedbyNYSEGregardingtheVoiceYourChoiceprogram.TheALJdeniedtheESCOs’motioninaRulingissuedonFebruary10,2006.IntheRuling,theALJconcludedthattheNYPSC’sAugust2004PolicyStatement

MD&A 9

wasnotintendedasabindingorderand,asamatteroflaw,doesnotprecludeNYSEG’sproposaltoextenditsVoiceYourChoiceprogram.TheALJalsodeterminedthatNYSEG’sElectricRatePlanExtensionproceedingistheproperforumforconsiderationofissuespresentedbyNYSEG’sproposaltoextenditsVoiceYourChoiceprogram.

InearlyFebruary2006,StaffoftheNYPSC(Staff )andsixotherpartiessubmittedtheirdirectcases.Staffpresentedaone-yearratecaseonly.Initspresentation,Staffproposedanoveralldeliveryratedecreaseofapproximately$82.8million,orabout13.4%,forthe2007rateyear.StaffneitherrebuttednoraddressedNYSEG’ssix-yearrateplanextensionproposal,includingNYSEG’sNUGlevelizationproposal.StaffalsoopposedNYSEG’sproposaltoextenditsVoiceYourChoiceprogram.

NYSEGfileditsrebuttalcaseonFebruary21,2006,respondingtoStaff ’sone-yearratecaseproposalbyproposingtoincreasedeliveryratescommencingJanuary1,2007,byapproximately$58.3million,whichwouldbeoffsetbyanequalamortizationoftheASGAbacktocustomers.NYSEGalsoproposedtoamortizeanequivalentportionoftheASGAliabilitythroughabillcreditinthenonbypassablewireschargetooffsetthedeliveryincrease,resultinginnochangein2007.AlthoughNYSEG’srebuttaltestimonyrespondstoStaff ’sone-yearratecaseproposal,NYSEGcontinuestosupporttheadoptionofasix-yearrateplanextensionproposal,includingitsNUGlevelizationproposaltomoderatethedeliveryrateincreaseanditsproposaltoextendtheVoiceYourChoiceprogram.

HearingsarescheduledtocommenceonMarch22,2006.NYSEGcannotpredicttheoutcomeofthisproceeding.

RG&E tRanSmISSIOn PROjECt InDecember2004RG&EreceivedapprovalfromtheNYPSCtoupgradeitselectrictransmissionsysteminordertoprovidesufficienttransmissionandensurereliableservicetocustomersfollowingtheshutdownofRG&E’s257MWcoal-firedRussellStation,whichisexpectedtooccurin2007.Theprojectincludesbuildingorrebuilding38milesoftransmissionlinesandupgradingsubstationsintheRochester,NewYorkarea.InAugust2005RG&EselectedtheteamofEPROEngineering,E.S.BoulosandO’ConnellElectricCompanyfortheproject.Constructionontheprojectisexpectedtobegininthefirstquarterof2006.Theestimatedcostoftheprojectisapproximately$110million.

nIaGaRa POwER PROjECt RElICEnSInGTheNYPA’sFERClicensewithrespecttotheNiagaraPowerProjectexpiresonAugust31,2007.InordertocontinueoperatingtheNiagaraPowerProject,theNYPAfiledarelicensingapplicationinAugust2005.TheNYPA’srelicensingprocessisimportanttoNYSEG’sandRG&E’scustomersbecausethecompaniesareallocatedanaggregateofover360MWsofNiagaraPowerProjectpowerbasedontheircontractswiththeNYPA.(NYSEGandRG&EalsoreceiveallocationsfromtheSt.LawrenceProjectpursuanttothosesamecontracts.)ThecontractsexpireonAugust31,2007,uponterminationoftheNYPA’slicense.TheannualvalueoftheNiagaraallocationtothecompanies,atcurrentelectricitymarketprices,isapproximately$100millionandthelossoftheallocationwouldincreaseNYSEG’sandRG&E’sresidentialcustomerrates.However,theNYPAhasstatedthattheallocationofNiagarapowertoNYSEGandRG&Eshouldnotbeaddressedintherelicensingproceedingandthatthedispositionofthepowerwillbeinaccordancewithstateandfederalrequirements.

NYSEGandRG&EfiledamotiontointerveneintherelicensingproceedingonNovember3,2005,andonDecember16,2005,NYSEGandRG&EsubmittedcommentsarguingthattheFERCshould:(1)considerpowerallocationissues(includingtoNYSEGandRG&E)initsreviewoftheapplication;(2)requiretheNYPAtoupdatetherecordwithinformationconcerningthebenefitsoftheallocationtoNYSEGandRG&Ecustomers;and(3)requiretheNYPAtomeetwithNYSEGandRG&Etodiscusstheirallocationsandtheeffectsofwithdrawaloftheallocationsontheircustomers.OnJanuary3,2006,theNYPAfiledananswerarguingthatcertainissuesraisedinourcommentsshouldbeignoredbythe

10 MD&A

FERCandthatallocationissuesarenotanappropriatequestionintherelicensingproceeding.OnJanuary10,2006,NYSEGandRG&EfiledaresponsetoNYPA’sanswer.Weareunabletopredicttheoutcomeofthisproceeding.

CmP altERnatIvE RatE PlanOnDecember7,2005,CMPandtheOfficeofthePublicAdvocatefiledwiththeMPUCastipulationforanextensionofCMP’sARP2000.Thisstipulationisalsosupportedbylow-incomecustomeradvocatesandacoalitionofindustrialenergycustomershassignedthestipulationagreement.ThestipulationmaintainstheprovisionsofCMP’sARP2000andproposesathree-yearextensionwithfouradditionalitems.Thestipulationprovidesfora0.5%increaseinthescheduledproductivityoffsetforJuly2006andprovidesforproductivityoffsetsaveraging2%for2008,2009and2010.Thestipulationadds$2.2millioninassistanceforlowincomecustomersannuallystartingin2006.Underthestipulation,CMPagreestoeducateitscustomersontheregionalbenefitsofadjustingusageduringpeakhoursanddemandperiodsandalsoagreestolimitthepromotionofincreasedusageduringspecifiedhigherdemandperiods.Finally,CMPagreestocommittoinvestinganadditional$25millionthrough2010forenhancementstothereliability,safetyandsecurityofitsdistributionsystem.

OnFebruary1,2006,theMPUCapprovedthatportionofthestipulationincreasingassistancetolowincomecustomers.TheMPUChasestablishedascheduletoreviewtheremainingtermsofthestipulation,anditsdecisionisexpectedinthesecondquarterof2006.CMPcannotpredicttheoutcomeofthisproceeding.

CmP ElECtRICItY SuPPlY RESPOnSIbIlItYUnderMainestatutes,CMP’scustomerscanchoosetoarrangeforcompetitiveenergysupplyortakedefaultsupplyunderstandard-offerserviceasarrangedbytheMPUC.TheMPUCconductsperiodicsupplysolicitationsforstandard-offerservicebycustomerclass.IftheMPUCdoesnotacceptanycompetitivesupplybidforastandardofferarrangement,theMPUCcanmandatethatCMPbeastandard-offerproviderofelectricitysupplyserviceforretailcustomersandCMPwouldrecoverallcostsofsuchanarrangementinrates.AsofJanuary2006,theMPUChasapprovedstandard-offerservicearrangementsforallofCMP’scustomerclassesthroughcompetitivesolicitation.Thesupplypricesandtermsofthearrangementsvarybyclass,includingaladderedthree-yeararrangementforresidentialandsmallcommercialcustomersthatsolicitsone-thirdofthesupplyeachyearandasix-montharrangementformediumandlargecommercialandindustrialcustomers.

CmP nuClEaR COStS CMPownssharesofstockinthreecompaniesthatownnucleargeneratingfacilitiesinNewEnglandthathavebeenpermanentlyshutdown,andaredecommissionedorinprocessofbeingdecommissioned:MaineYankeeAtomicPowerCompany(38%ownership),ConnecticutYankeeAtomicPowerCompany(6%ownership)andYankeeAtomicElectricPowerCompany(9.5%ownership).EachofthethreefacilitieshasanestablishedNRClicensedindependentspentfuelstorageinstallationonsitetostorespentnuclearfuelindrycasksuntiltheDOEtakesthefuelfordisposal.TheYankeecompaniescommencedlitigationin1998chargingthatthefederalgovernmenthadbreachedthecontractsitenteredintowitheachoftheYankeecompaniesin1983forspentnuclearfueldisposal.ThecontractsprovidedforthefederalgovernmenttobeginremovingspentnuclearfuelfromtheYankeecompanies,nolaterthanJanuary31,1998,inreturnforpaymentsbyeachoftheYankeecompanies.TwofederalcourtsfoundthatthefederalgovernmentbreacheditscontractswiththeYankeecompaniesandotherutilities.AtrialintheU.S.CourtofFederalClaimstodeterminethemonetarydamagesowedtotheYankeecompaniesfortheDOE’scontinuedfailuretoremovespentnuclearfuelconcludedinJanuary2005.TheYankeecompanies’individualdamageclaimsarespecifictoeachplantandincludedcoststhrough2010,theearliestyeartheDOEexpectsthatitwillbeginremovingfuel.TheYankeecompanies’damageclaimsthrough2002totaledapproximately$263millionandCMP’ssponsor-weightedshareisapproximately$45million.Theclaimsalsonoteadditionalcoststhatwillbeincurredforeachyearthatfuelremainsatthesitesbeyond2010.IftheYankeecompaniesprevailinthesecases,anydamagesawardedwouldbecredited

MD&A 11

totheirrespectivedecommissioningorspentfueltrustfunds.Anyremainingtrustfundswouldbereturnedtoelectriccustomerswhendecommissioningiscomplete.TheYankeecompaniesexpectatrialcourtdecisioninthefirsthalfof2006.CMPcannotpredicttheoutcomeofthislitigation.

PursuanttoaFERCapprovedsettlement,inJuly2004ConnecticutYankeefiledforFERCapprovalofarevisedscheduleofdecommissioningchargestobecollectedfromitswholesalecustomers,basedonanupdatedestimateofdecommissioningcosts.Estimateddecommissioningandlong-termspentfuelstoragecostsfortheperiod2000through2023increasedbyapproximately$390millionin2003dollarsandresultinannualcollectionsof$93millionfromConnecticutYankee’sowners,includingCMP.Therevisedestimatereflectsincreasesintheprojectedcostsforspentfuelstorage,security,liabilityandpropertyinsuranceandthefactthatConnecticutYankeehadtotakeoverallworktocompletethedecommissioningoftheplantduetoitsterminationofitscontractwithBechtel,theturnkeydecommissioningcontractor,inJuly2003.BechtelfiledalawsuitinConnecticutstatecourtchallengingthatterminationandConnecticutYankeefiledacounterclaimtorecoverdamagescausedbyBechtel’sbreachofcontractandtermination.AnyamountthatConnecticutYankeerecoversfromBechtelwouldbecreditedtoitsdecommissioningcostsandanyremainingdecommissioningfundswouldbereturnedtoelectriccustomerswhendecommissioningiscomplete.Thismatterisscheduledfortrialinmid-2006andCMPcannotpredicttheoutcomeofthislitigation.

TheFERCauthorizedConnecticutYankeetobegincollectingthereviseddecommissioningchargesinJanuary2005fromConnecticutYankee’sowners,includingCMP,whoseshareofa$93millionincreaseisapproximately$6million.UnderMainestatutes,CMPisallowedtorecoveranyincreasesindecommissioningcostsandpursuanttotheJanuary2005strandedcostsettlement,CMPbegancollectingthehigherConnecticutYankeedecommissioningcoststhroughratesinMarch2005.(SeeElectricDeliveryRateOverview.)

InJune2004theDPUCandtheOCCfiledapetitionwiththeFERCaskingittodetermineifanyofConnecticutYankee’sincreaseddecommissioningcostswerenotprudentlyincurred.InAugust2004theFERCissuedaninitialOrderrejectingtheDPUC’spetition;approvedarateincreaseforConnecticutYankeeeffectiveFebruary1,2005,subjecttorefund;andsetforhearingthecoststoberecovered.TheDPUCrequestedrehearingoftheFERC’sAugust2004OrderandonOctober20,2005,theFERCissuedanorderdenyingtherequestforrehearing.InDecember2005theDPUCfiledanoticeofappealoftheinitialAugust2004OrderwiththeUnitedStatesCourtofAppeals,DistrictofColumbiaCircuit.

TheDPUChasallegedtotheFERCthatConnecticutYankeeimprudentlymanagedandwrongfullyterminatedBechtel,theturnkeydecommissioningcontractor,andasaresult,concludesthatapproximately$225millionto$235millionofConnecticutYankee’srateincreaseshouldbedenied.TheFERCStaffandBechtelalsoallegethatthecostincreasewasimprudentlyincurred.OnNovember22,2005,theFERC’sALJissuedanInitialDecisionthatfoundinfavorofConnecticutYankeeonallimprudenceclaims,findingthatnodisallowancewaswarranted.BecausetheALJfoundthatConnecticutYankeehadrefutedallclaimsofimprudence,theALJdidnotaddressanyparty’sproposeddisallowance.TheintervenerswhounsuccessfullyraisedimprudenceclaimsbeforetheALJhavetakenexceptiontotherulingbeforetheFERC,whichisexpectedtoissueafinaldecisionin2006.CMPisunabletopredicttheoutcomeofthisproceeding.

nOnutIlItY GEnERatIOnWeexpensedapproximately$631millionforNUGpowerin2005andweestimatethatourcombinedNUGpowerpurchaseswilltotal$571millionin2006,$575millionin2007,$410millionin2008,$244millionin2009and$83millionin2010.CMPandNYSEGcontinuetoseekwaystoproviderelieftotheircustomersfromabove-marketNUGcontractsthatstateregulatorsorderedthecompaniestosign,andwhich,in2005,averaged10.0centsperkilowatt-hourforCMPand10.2centsperkilowatt-hourforNYSEG.RecoveryoftheseNUGcostsisprovidedforinCMP’sstrandedcost

12 MD&A

ratesandinNYSEG’scurrentelectricrateplanthroughanonbypassablewirescharge.(SeeNote9toourConsolidatedFinancialStatements.)

OthER PROCEEdInGS On thE nYPSC COllabORatIvE On End StatE Of EnERGY COmPEtItIOnNYSEGandRG&EhavesuppliedcommentsinNYPSCproceedingsregardingotherinvestor-ownedutilityprogramsthataredesignedtoencouragecustomerstomigratefromutilitiestoESCOs.NYSEGandRG&Ebelievethatthe“PowerSwitch”programimplementedbyOrangeandRocklandUtilities,Inc.,whichisbeingtoutedasamodelfortherestofthestate,isflawed,sinceitresultsincustomersbeingswitchedtoESCOswithoutcompleteinformationontheprogram.Intheirfiling,NYSEGandRG&Equestionwhetherthe“PowerSwitch”programisconsistentwiththeNYPSC’sUniformBusinessPractices.NYSEGandRG&Ebelievetheprogramresultsmaybesuspectandshouldnotbeusedasabasistoexpandtheprogramtootherutilities.OnJune1,2005,theNYPSCapprovedCentralHudsonGas&ElectricCorporation’sretailaccessplanandrejectedNYSEG’sandRG&E’scommentsrequestingtheNYPSCtonottakeactiononCentralHudson’splanandtosuspendthedevelopmentofnewretailaccessinitiativesthatarebasedonflawedmodels.

Inarelatedmatter,onJuly26,2005,theNYPSCissuedanoticesolicitingcommentsonanNYPSCStaffproposalonstatewideguidelinesforESCOReferralPrograms.AsaresultofexperiencegainedsincethePolicyStatementwasissuedinAugust2004,theNYPSCStaffhasidentifiedaneedforstatewidesimplicity,consistencyanduniformity,totheextentpracticable,inESCOReferralPrograms.InSeptemberandOctober2005NYSEGandRG&Efiledcommentsurgingrejectionoftheproposalandobjectingtotheproposaltotheextentthatitwillrequireallutilitiestoadopta“PowerSwitch”typeprogram.AtitssessiononDecember14,2005,theNYPSCestablishedproceduresforutilitiestofollowinimplementingESCOReferralProgramsbasedontheOrange&Rocklandmodelforthoseprograms,asmodifiedandenhancedwithadditionalconsumerprotectionmeasures.TheNYPSCalsoapproved,withmodifications,CentralHudson’sproposedESCOReferralProgram.TheNYPSCorderedRG&EtobeginacollaborativewithinterestedpartiesforthepurposeofimplementinganESCOReferralProgramatRG&E.TheNYPSCfurtherpermittedNYSEGtoaddresstheESCOReferralProgramwithinthecontextofitscurrentratecasedescribedabove.Basedontheselatestdevelopments,itisunclearwhetherornotNYSEGwillbeabletoextenditsVoiceYourChoiceprogramasapartofitsongoingelectricrateproceeding.

nEw EnGland RtO InMarch2004theFERCissuedanorderthatacceptedasix-stateNewEnglandRTOasproposedbyISONewEnglandandtheNewEnglandtransmissionowners.AsanRTO,ISONewEnglandisresponsiblefortheindependentoperationoftheregionaltransmissionsystemandregionalwholesaleenergymarket.Thetransmissionownersretainownershipoftheirtransmissionfacilitiesandcontrolovertheirrevenuerequirements.TheFERCalsoapprovedbotha50basispointROEincentiveadderforregionaltransmissionfacilitiessubjecttoRTOcontrolanda100basispointROEincentiveadderfornewregionaltransmissionfacilitiesdevelopedbyanRTO.TheNewEnglandtransmissionownershaveappealedtheapplicationoftheadderstoregionalfacilitiestotheCircuitCourtofAppealsfortheDistrictofColumbia.OtherpartieshaveappealedtheFERC’sdecisiontogranttheadderstoregionalfacilities.TheappealsarependingbeforetheCourtandnodecisionisexpecteduntilmid-2006.TheFERCorderalsoaccepted,subjecttosuspensionandhearing,theNewEnglandtransmissionowner’sproposedbaselevelROEof12.8%applicabletoratesforlocalandregionaltransmissionservice.Thoseratesbecameeffective,subjecttorefund,February1,2005.TheFERCconductedevidentiaryhearingsonthefinalbaselevelROEandtheincentivefornewtransmissioninvestmentinJanuaryandFebruary2005,andissuedaninitialdecisioninMay2005recommendingabaselevelROEof10.72%,plusthe50basispointadderforregionalfacilities.TheNewEnglandtransmissionownershavefiledexceptionstotheinitialdecisionbothwithrespecttothebaselevelROEandalsoseekingapplicationofthe100basispointadderfornewinvestmentsapplicabletoboththelocalandregionaltransmissionrates.AfinaldecisionfromtheFERConthoseissuesisnotexpecteduntilearly2006.TheNewEnglandtransmissionownersandISONewEnglandimplementedtheNewEnglandRTOeffectiveFebruary1,2005.

MD&A 13

nYISO bIllInG adjuStmEnt TheNYISOfrequentlybillsmarketparticipantsonaretroactivebasiswhenitdeterminesthatbillingadjustmentsarenecessary.Suchretroactivebillingscancoverseveralmonthsoryearsandcannotbereasonablyestimated.NYSEGandRG&Erecordtransmissionorsupplyrevenueorexpense,asappropriate,whenrevisedamountsareavailable.ThetwocompanieshavedevelopedanaccrualprocessthatincorporatesavailableinformationaboutretroactiveNYISObillingadjustmentsasprovidedtoallmarketparticipants.However,onanongoingbasis,theycannotfullypredicteitherthemagnitudeorthedirectionofanyfinalbillingadjustments.

TheFERCissuedanorderdirectingtheNYISOtomodifycertainenergypricesforMay8and9,2000,andtobackbillNYISOmarketparticipants,includingNYSEGandRG&E.TheNYISOandmanymarketparticipantsfiledrequestsforrehearingwiththeFERCconcerningthatorder.WhiletheFERChasnotruledonthoserequestsforrehearing,onJuly8,2005,andOctober7,2005,theNYISOissuedbackbillingsthatreflectedtheFERCorderconcerningtheMay2000issues.NYSEG’supdatedbackbillingrelatingtoMay8and9,2000,wasapproximately$2millionandRG&E’swasapproximately$1million.Inthethirdquarterof2005NYSEGandRG&Edeferredtheamountsassociatedwiththebackbillingsasregulatorymandates,pursuanttotheirElectricRateAgreementsapprovedbytheNYPSC.

lOCatIOnal InStallEd CaPaCItY maRkEtSIn2003theFERCrequiredISONewEnglandtofileaproposedmechanismtoimplementbyJanuary1,2006,locationordeliverabilityrequirementsintheinstalledcapacityorresourceadequacymarkettoensurethatgeneratorsthatprovidecapacitywithinareasofNewEnglandareappropriatelycompensatedforreliability.Inresponse,in2004ISONewEnglanddevelopedandfiledwiththeFERCaLICAPmarketproposalbasedonanadministrativelysetdemandcurve.InJune2005theFERCALJissuedaninitialdecisionessentiallyadoptingtheISONewEnglandLICAPmarketproposalwithminormodifications.CMPandotherpartiesthatopposetheISONewEnglandLICAPmarketproposalfiledexceptionstotherecommendeddecisioninJuly2005.TheEnergyPolicyActof2005includeda“senseofCongress”provisiontotheeffectthattheFERCshouldcarefullyconsidertheobjectionsoftheNewEnglandstatestotheLICAPproposalintherecommendeddecision.Inaddition,theMPUC,CMP,theDPUCrepresentingthestateofConnecticutandtheOCC,joinedwithseveralMassachusettspartiesandfiledbriefswiththeFERCaskingthatthepartiesconductsettlementdiscussionstoconsideralternativesandthattheFERCconsiderotheralternativestotheLICAPmarketproposal.Inresponsetotheseprotests,theFERChasdelayedanypossibleimplementationofLICAPuntilOctober1,2006,attheearliestandgrantedoralargumentstoconsideroppositiontoLICAPandpossiblealternatives.Followingoralarguments,theFERCgrantedtherequesttoconductsettlementdiscussionstoconsideralternatives.ThediscussionsbeganinNovember2005andonJanuary31,2006,theSettlementALJreportedtotheFERCthatmostofthepartieshadreachedanagreementinprincipleonanalternativetoLICAP.ThisalternativewillbefiledwiththeFERCbyApril12,2006,andthereafterpartieswillbeallowedtosubmitcommentsoroppositionbeforetheFERCissuesadecision.CMPwillreviewandevaluatethesettlementasfiledwiththeFERC.Presently,CMPandtheMPUC,amongotherparties,areopposedtotheLICAPproposalandthealternative,aseitherproposalcouldhaveanadverseeffectonMaine’seconomybyincreasingrates5%to10%.Mainelawmakersareholdinghearingsinearly2006onthepossibilityofMainewithdrawingfromISONewEngland.CMPcannotpredicttheoutcomeofthesesettlementdiscussions,howtheFERCwillruleorwhatmodificationstheFERCmightmaketothefiling.AnyincreaseincostsassociatedwithLICAPoranynegotiatedalternativewillbereflectedinMaine’sstandardofferrates.

ERRant vOltaGEInJanuary2005theNYPSCissuedanOrderInstitutingSafetyStandardsinresponsetoapedestrianbeingelectrocutedfromcontactwithanenergizedserviceboxcoverinNewYorkCity.Theincidentoccurredoutsideofourserviceterritory.AllNewYorkutilitiesweredirectedtorespondtothatorderbyFebruary19,2005,withareportthatprovidedadetailedvoltagetestingprogram,aninspectionprogramandschedule,safetycriteriaappliedtoeachprogram,aqualityassuranceprogram,

14 MD&A

atrainingprogramfortestingandinspectionsandadescriptionofcurrentorplannedresearchanddevelopmentactivitiesrelatedtoerrantvoltageandsafetyissues.TheOrderInstitutingSafetyStandardsalsodeniesutilityrequestsforrecoveryofimplementationcostsandestablishescriteriaforutilitiesseekingauthorizationtorecovercostsasanincrementalexpense.Theorderalsoestablishedpenaltiesforfailuretoachieveannualperformancetargetsfortestingandinspections,at75basispointseach.

InearlyFebruary2005NYSEGandRG&Efiled,withtwootherNewYorkStateutilities,ajointpetitionforrehearingthatfocusedonseveralareasincludingtheimpracticabilityofthetimetableestablishedintheorder.Inaddition,NYSEGandRG&Efiledaseparatepetitionforrehearingdealingwiththerecoveryofincrementalcostsofcomplyingwiththeorder.Inresponsetotheorder,inlateFebruary2005NYSEGandRG&Efiledatestingandinspectionplanthatisconsistentwiththetimetableidentifiedinthejointpetitionforrehearing.NYSEGandRG&Ehavebeguntoimplementtheirplans,includingtestingofequipment.OnJuly21,2005,intheresponsetothepetitionforrehearing,theNYPSCissuedanorderdetailingtherevisedrequirementsforstrayvoltagetestingandreducedpenaltiesduringthefirstyearto37.5basispoints.NYSEGandRG&EfiledtherequiredannualreportswiththeNYPSConJanuary17,2006.NYSEGandRG&Ehaveincurredcostsofapproximately$3millionasofDecember31,2005,includingmorethan$1millionincurredbyRG&E.RG&Eestimatesthatitwillincuradditionalcostsofapproximately$3million,andNYSEGestimatesitwillincuranotherapproximately$9millionofcosts,bytheendof2006tocomplywiththeorder.

huRRICanES’ EffECtS On natuRal GaS SuPPlYWhilenoneofouroperatingutilitiesweredirectlyaffectedbyHurricaneKatrinaorHurricaneRita,thehurricanes’effectsonnaturalgassupplyandsubsequentpriceincreases,includingwholesaleelectricityprices,haveaffectedourelectricitycustomers.ElectricitypricesforcustomerswhoelectedvariablerateoptionshaverisendramaticallysincethehurricanesstrucktheGulfCoastinlateAugustandSeptember2005.Currentpricesremainhighduetoeconomicconditions.Weareunabletopredictwhateffectthesharpincreaseinnaturalgaspricesmayhaveonwholesaleelectricitypricesandourcustomers’energyconsumptionorabilitytopay.

Natural Gas Delivery Rate Overview

Ournaturalgasdeliverybusinessconsistsofourregulatednaturalgastransportation,storageanddistributionoperationsinNewYork,Connecticut,MassachusettsandMaine.Thenaturalgasindustryisregulatedbyvariousstateandfederalagencies,includingstateutilitycommissions.Allofournaturalgasutilitieshaveanaturalgassupplychargeorapurchasedgasadjustmentclausetodeferandrecoveractualnaturalgascosts.Thefollowingisabriefoverviewofthecurrentrateagreementsineffectforeachofournaturalgasutilities.

natuRal GaS RatE PlanS NYSEG’sNaturalGasRatePlan,whichbecameeffectiveOctober1,2002,freezesoveralldeliveryratesthroughDecember31,2008,andcontainsanearnings-sharingmechanism,aweathernormalizationadjustmentmechanismandagascostincentivemechanism.Theearnings-sharingmechanismrequiresequalsharingofearningsbetweenNYSEGcustomersandshareholdersofROEsinexcessof11.5%forthe27-monthperiodendedDecember31,2004,andinexcessof12.5%foreachofthecalendaryearsfrom2005through2008.Forpurposesofearningssharing,NYSEGisrequiredtousethelowerofitsactualequityora45%equityratio,whichapproximates$250million.Nosharingoccurredin2005or2004.

RG&E’scurrentrateswereestablishedbythe2004NaturalGasRateAgreement,whichaddressesRG&E’snaturalgasratesthrough2008.KeyfeaturesoftheNaturalGasRateAgreementincludefreezingnaturalgasdeliveryratesthroughDecember2008,exceptfortheimplementationofanaturalgasmerchantfunctionchargetorecoverapproximately$7millionannuallybeginningMay1,2004.

TheNaturalGasRateAgreementalsoimplementedaweathernormalizationadjustmenttoprotectbothcustomersandRG&Efromfluctuatingrevenuesduetoswingsintemperatureoutsideanormalrange,andagascostincentivemechanismtoprovideameansofsharingwithcustomersanyfuturegassupplycostsavingsthatRG&Eachieves.Anearnings-sharingmechanismwasestablishedtoallowcustomersandshareholderstoshareequallyinearningsabovea12.0%ROEtarget.Nosharingoccurredin2005or2004.TheROEtargetcanbeincreasedto12.25%ifcertainincentivetargetsaremet.

SCG’scurrentratesbecameeffectiveonJanuary1,2006,pursuanttoasettlementagreementthatwillbeineffectthroughDecember31,2007.Thetotalincreaseinrevenuerequirementsforfirmrateswassetat8.4%orabout$26.7millionandincludedamountsforrecoveryofpreviouslydeferredcosts.(SeeNaturalGasDeliveryBusinessDevelopments.)

OnMarch29,2005,CNGrespondedtoaDPUCrequestpertainingtotheSeptember30,2005,expirationofCNG’sIRP.CNGnotifiedtheDPUCthatCNG’sexistingrateswouldcontinueineffectaftertheexpirationoftheIRP,buttheearningssharingmechanism,theratestay-outcommitment,theexogenouscostprovisionandprovisionsinvolvingmerger-enabledgascostsavingswouldnolongerbeapplicable.

BerkshireGas’currentrateplanisa10-yearrateplanthatwentintoeffectonFebruary1,2002,andrunsthroughJanuary31,2012,withamid-periodreviewin2007.ThisplanhasnoROEcapandhasanannualinflationaryrateadjustmentthatisdeterminedthroughtheformulaofthegrossdomesticproductminus1%asaproductivityoffset.TheadjustmentismadeonSeptember1steachyear.

Natural Gas Delivery Business DevelopmentsnatuRal GaS SuPPlY aGREEmEntS Ournaturalgascompanies–NYSEG,RG&E,SCG,CNG,BerkshireGasandMNG–eachhaveathree-yearstrategicalliancewithBPEnergyCompany,effectiveApril1,2004,thatprovidesthecompaniestherighttoacquirenaturalgassupplyandoptimizestransportationandstorageservices.

OthER PROCEEdInGS On thE nYPSC COllabORatIvE On End StatE Of EnERGY COmPEtItIOnSeeElectricDeliveryBusinessDevelopments.

SCG REGulatORY PROCEEdInGSCG’sIRPexpiredonSeptember30,2005.SCGfiledaratecaseonApril29,2005,asaresultofaDPUCdecisioninOctober2004todenyrecoveryofapproximately$21millionofexogenouscoststhatincludedqualifiedpensionandotherpostretirementbenefits,taxes,uncollectibleexpenseandSCG’sCustomerHardshipArrearageForgivenessProgram.SCGrequestedapproximately$35millionofadditionalrevenues,oranincreaseofapproximately11%comparedwithrevenuesbasedoncurrentrates.OnDecember28,2005,theDPUCapprovedasettlementagreementandallowedanannualrevenueincreaseof$26.7millionor8.4%.Therateincreaseincludesapproximately$5millionannuallyforsixyearsforrecoveryofamountspreviouslydeferredunderSCG’sCustomerHardshipArrearageForgivenessProgramanditsThree-WayPaymentPlanandapproximately$12millionforuncollectibleexpense.TheDPUCapprovalallowsforanROEof10%effectivefromJanuary1,2006,throughDecember31,2007.

manufaCtuREd GaS Plant REmEdIatIOn RECOvERYRG&EandNYSEGindependentlybegancostcontributionactionsagainstFirstEnergyCorp.(formerlyGPU,Inc.)infederaldistrictcourt;RG&EintheWesternDistrictofNewYorkinAugust2000andNYSEGintheNorthernDistrictofNewYorkinApril2003.Theactionsareforbothpastandfuturecostsincurredfortheinvestigationandremediationofinactivemanufacturedgasplantsites.MotionstoendtheRG&EactionarependinganddiscoveryisongoingintheNYSEGaction.Anyproceedsfromtheseactionswillgotocustomers.RG&EandNYSEGareunabletopredicttheoutcomeoftheseactionsatthistime.

MD&A 15

16 MD&A

huRRICanES’ EffECtS On natuRal GaS SuPPlY WhilenoneofouroperatingutilitiesweredirectlyaffectedbyHurricaneKatrinaorHurricaneRita,thehurricanes’effectsonnaturalgassupplyandsubsequentpriceincreaseshaveaffectedourcustomers.NaturalgaspriceshaverisendramaticallysincethehurricanesstrucktheGulfCoastinlateAugustandSeptember2005.Currentpricesremainhighduetoeconomicconditions.Weareunabletopredictwhateffectthesharpincreaseinnaturalgaspricesmayhaveonourcustomers’energyconsumptionorabilitytopay.

Other Businesses

SOuth GlEnS fallS EnERGY bankRuPtCY fIlInGInthefourthquarterof2005SouthGlensFallsEnergy,LLCdecidedtoshutdownoperationsofits67MWnaturalgas-firedpeakingco-generationfacilitylocatedinSouthGlensFalls,NewYork.Oursubsidiary,CayugaEnergy,owns85%ofSGF.ThedeterminationtoshutdownoperationswasbasedonSGF’sinabilitytorecovercostsgiventhecurrentandforecastedpricesfornaturalgasandelectricity.SGFalsohadanagreementtosellsteamthatwasresultinginongoinglosses.OnJanuary26,2006,SGFfiledforbankruptcyunderChapter7oftheUnitedStatesBankruptcyCode.SGFhasceasedoperationsandin2005werecordedanafter-taxlossof$5.2million,representingtheimpairmentofSGF’sassets.

Other Matters

New Accounting Standards

StatEmEnt 123(R)InDecember2004theFASBissuedStatement123(R),whichisarevisionofStatement123.Statement123(R)requiresapublicentitytomeasurethecostofemployeeservicesthatitreceivesinexchangeforanawardofequityinstrumentsbasedonthegrant-datefairvalueoftheawardandrecognizethatcostovertheperiodduringwhichtheemployeeisrequiredtoprovideserviceinexchangefortheaward.Statement123(R)alsorequiresapublicentitytoinitiallymeasurethecostofemployeeservicesreceivedinexchangeforanawardofliabilityinstruments(e.g.instrumentsthataresettledincash)basedontheaward’scurrentfairvalue,subsequentlyremeasurethefairvalueoftheawardateachreportingdatethroughthesettlementdateandrecognizechangesinfairvalueduringtherequiredserviceperiodascompensationcostoverthatperiod.WeearlyadoptedStatement123(R)effectiveOctober1,2005,usingthemodifiedversionofprospectiveapplication.OuradoptionofStatement123(R)didnothaveamaterialeffectonourfinancialposition,resultsofoperationsorcashflowsasofDecember31,2005.(SeeNote1andNote12toourConsolidatedFinancialStatements.)

fIn 47 InMarch2005theFASBissuedFIN47,whichclarifiesthattheterm“conditionalassetretirementobligation”asusedinStatement143referstoanentity’s“legalobligationtoperformanassetretirementactivityinwhichthetimingand/ormethodofsettlementareconditionalonafutureeventthatmayormaynotbewithinthecontroloftheentity.”FIN47requiresthatifanentityhassufficientinformationtoreasonablyestimatethefairvalueoftheliabilityforaconditionalassetretirementobligation,itmustrecognizethatliabilityatthetimetheliabilityisincurred.WebeganapplyingFIN47effectiveDecember31,2005,asrequired.OurapplicationofFIN47didnothaveamaterialeffectonourfinancialposition,resultsofoperationsorcashflows.(SeeNote1toourConsolidatedFinancialStatements.)

Contractual Obligations and Commercial Commitments

AtDecember31,2005,ourcontractualobligationsandcommercialcommitmentsare:

(1)Amountsforlong-termdebtandcapitalleaseobligationsincludefutureinterestpayments.Futureinterestpaymentsonvariable-ratedebtaredeterminedusingestablishedratesatDecember31,2005.(2)Amountsarethrough2015only.

Critical Accounting Estimates

InpreparingthefinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,managementmustoftenmakeestimatesandassumptionsthataffectthereportedamountsofassets,liabilities,revenues,expensesandrelateddisclosuresatthedateofthefinancialstatementsandduringthereportingperiod.Someofthosejudgmentscanbesubjectiveandcomplex,andactualresultscoulddifferfromthoseestimates.Ourmostcriticalaccountingestimatesincludetheeffectsofutilityregulationonourfinancialstatements,theestimatesandassumptionsusedtoperformourannualimpairmentanalysesforgoodwillandotherintangibleassets,tocalculatepensionandotherpostretirementbenefitsandtoestimateunbilledrevenuesandtheallowancefordoubtfulaccounts.

StatEmEnt 71 Statement71allowscompaniesthatmeetcertaincriteriatocapitalize,asregulatoryassets,incurredandaccruedcoststhatareprobableofrecoveryinfutureperiods.Thosecompaniesrecord,asregulatoryliabilities,obligationstorefundpreviouslycollectedrevenueorobligationstospendrevenuecollectedfromcustomersonfuturecosts.

WebelieveourpublicutilitysubsidiarieswillcontinuetomeetthecriteriaofStatement71fortheirregulatedelectricandnaturalgasoperationsinNewYork,Maine,ConnecticutandMassachusetts;however,wecannotpredictwhateffectacompetitivemarketorfutureactionsoftheNYPSC,MPUC,DPUC,DTEorFERCwillhaveontheirabilitytocontinuetodoso.IfourpublicutilitysubsidiariescannolongermeetthecriteriaofStatement71foralloraseparablepartoftheirregulatedoperations,theymayhavetorecordasexpenseorrevenuecertainregulatoryassetsandliabilities.

Approximately90%ofourrevenuesarederivedfromoperationsthatareaccountedforpursuanttoStatement71.Theratesouroperatingutilitieschargetheircustomersaresetundercostbasisregulationreviewedandapprovedbyeachutility’sgoverningregulatorycommission.

MD&A 17

Total 2006 2007 2008 2009 2010 After2010

(Thousands)

Contractual Obligations Long-termdebt(1) $6,256,836 $537,061 $449,105 $274,979 $321,626 $423,473 $4,250,592 Capitalleaseobligations(1) 56,211 4,337 4,145 4,145 4,172 4,171 35,241 Operatingleases 64,504 12,473 11,409 8,384 7,252 7,717 17,269 Nonutilitygeneratorpower purchaseobligations 2,434,653 571,225 575,168 409,730 244,463 83,446 550,621 Nuclearplantobligations 289,262 37,802 33,574 29,565 21,557 19,383 147,381 Unconditionalpurchaseobligations: Electric 2,330,230 343,947 331,075 289,727 292,692 309,481 763,308 Naturalgas 276,962 96,596 84,180 66,241 17,651 7,074 5,220 Pensionandother postretirementbenefits(2) 2,184,598 177,586 184,576 193,351 203,821 214,585 1,210,679 Otherlong-termobligations 12,954 3,942 3,199 1,640 1,674 1,387 1,112

total Contractual Obligations $13,906,210 $1,784,969 $1,676,431 $1,277,762 $1,114,908 $1,070,717 $6,981,423

18 MD&A

GOOdwIll and OthER IntanGIblE aSSEtS Wedonotamortizegoodwillorintangibleassetswithindefinitelives.Wetestbothgoodwillandintangibleassetswithindefinitelivesforimpairmentatleastannuallyandamortizeintangibleassetswithfinitelivesandreviewthemforimpairment.Impairmenttestingincludesvariousassumptions,primarilythediscountrateandforecastedcashflows.Weconductourimpairmenttestingusingarangeofdiscountratesrepresentingourmarginal,weighted-averagecostofcapitalandarangeofassumptionsforcashflows.Changesinthoseassumptionsoutsideoftherangesanalyzedcouldhaveasignificanteffectonourdeterminationofanimpairment.Wehadnoimpairmentin2005ofourgoodwillorintangibleassetswithindefinitelives.(SeeNote4toourConsolidatedFinancialStatements.)

PEnSIOn and OthER POStREtIREmEnt bEnEfIt PlanS Wehavepensionandotherpostretirementbenefitplanscoveringsubstantiallyallofouremployees.InaccordancewithStatement87andStatement106,thevaluationofbenefitobligationsandtheperformanceofplanassetsaresubjecttovariousassumptions.Theprimaryassumptionsincludethediscountrate,expectedreturnonplanassets,rateofcompensationincrease,healthcarecostinflationrates,mortalitytables,expectedyearsoffutureserviceunderthepensionbenefitplansandthemethodologyusedtoamortizegainsorlosses.

Assumptionsarebasedonourbestestimatesoffutureeventsusinghistoricalevidenceandlong-termtrends.Changesinthoseassumptions,aswellaschangesintheaccountingstandardsrelatedtopensionandpostretirementbenefitplans,couldhaveasignificanteffectonournoncashpensionincomeorexpenseoronourpostretirementbenefitcosts.AsofDecember31,2005,wedecreasedthediscountratefrom5.75%to5.50%.Thediscountrateistherateatwhichthebenefitobligationscouldpresentlybeeffectivelysettled.Thediscountratewasdeterminedbydevelopingayieldcurvederivedfromaportfolioofhighgradenoncallablebondsthatcloselymatchesthedurationoftheexpectedcashflowsofourbenefitobligations.(SeeOtherMarketRiskandNote14toourConsolidatedFinancialStatements.)

unbIllEd REvEnuES Unbilledrevenuesrepresentestimatesofreceivablesforenergyprovidedbutnotyetbilled.Theestimatesaredeterminedbasedonvariousassumptions,suchascurrentmonthenergyloadrequirements,billingratesbycustomerclassificationanddeliverylossfactors.Changesinthoseassumptionscouldsignificantlyaffecttheestimatesofunbilledrevenues.Duringthethirdquarterof2005were-examinedthesetofestimatesusedforalltheoperatingcompaniesanddeterminedthatsomeoperatingcompaniesrequiredchangestotheassumptionsusedindeterminingtheirunbilledrevenueestimates.(SeeNote1toourConsolidatedFinancialStatements.)

allOwanCE fOR dOubtful aCCOuntSTheallowancefordoubtfulaccountsisourbestestimateoftheamountofprobablecreditlossesinourexistingaccountsreceivable,determinedbasedonexperienceforeachserviceregionandoperatingsegmentandothereconomicdata.Eachmonththeoperatingcompaniesreviewtheirallowancefordoubtfulaccountsandpastdueaccountsover90daysand/oraboveaspecifiedamount,andreviewallotherbalancesonapooledbasisbyageandtypeofreceivable.Whenanoperatingcompanybelievesthatareceivablewillnotberecovered,itchargesofftheaccountbalanceagainsttheallowance.Changesinassumptionsaboutinputfactorssuchaseconomicconditionsandcustomerreceivables,whichareinherentlyuncertainandsusceptibletochangefromperiodtoperiod,couldsignificantlyaffecttheallowancefordoubtfulaccountsestimates.(SeeNote1toourConsolidatedFinancialStatements.)

MD&A 19

Liquidity and Capital Resources

Cash Flows

Thefollowingtablesummarizesourconsolidatedcashflowsfor2005,2004and2003.

Thetotalofcashflowsfromoperatingandinvestingactivitiesin2005was$132millionascomparedto$436millionin2004and$213millionin2003.Thedecreaseof$304millionin2005andincreaseof$223millionin2004wasprimarilyduetothesaleofGinnain2004,whichresultedincashproceedsandretentionofexcessdecommissioningfundsthattotaled$530million.(SeeNote2toourConsolidatedFinancialStatements.)Thedecreasein2005waspartiallyoffsetbyanincreaseinnetcashprovidedbyoperatingactivitiesof$161million.Theincreasein2004waspartiallyoffsetbya$100millionincreaseinworkingcapitalexpenses.

OPERatInG aCtIvItIES CaSh flOwSNetcashprovidedbyoperatingactivitieswas$500millionin2005comparedto$339millionin2004and$476millionin2003.Themajorissuesthatcontributedtothe$161millionincreaseincashprovidedbyoperatingactivitiesfor2005were:

3 Increasedaccountspayableandaccruedliabilitiesof$103millionprimarilyforthepurchaseofelectricityandnaturalgasathigherpricesthanintheprioryear.

3Adecreaseintheamountoftaxespaidinthecurrentyearof$95million,primarilyduetotaxespaidin2004forthesaleofGinna.

3Adecreaseof$35millionincustomerrefundsrelatedtotheproceedsfromthesaleofGinnain2004.RG&Erefunded$60millionin2004and$25millionin2005.

Year Ended december 31 2005 2004 2003

(Thousands)

Operating activities Netincome $256,833 $229,337 $210,446 Noncashadjustmentstonetincome 422,635 431,700 482,345 Changesinworkingcapital (98,309) (227,726) (127,610) Other (80,887) (94,211) (89,414)

net Cash Provided by Operating activities 500,272 339,100 475,767

Investing activities Saleofgenerationassets – 453,678 – Excessdecommissioningfundsretained – 76,593 – Utilityplantadditions (331,294) (299,263) (289,320) Currentinvestmentsavailableforsale (57,270) (135,655) – Other 20,133 1,600 26,740

net Cash (used in) Provided by Investing activities (368,431) 96,953 (262,580)

financing activities Netissuanceofcommonstock (3,838) (2,988) 4,234 Net(repaymentsof)increaseindebtandpreferredstockofsubsidiaries 30,908 (333,095) (239,745) Dividendsoncommonstock (150,367) (136,374) (127,940)

net Cash used in financing activities (123,297) (472,457) (363,451)

net Increase (decrease) in Cash and Cash Equivalents 8,544 (36,404) (150,264)Cash and Cash Equivalents, beginning of Year 111,465 147,869 298,133

Cash and Cash Equivalents, End of Year $120,009 $111,465 $147,869

2003

2004

2005

$1.00

$1.055

$1.115

Common stock dividends increased 6% in 2005.

20 MD&A

Thoseincreaseswerepartiallyoffsetby:

3 Increasedexpendituresof$40milliontoreplenishnaturalgasinventories,

3Anincreaseof$37millionduetohigheraccountsreceivableresultingfromhigherprices,and

3Anincreaseof$34millioninpensioncontributions.

The$137milliondecreaseinnetcashprovidedbyoperatingactivitiesin2004wasprimarilydueto:

3The$60millionofnetproceedsfromthesaleofGinnathatwasrefundedtoRG&Ecustomersin2004asprovidedinRG&E’sElectricRateAgreement.

3 Increasedtaxpaymentsof$74millionprimarilyduetotheeliminationofdeferredtaxliabilitiesduetothesaleofGinna.

3 Increasedexpendituresof$44milliontoreplenishnaturalgasinventories.

InvEStInG aCtIvItIES CaSh flOwSNetcashusedininvestingactivitieswas$368millionin2005comparedtonetcashprovidedbyinvestingactivitiesof$97millionin2004andnetcashusedininvestingactivitiesof$263millionin2003.The$465milliondecreasein2005andthe$360millionincreasein2004wereprimarilyduetoeffectsofthesaleofGinnain2004.

Capitalspendingtotaled$331millionin2005,$299millionin2004,and$289millionin2003,includingnuclearfuelforRG&Ein2004and2003.Capitalspendinginallthreeyearswasfinancedprincipallywithinternallygeneratedfundsandwasprimarilyfortheextensionofenergydeliveryservice,necessaryimprovementstoexistingfacilities,compliancewithenvironmentalrequirementsandgovernmentalmandates,andanewcustomercaresystemforNYSEG.

Capitalspendingisprojectedtobe$442millionin2006,isexpectedtobepaidforprincipallywithinternallygeneratedfundsandwillbeprimarilyforthesamepurposesdescribedabove,aswellastheRG&Etransmissionproject,onwhichconstructionwillbegininthefirstquarterof2006.(SeeNote9toourConsolidatedFinancialStatements.)

fInanCInG aCtIvItIES CaSh flOwSNetcashusedinfinancingactivitieswas$123millionin2005comparedto$472millionin2004and$363millionin2003.The$349milliondecreasein2005wasprimarilytheresultoflowerdebtredemptionsthanin2004whenfundswereavailablefromthesaleofGinna.For2004,the$109millionincreasewastheresultofhighernetrepaymentsofdebtandpreferredstockprimarilyduetofundsavailablefromthesaleofGinna.

(1)Includescurrentportionoflong-termdebt(2)Includesnotespayable

Thefinancingactivitiesdiscussedbelowincludethoseactivitiesnecessaryforthecompanyanditsprincipalsubsidiariestomaintainadequateliquidityandimprovecreditquality,andensureaccesstocapitalmarkets.ActivitiesincludeminimalcommonstockissuancesinconnectionwithourInvestorServicesProgramandemployeestock-basedcompensationplans,newshort-termfacilitiesandvariousmedium-termandlong-termdebttransactions.

Capital Structure at december 31 2005 2004 2003

Long-termdebt(1) 54.6% 54.8% 55.0%Short-termdebt(2) 1.8% 3.3% 4.6%Preferredstock 0.4% 0.7% 1.8%Commonequity 43.2% 41.2% 38.6%

100.0% 100.0% 100.0%

MD&A 21

Ourequityfinancingactivitiesduring2005andearly2006included:

3Raisingourcommonstockdividend5.5%inOctober2005toanewannualrateof$1.16pershare.

3 Issuing607,342sharesofcompanycommonstockin2005,atanaveragepriceof$26.46pershare,throughourInvestorServicesProgram.Theshareswereoriginalissueshares.

3Awarding265,406sharesofourcommonstockin2005,issuedoutoftreasurystock,tocertainemployeesthroughourRestrictedStockPlan,ataweighted-averagegrantdatefairvalueof$26.42pershareofcommonstockawarded.

3Awarding248,320sharesofourcommonstockinFebruary2006,issuedoutoftreasurystock,tocertainemployeesthroughourRestrictedStockPlan,ataweighted-averagegrantdatefairvalueof$24.83pershareofcommonstockawarded.

Duringthefirstquarterof2005,NYSEGauctioned$100millionofSeries2004CpollutioncontrolrevenuebondsforaperiodoffiveyearsthroughJanuary2010,at3.245%.NYSEGalsoconverted$60millionofSeries1985Apollutioncontrolrevenuebondsfromanannual-termputmodetoafixedrateof4.10%throughmaturityonMarch15,2015.InMay2005NYSEGrefundeda$65million6.15%fixed-ratetax-exemptpollutioncontrolnotewithproceedsfromtheissuanceof$65millionofmulti-modetax-exemptpollutioncontrolnotesduein2026.

InMarch2005CMPredeemedatpar$25millionofitsSeriesE,8.125%medium-termnoteswithproceedsfromtheissuanceofshort-termdebt.InApril2005CMPissued$25millionofSeriesFmedium-termnotesat5.78%,duein2035,torepaytheshort-termdebt.InJune2005CMPredeemedall$22millionofits3.50%SeriesPreferredStock,$100parvaluepershare,ataredemptionpriceof$101pershare.InJune2005CMPissued$20millionofSeriesFmedium-termnotesat5.375%,duein2035,tofinancethe3.50%SeriesPreferredStockredemption.InJuly2005CMPissued$25millionofSeriesFmedium-termnotesat5.43%,duein2035,tofundmaturingmedium-termnotes.InOctober2005CMPissued$15millionofSeriesFmedium-termnotesat5.70%,duein2025,and$15millionofSeriesFmedium-termnotesat5.875%,duein2035,toreduceshort-termdebt.InNovember2005CMPagreedtoissueinJanuary2006$30millionofSeriesFmedium-termnotesat5.30%,duein2016,torefinancematuringdebt.Inadditiontothatissuance,inJanuary2006CMPissued$10millionofSeriesFmedium-termnotesat5.27%,duein2016,torefinancematuringdebt.

InSeptember2005CNGissued$20millionofSeriesCmedium-termnotesat5.63%,duein2035,andusedtheproceedstoreduceshort-termdebt.InOctober2005CNGissued$25millionofSeriesCmedium-termnotesat5.84%,duein2035,tofundworkingcapitalneeds.

InSeptember2005SCGpaidatmaturity$25millionofSeriesIImedium-termnoteswithproceedsfromtheissuanceofshort-termdebt.InOctober2005SCGissued$25millionofSeriesIIImedium-termnotesat5.78%,duein2025,tofundworkingcapitalneeds.InDecember2005SCGissued$20millionofSeriesIIImedium-termnotesat5.77%,duein2035,and$25millionofSeriesIIImedium-termnotescarryingafloatingrateof7basispointsover3-monthLIBOR,dueinJune2007,andcallablesixmonthsfromthedateofissuance,tofundworkingcapitalneeds.

OnMarch24,2005,NYSEGfiledaForm15withtheSECandonJune20,2005,CMPfiledaForm15withtheSEC,eachterminatingitsstatusasaregistrantundertheSecuritiesExchangeActof1934(ExchangeAct).NYSEGandCMPwillnolongerfileExchangeActreportsincludingForms10-K,10-Qand8-K,andproxystatementsorinformationstatements.WedonotexpectthattheterminationofeitherNYSEG’sorCMP’sExchangeActregistrationwillmateriallyaffecttheiraccesstoorcostofcapital.

InJuly2006EnergyEastisplanningtocall,atpar,its$345million,8¼%CapitalSecurities(mandatorilyredeemabletrustpreferredsecurities).Weexpecttowriteoffapproximately$11millionofunamortizeddebtexpensewhenthe8¼%CapitalSecuritiesarecalled.InNovember2006EnergyEast’s$232million

22 MD&A

5.75%notematures.EnergyEasthasenteredintoseveralarrangementstohedgeinterestratesinconnectionwiththerefinancingofthesesecurities.

Available Sources of Funding EnergyEastisthesoleborrowerinarevolvingcreditfacilityprovidingmaximumborrowingsofupto$300million.Ouroperatingutilitiesarejointborrowersinarevolvingcreditfacilityprovidingmaximumborrowingsofupto$475millioninaggregate.Sublimitsthattotaltotheaggregatelimitapplytoeachjointborrowerandcanbealteredwithintheconstraintsimposedbymaximumlimitsthatapplytoeachjointborrower.Bothfacilitieshaveexpirationdatesin2010andrequirefeesonundrawnborrowingcapacity.Twoofouroperatingutilitieshaveuncommittedbilateralcreditagreementsforatotalof$10million.Thetworevolvingcreditfacilitiesandthetwobilateralcreditagreementsprovidedforconsolidatedmaximumborrowingsof$785millionatDecember31,2005.Ourpreviousrevolvingcreditagreements,whichwerereplacedinJune2005bythetwofacilitiesdescribedabove,providedforconsolidatedmaximumborrowingsof$740millionatDecember31,2004.

Weusecommercialpaperanddrawingsonourcreditfacilities(seeabove)tofinanceworkingcapitalneeds,totemporarilyfinancecertainrefundingsandforothercorporatepurposes.Therewas$121millionofsuchshort-termdebtoutstandingatDecember31,2005,and$206millionoutstandingatDecember31,2004.Theweighted-averageinterestrateonshort-termdebtwas4.6%atDecember31,2005,and2.8%atDecember31,2004.

WefiledashelfregistrationstatementwiththeSECinJune2003tosellupto$1billioninanunspecifiedcombinationofdebt,preferredstock,commonstockandtrustpreferredsecurities.Weplantousethenetproceedsfromthesaleofsecuritiesunderthisshelfregistration,ifany,forgeneralcorporatepurposes.Wecurrentlyhave$805millionavailableundertheshelfregistrationstatement.

Market RiskMarketriskrepresentstheriskofchangesinvalueofafinancialorcommodityinstrument,derivativeornonderivative,causedbyfluctuationsininterestratesandcommodityprices.Thefollowingdiscussionofourriskmanagementactivitiesincludes“forward-looking”statementsthatinvolverisksanduncertainties.Actualresultscoulddiffermateriallyfromthosecontemplatedinthe“forward-looking”statements.Wehandlemarketrisksinaccordancewithestablishedpolicies,whichmayincludevariousoffsetting,nonspeculativederivativetransactions.(SeeNote1toourConsolidatedFinancialStatements.)

Thefinancialinstrumentsweholdorissuearenotfortradingorspeculativepurposes.Ourquantitativeandqualitativedisclosuresbelowrelatetothefollowingmarketriskexposurecategories:InterestRateRisk,CommodityPriceRiskandOtherMarketRisk.

IntERESt RatE RISkWeareexposedtoriskresultingfrominterestratechangesonvariable-ratedebtandcommercialpaper.Weuseinterestrateswapagreementstomanagetheriskofincreasesinvariableinterestratesandtomaintaindesiredfixed-to-floatingrateratios.Werecordamountspaidandreceivedunderthoseagreementsasadjustmentstotheinterestexpenseofthespecificdebtissues.Aftergivingeffecttothoseagreementsweestimatethat,atDecember31,2005,a1%changeinaverageinterestrateswouldchangeourannualinterestexpenseforvariable-ratedebtbyabout$4million.Pursuanttoitscurrentrateplans,RG&Edefersanychangesinvariable-rateinterestexpense.(SeeNotes6,7and11toourConsolidatedFinancialStatements.)

Wealsousederivativeinstrumentstomitigateriskresultingfrominterestratechangesonanticipatedfuturefinancings,andamortizeamountspaidandreceivedunderthoseinstrumentstointerestexpenseoverthelifeofthecorrespondingfinancing.

MD&A 23

COmmOdItY PRICE RISk Commoditypricerisk,duetovolatilityexperiencedinthewholesaleenergymarkets,isasignificantissuefortheelectricandnaturalgasutilityindustries.Wemanagethisriskthroughacombinationofregulatorymechanisms,suchasallowingforthepass-throughofthemarketpriceofelectricityandnaturalgastocustomers,andthroughcomprehensiveriskmanagementprocesses.Thesemeasuresmitigateourcommoditypriceexposure,butdonotcompletelyeliminateit.

NYSEG’sandRG&E’scurrentelectricrateplansoffertheirretailcustomerschoiceintheirelectricitysupplyincludingfixedandvariablerateoptionsandanoptiontopurchaseelectricitysupplyfromanESCO.Approximately45%ofNYSEG’s,andapproximately75%ofRG&E’s,totalelectricloadisnowprovidedbyanESCOoratthemarketprice.NYSEG’sandRG&E’sexposuretofluctuationsinthemarketpriceofelectricityislimitedtotheloadrequiredtoservethosecustomerswhoselectthefixedrateoption,whichcombinesdeliveryandsupplyserviceatafixedprice.NYSEGandRG&Euseelectricitycontracts,bothphysicalandfinancial,tomanagefluctuationsinthecostofelectricityrequiredtoservecustomerswhoselectthefixedrateoption.Weincludethecostorbenefitofthosecontractsintheamountexpensedforelectricitypurchasedwhentherelatedelectricityissold.Ownedelectricgenerationandlong-termsupplycontractsreduceNYSEG’sexposure,andsignificantlyreduceRG&E’sexposure,tomarketfluctuationsforprocurementoftheirfixedrateoptionelectricitysupply.

AsofFebruary15,2006,theportionofloadforfixedrateoptioncustomersnotsuppliedbyownedgenerationorlong-termcontractsis100%hedgedforNYSEG,and100%hedgedforRG&E,foron-peakandoff-peakperiodsin2006.Afluctuationof$1.00permegawatt-hourintheaveragepriceofelectricitywouldchangeearningslessthan$150thousandforNYSEGandlessthan$100thousandforRG&Ein2006.ThepercentageofNYSEG’sandRG&E’shedgedloadisbasedonloadforecasts,whichincludecertainassumptionssuchashistoricalweatherpatterns.Actualresultscoulddifferasaresultofchangesintheloadcomparedtotheloadforecast.

OthercomprehensiveincomeassociatedwithourfinancialelectricitycontractsfortheyearendedDecember31,2005,was$153million,reflectinganincreaseof$148millionascomparedtoDecember31,2004.Theincreaseisprimarilyaresultofwholesalemarketpricechangesforelectricity.Othercomprehensiveincomefor2005willhavenoeffectonfuturenetincomebecauseweonlyusefinancialelectricitycontractstohedgethepriceofourelectricloadrequirementsforcustomerswhohavechosenafixedrateoption.

Allofournaturalgasutilitieshavepurchasedgasadjustmentclausesthatallowthemtorecoverthroughratesanychangesinthemarketpriceofpurchasednaturalgas,substantiallyeliminatingtheirexposuretonaturalgaspricerisk.Weusenaturalgasfuturesandforwardstomanagefluctuationsinnaturalgascommoditypricesinordertoprovidepricestabilitytocustomers.Weincludethecostorbenefitofnaturalgasfuturesandforwardsinthecommoditycostthatispassedontocustomerswhentherelatedsalescommitmentsarefulfilled.Werecordchangesinthefairvalueofnaturalgashedgecontractsasregulatoryassetsorregulatoryliabilities.

TwoofourenergymarketingsubsidiariesofferretailelectricandnaturalgasservicetocustomersinNewYorkStateandactivelyhedgetheloadrequiredtoservecustomersthathavechosenthemastheircommoditysupplier.AsofFebruary15,2006,theenergymarketingsubsidiariesfixedpriceloadwas100%hedgedfor2006.Thepercentageofhedgedloadfortheenergymarketingsubsidiariesisbasedonloadforecasts,whichincludecertainassumptionssuchashistoricalweatherpatterns.Actualresultscoulddifferasaresultofchangesintheloadcomparedtotheloadforecast.

NYSEG,RG&Eandourtwoenergymarketingsubsidiariesfacerisksrelatedtocounterpartyperformanceonhedgingcontractsduetocounterpartycreditdefault.Wehavedevelopedamatrixofunsecuredcreditthresholdsthataredependentonacounterparty’sMoody’sorS&Pcreditrating.Whenourexposuretorisk

Net Income (thousands)

24 MD&A

foracounterpartyexceedstheunsecuredcreditthreshold,thecounterpartyisrequiredtopostadditionalcollateralorwewillnolongertransactwiththecounterpartyuntiltheexposuredropsbelowtheunsecuredcreditthreshold.

OthER maRkEt RISk Ourpensionplanassetsareprimarilymadeupofequityandfixedincomeinvestments.Fluctuationsinthosemarketsaswellaschangesininterestratesmaycauseustorecognizeincreasedordecreasedpensionincomeorexpense.Ourpensionincomewouldchangebyapproximately$6millionifeitherourexpectedreturnonplanassetsorourdiscountrateweretochangeby¼%.OuraccumulatedothercomprehensiveincomeatDecember31,2005,includesanaccumulatedlossof$65millionassociatedwithourpensionliability.UnderRG&E’sElectricandNaturalGasRateAgreementsandunderNYSEG’snaturalgasrateplan,changesinpensionincomeresultingfromchangesinmarketconditionsaredeferred.(SeeNote14toourConsolidatedFinancialStatements.)

Forward-looking StatementsThePrivateSecuritiesLitigationReformActof1995providesasafeharborforforward-lookingstatementsincertaincircumstances.ThisAnnualReportcontainscertainforward-lookingstatementsthatarebaseduponmanagement’scurrentexpectationsandinformationthatiscurrentlyavailable.Wheneverusedinthisreport,thewords“estimate,”“expect,”“believe,”“anticipate,”orsimilarexpressionsareintendedtoidentifysuchforward-lookingstatements.

Inadditiontotheassumptionsandotherfactorsreferredtospecificallyinconnectionwithsuchstatements,factorsthatinvolverisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromthosecontemplatedinanyforward-lookingstatementsarediscussedinMarketRisk,andalsoinclude,amongothers:

3 thederegulationandcontinuedregulatoryunbundlingofaformerlyverticallyintegratedutilityindustry,3ourabilitytocompeteintherapidlychangingandincreasinglycompetitiveelectricand/ornaturalgas

utilitymarkets,3 regulatoryuncertaintyinapolitically-chargedenvironmentofescalatingandvolatileenergyprices,3 theimpactsoftheNYPSCEndStatemodelexperimentadoptedinitsCollaborativeonEndStateof

EnergyCompetition,3enactmentandimplementationoftheEnergyPolicyActof2005,3 increasedstateandFERCregulationof,amongotherthings,intercompanycostallocations,3 theoperationoftheNYISO,3 theoperationofISONewEnglandasanRTO,3ourcontinuedabilitytorecoverNUGandothercosts,3changesinfuelsupplyorcostandthesuccessofstrategiestosatisfypowerrequirements,3ourabilitytoexpandourproductsandservices,includingourenergyinfrastructureintheNortheast,3 theeffectofrapidlyincreasingcommoditycostsoncustomerusageanduncollectibleexpense,3ourabilitytoachieveandmaintainenterprise-wideintegrationsynergies,3marketrisk,3ourabilitytoobtainadequateandtimelyratereliefand/ortheextensionofcurrentrateplans,3 thepossiblediscontinuationoffixed-pricesupplyprogramsinNewYork,3nucleardecommissioningorenvironmentalincidents,3 legaloradministrativeproceedings,3changesinthecostoravailabilityofcapital,

MD&A 25

3economicgrowthintheareasinwhichwedobusiness,3extremeweather-relatedeventssuchashurricanes,icestormsorsnowstorms,3weathervariationsaffectingcustomerenergyusage,3 authoritativeaccountingguidance,3 actsofterrorism,3 theeffectofthevolatilityintheequityandfixedincomemarketsonthecostofpensionandother

postretirementbenefits,3 theinabilityofourinternalcontrolframeworktoprovideabsoluteassurancethatallincidentsoffraud

orerrorwillbedetectedandprevented,and3otherconsiderationsthatmaybedisclosedfromtimetotimeinourpubliclydisseminateddocuments

andfilings.

Weundertakenoobligationtopubliclyupdateanyforward-lookingstatements,whetherasaresultofnewinformation,futureeventsorotherwise.

Results of Operations

2005 Earnings per Share

Earningsfromcontinuingoperations,basicfor2005increased12centspersharecomparedto2004primarilyasaresultof:

3Anincreaseof21centspershareduetohighermarginsonelectricsalesunderelectriccommodityprogramsforNewYorkcustomers,

3Anincreaseof17centspershareresultingfroma3%increaseinelectricdeliveries,and

3Anincreaseof4centspershareresultingfromincreasednaturalgasmargins.TheincreaseresultedprimarilyfromincreasedsalestointerruptiblecustomersandRG&E’sadoptionofanaturalgasmerchantfunctionchargein2004.

Thoseincreaseswerepartiallyoffsetby:3Adecreaseof19centspershareresultingfromhigheroperatingandmaintenanceexpenses,including

approximately5centspershareforstorm-relatedrepairsandmaintenance,9centspershareforincreasesinallowancesfordoubtfulaccounts,2centspershareforhigherregionalnetworkservicestransmissioncostsand4centspershareformedicalandotherbenefitscost.Thehigheroperatingandmaintenance

2005 2004 2003

(Thousands,exceptpershareamounts)

OperatingRevenues $5,298,543 $4,756,692 $4,514,490 OperatingExpenses $4,605,388 $4,006,739 $3,862,677 OperatingIncome $693,155 $749,953 $651,813 InterestCharges,NetandPreferredStockDividendsofSubsidiaries $290,371 $280,581 $303,491 IncomeTaxesonContinuingOperations $169,997 $251,445 $128,663 IncomefromContinuingOperations $256,833 $237,621 $208,490 NetIncome $256,833 $229,337 $210,446 AverageCommonSharesOutstanding,basic 146,964 146,305 145,535 EarningsperSharefromContinuingOperations,basic $1.75 $1.63 $1.43 EarningsperShare,basic $1.75 $1.57 $1.45

2003

2004

2005

$210,446

$229,337

$256,833

Net Income (thousands)

26 MD&A

expenseswerepartiallyoffsetbyadecreaseof8centspershareforlowerstockoptionexpenses.Stockoptionexpensein2005includedaonecent-per-sharechargefortheadoptionofStatement123(R),

3Adecreaseof4centspersharefromtheterminationofoperationsatSouthGlensFallsandwritedownoftheassets,and

3One-timeeffectsfromthesaleofGinnaandtheapprovalofRG&E’sElectricandNaturalGasRateAgreementsthatincreasedearnings7centspersharein2004.Theone-timeeffectsincludetheflow-throughofexcessdeferredtaxesandITCsandtheeliminationofcertainreservesestablishedpendingregulatorytreatment.

2004 Earnings per Share

Earningspersharefromcontinuingoperations,basicfor2004increased20centscomparedto2003primarilybecauseof:

3Additionalearningsof16centspershareasaresultofone-timeandongoingeffectsfromRG&E’sElectricandNaturalGasRateAgreements,includingratemakingtreatmentforthesaleofGinna.Theone-timeeffectsadded7centspershare.Ongoingeffectsadded9centspersharetoearnings,andincludedincreasesasaresultofRG&E’selectricretailaccesssurchargeandnaturalgasmerchantfunctioncharge,andannualcreditsfromtheASGAasprovidedinRG&E’sElectricRateAgreement.

3Anincreaseof10centspersharefromlowerfinancingcostsandsavingsfromintegrationandefficiencyinitiatives.Financingcostsdecreasedprincipallyduetoredemptionsandrefinancingsoffirstmortgagebondsandpreferredstockofsubsidiariesfunded,inpart,byproceedsfromthesaleofGinna,aswellasthesaleofcertainnonutilitybusinessesin2003and2004andinternallygeneratedfunds.

3Theeffectofalossonretirementofdebtthatreducedearnings9centspersharein2003.

Thoseincreaseswerepartiallyoffsetby:3Lowerincomefromnaturalgasoperations,dueinparttoa2%dropinretailsales,whichreduced

earnings7centspershare.3Areductionof6centspershareduetocumulativestock-basedcompensationbecauseofchangesinthe

marketvalueofEnergyEastcommonstockduring2004.3Adecreaseof3centspersharebecauseofhigherdepreciationexpenseduetoelectricplantadditions,

excludingdepreciationrelatedtoGinna.

Other Items

PEnSIOn InCOmEPeriodicpensionincomeisincludedinotheroperatingandmaintenanceexpensesandreducestheamountofexpensethatwouldotherwisebereported.Otheroperatingandmaintenanceexpenseswouldhavebeen$1millionhigherfor2005and$20millionlowerfor2004ifperiodicpensionincomehadnotchangedcomparedtotheprioryear.Thechangeswereprimarilyduetoincreasedamortizationofactuarialgains,partiallyoffsetbyareductioninthesettlementchargeandrevisedactuarialassumptionsincludingthediscountrateusedtocomputeourpensionliability(reducedto5.75%asofDecember31,2004,andto6.25%(from6.50%)asofDecember31,2003).

Theoperatingcompaniesamortizeunrecognizedactuarialgainsandlosseseitherovertenyearsfromthetimetheyareincurredorusingthestandardamortizationmethodology,underwhichamountsinexcessof10%ofthegreateroftheprojectedbenefitobligationormarketrelatedvalueareamortizedovertheplanparticipants’averageremainingservicetoretirement.Weexpectpensionincometodeclineinfutureyearsasprioryeargainsarefullyamortized.Weestimatepensionincomeof$26millionfor2006andexpect

tocontributebetween$10millionand$20milliontoourpensionplansin2006.(SeeNote14toourConsolidatedFinancialStatements.)

OthER (InCOmE) and OthER dEduCtIOnS(SeeNote1toourConsolidatedFinancialStatements.)

Thechangesfor2005include:

3A$3millionincreaseinOther(income)frominterestincome,

3A$6milliondecreaseinOther(income)duetotheeffectofaone-timeincreaseasaresultoftheRG&EElectricRateAgreementin2004,

3A$6milliondecreaseinOtherdeductionsforlossesonhedgeactivityrelatedtoourelectricitycontractsandinterestrateswapagreements,

3A$3milliondecreaseinOtherdeductionsforlossesfromthedispositionofnonutilityproperty,and

3A$3millionincreaseinOtherdeductionsfrommiscellaneouslosses.

Thechangesfor2004include:

3An$18millionincreaseinOther(income),primarilyduetohigherinterestincomeof$6millionanda$6millionincreaseasaresultofRG&E’sElectricRateAgreement.

3A$13milliondecreaseinOtherdeductionsprimarilyduetotheeffectofa$23millionlossonretirementofdebtin2003.

IntERESt ChaRGES, nEt and PREfERREd StOCk dIvIdEndS Of SubSIdIaRIESInterestcharges,netandpreferredstockdividendsofsubsidiariesincreasedacombined$10millionin2005.Theincreaseisprimarilydueto:

3Anetincreaseof$115millionintheaggregateamountoflong-termdebtandpreferredstockoutstanding,and

3Anincreaseinratesonvariableratedebtandnotespayable.

Interestcharges,netandpreferredstockdividendsofsubsidiariesdecreased$23millionin2004.InJuly2003webegantorecognizeasinterestexpensecertaindistributionsthatwehadpreviouslyrecognizedaspreferredstockdividends.Thecombineddecreaseisprimarilydueto:

3Refinancingsoflong-termdebtatlowerinterestrates,and

3Redemptionsandrepurchasesoffirstmortgagebondsandpreferredstockofsubsidiaries.

InCOmE tax ExPEnSETheeffectivetaxrateforcontinuingoperationswas40%in2005,51%in2004and36%in2003.

The2005effectivetaxratewasessentiallyatthecombinedfederalandstatestatutoryrateanddeclinedprimarilyduetotheeffectoftheregulatorytreatmentofRG&E’sdeferredgainonthesaleofGinnain2004.

Theincreaseinthe2004effectivetaxratewasprimarilydueto:

3RegulatorytreatmentofRG&E’sdeferredgainonthesaleofGinna.RG&Erecordedpretaxincomeof$112millionandincometaxexpenseof$112million.(SeeNote2toourConsolidatedFinancialStatements.)

3 Increasesduetochangesinestimatesofprioryeartaxesof$3million.

MD&A 27

2005 2004 2003

($inMillions)

Periodicpensionincome(pretax) $30 $29 $49 Asapercentofnetincome 7% 8% 14%

Operating Results for the Electric Delivery Business

(1)IncludedinRetailDeliveries.

OPERatInG REvEnuESThe$188millionincreaseinoperatingrevenuesfor2005wasprimarilytheresultof:

3Anincreaseof$73millionfromincreasesinelectricenergysuppliedbyNYSEGandRG&Eundercommodityoptionswheretheyprovidesupply.HighermarketpricesforelectricitymorethanoffsetthedeclineincommodityrevenuesresultingfrommorecustomerselectingESCOsastheirelectricitysupplier.

3Anincreaseof$168millioninwholesalerevenues,whichincluded$100millionfromincreasedwholesalesalesbyNYSEGandRG&E,$29millionfromhigherpricesonthosesalesand$39millionasaresultofhigherpricesonthesaleofCMP’sNUGentitlements,effectiveMarch1,2005.

3Anincreaseof$42millionresultingfroma3%increaseinretaildeliveries.Abouthalfofthisincreaseresultedfromwarmersummerweatherandtheremainderresultedfromgeneraleconomicconditions,and

3Anincreaseof$36millioninotherelectricrevenues,including$6millionfromCMP’sNUGcontractrestructuringincentiveandtheremainderprimarilyfromaccrualstoreflectactualgeneratingandpurchasepowercosts.

Thoseincreaseswerepartiallyoffsetby:

3Adecreaseof$102millionresultingfromlowertransitioncharges.Thetransitionchargereflectsthedifferencebetweenthemarketpriceofelectricityandthepricessetbyourlong-termelectricitysupplycontracts,anddecreasesasmarketpricesincrease,and

3Adecreaseof$29millionasaresultofhigheraccrualsforearningssharingunderNYSEG’sandRG&E’selectricrateplanprovisions.

The$23millionincreaseinoperatingrevenuesfor2004wasprimarilytheresultof:

3Higherwholesalesalesof$68millionprimarilyforNYSEG.Theincreasereflectedhighermarketpricesandincreasedactivitytomitigatesupplyprices,

3Anincreaseof$5millionduetohigherretaildeliveries,and

3CertainprovisionsofRG&E’sElectricRateAgreementthatadded$10milliontorevenues,including$4millionfromaretailaccesssurchargeand$6millionasaresultofvariouscreditsfromtheASGA.

28 MD&A

2005 2004 2003

(Thousands)

Megawatt-hours RetailDeliveries 32,019 31,019 30,593 RetailCommoditySales(1) 14,385 15,613 N/A WholesaleSales 9,466 7,855 5,734 OperatingRevenues $2,969,558 $2,781,322 $2,758,695Electricitypurchasedandfuelusedingeneration $1,457,746 $1,321,081 $1,192,397Otheroperatingandmaintenanceexpenses $672,595 $667,503 $767,150Depreciationandamortization $178,806 $196,782 $211,120 OperatingExpenses $2,452,506 $2,227,450 $2,311,801 OperatingIncome $517,052 $553,872 $446,894

2003

2004

2005

30,593

31,019

32,019

Electric Retail Deliveries (thousands of megawatt-hours)

Thoseincreaseswerepartiallyoffsetby:3Adecreaseof$27millionduetoratereductionsforCMPreflectinglowerstrandedcostsandlower

amortizationofstormandDSMcosts.

3A$19milliondecreaseduetoachangeinmarketstructureforRG&EthatallowsESCOstoprovideelectricity,resultinginlowerretailrevenuespartiallyoffsetbyhigherwholesalerevenues.

3A$15milliondecreaseforNYSEGduetoreductionsintheamountofelectricitysuppliedbyNYSEGunderitsvariouscommodityoptions.

OPERatInG ExPEnSES The$225millionincreaseinoperatingexpensesfor2005wasprimarilytheresultof:

3Anincreaseof$112millionasaresultoftheregulatorytreatmentin2004ofRG&E’sgainonthesaleofGinna,whichincludedRG&E’srecognitionofa$341millionpretaxgainpartiallyoffsetbytheafter-taxdeferralofthegainof$229million,

3Anetincreaseof$1millioninoperatingexpensesasaresultofthesaleofGinna,reflectinganincreaseinpurchasedpowercostsof$63million,substantiallyoffsetbydecreasesof$37millioninotheroperatingandmaintenanceexpenses,$21millionindepreciationand$4millioninothertaxes,

3Anincreaseof$75millioninpowerpurchaseslargelyresultingfromincreasedwholesalesalesandhighermarketpricesforelectricsupplypurchasedfortheNewYorkelectriccommoditycustomers,

3Anincreaseof$10millionduetocertaincreditstootheroperatingexpensesthatresultedfromRG&E’sElectricRateAgreementandreducedexpensesin2004,and

3 Increasesinvariousotheroperatingandmaintenanceexpenses,excludingGinna,totaling$27million.Higherstormcostsaccountedforapproximately$11millionofthatincrease,highertransmission-relatedexpensesaccountedforanadditional$6million,higheruncollectiblesexpenseaccountedfor$9millionandincreasedmedicalandotherbenefitsaccountedfor$8million.Lowerstockoptionexpensereducedelectricoperatingexpensesby$10million.

The$84milliondecreaseinoperatingexpensesfor2004wasprimarilytheresultof:3Anet$112milliondecreaseresultingfromtheregulatorytreatmentofRG&E’sgainonthesaleofGinna,

whichincludesRG&E’srecognitionofa$341millionpretaxgainpartiallyoffsetbytheafter-taxdeferralofthegainof$229million.

3Reducedoperatingcostsof$73million,includingreduceddepreciationanddecommissioningexpensesof$32million,asaresultofthesaleofGinna.

3A$10milliondecreaseinRG&E’soperatingandmaintenancecostsbecauseofcertaindeferralpetitionsthatwereresolvedaspartofRG&E’sElectricRateAgreement.

3Loweroperatingcostsof$25million,including$5millionbecauseCMPcompleteditsamortizationofstormandDSMcostsasoftheendofJune2004,$5millionforloweruncollectibleexpenseandavarietyofothersources.

Thosedecreaseswerepartiallyoffsetby:

3 Increasedpurchasedpowercostsof$91millionforRG&EduetothepurchasesfromGinnabeginninginJune2004.

3A$42millionincreaseduetohigherpurchasedpowercosts,primarilyforincreasedwholesalesales.

3Higherdepreciationof$7millionduetosignificantadditionstoplantinserviceandtheaccelerateddepreciationoflegacyaccountingsystemsthatwerereplacedin2004.

MD&A 29

Operating Results for the Natural Gas Delivery Business

OPERatInG REvEnuESThe$234millionincreaseinoperatingrevenuesfor2005wasprimarilytheresultof:

3Anincreaseof$244millionasaresultofhigherpricesofpurchasednaturalgasthatwerepassedontocustomers,and

3Anincreaseof$23millioninothernaturalgasrevenuesresultingprimarilyfromhigherinterruptiblesales.

Thoseincreaseswerepartiallyoffsetby:

3Lowerretaildeliveriesof$33milliondueinparttowarmerweatherbutalsoreflectingeconomicconditionsincludinghighermarketpricesfornaturalgas.

The$87millionincreaseinoperatingrevenuesfor2004wasprimarilyasaresultof:

3Highermarketpricesofnaturalgasof$120millionthatwerepassedontocustomers.

Thatincreasewaspartiallyoffsetby:

3Lowerretaildeliveriesof$12millionduetowarmerwinterweatherinthefirstquarterof2004,partiallyoffsetbyhigherdeliveriesinthefourthquarterof2004.

3Lowertransportationrevenueandwholesaleentitlementsof$28million.

OPERatInG ExPEnSES The$225millionincreaseinoperatingexpensesfor2005wasprimarilytheresultof:

3Anincreaseof$209millionforpurchasedgascosts,resultingfromanincreaseof$241millionduetohigherpricesoffsetby$32millionforlowervolumes,and

3Anincreaseof$15millioninotheroperatingandmaintenancecosts,including$12millionrelatedtoanincreaseintheallowancefordoubtfulaccounts.

The$103millionincreaseinoperatingexpensesfor2004wasprimarilytheresultof:

3Highernaturalgaspricesof$120millionbecauseofmarketconditions.

Thatincreasewaspartiallyoffsetbylowernaturalgaspurchases,including:

3Decreasesof$6millionduetolowerretaildeliveriesand$16millionduetolowerwholesalesales.

2003

2004

2005

212,745

208,444

204,677

Natural Gas Retail Deliveries (thousands of dekatherms)

2005 2004 2003 (Thousands)

Deliveries–Dekatherms

Retail 204,677 208,444 212,745

Wholesale 883 1,593 5,360

OperatingRevenues $1,783,547 $1,549,150 $1,462,127

OperatingExpenses $1,591,037 $1,366,486 $1,263,182

OperatingIncome $192,510 $182,664 $198,945

30 MD&A

Energy East Corporation Consolidated Statements of Income

Year Ended december 31 2005 2004 2003

(Thousands,exceptpershareamounts)

Operating Revenues Utility $4,753,105 $4,330,472 $4,220,822 Nonutility 545,438 426,220 293,668

total Operating Revenues 5,298,543 4,756,692 4,514,490

Operating Expenses Electricitypurchasedandfuelusedingeneration Utility 1,457,746 1,321,081 1,192,397 Nonutility 360,621 249,330 145,972 Naturalgaspurchased Utility 1,161,059 952,806 862,452 Nonutility 107,755 77,508 77,012 Otheroperatingexpenses 797,015 799,460 813,133 Maintenance 197,704 173,191 203,043 Depreciationandamortization 277,217 292,457 299,430 Othertaxes 246,271 252,860 269,238 Gainonsaleofgenerationassets – (340,739) – Deferralofassetsalegain – 228,785 –

total Operating Expenses 4,605,388 4,006,739 3,862,677

Operating Income 693,155 749,953 651,813Other (Income) (32,904) (35,497) (17,226)Other deductions 8,858 15,803 28,395Interest Charges, net 288,897 276,890 284,482Preferred Stock dividends of Subsidiaries 1,474 3,691 19,009

Income from Continuing Operations before Income taxes 426,830 489,066 337,153Income taxes 169,997 251,445 128,663

Income from Continuing Operations 256,833 237,621 208,490

discontinued Operations Lossfromdiscontinuedoperations(includinglossondisposalof $(7,565)in2004and$(13,360)in2003) – (7,109) (12,032) Incometaxes(benefits) – 1,175 (13,988)

(loss) Income from discontinued Operations – (8,284) 1,956

net Income $256,833 $229,337 $210,446

Earnings per Share from Continuing Operations, basic $1.75 $1.63 $1.43

Earnings per Share from Continuing Operations, diluted $1.74 $1.62 $1.43

(loss) Earnings per Share from discontinued Operations, basic – $(.06) $.02

(loss) Earnings per Share from discontinued Operations, diluted – $(.06) $.01

Earnings per Share, basic $1.75 $1.57 $1.45

Earnings per Share, diluted $1.74 $1.56 $1.44

average Common Shares Outstanding, basic 146,964 146,305 145,535

average Common Shares Outstanding, diluted 147,474 146,713 145,730

Thenotesonpages36through60areanintegralpartofourconsolidatedfinancialstatements.

Financials 31

32 Financials

Energy East Corporation Consolidated Balance Sheets

december 31 2005 2004

(Thousands)

assetsCurrent assets Cashandcashequivalents $120,009 $111,465 Investmentsavailableforsale 192,925 135,655 Accountsreceivableandunbilledrevenues,net 933,680 821,556 Fuelandnaturalgasinstorage,ataveragecost 278,590 198,640 Materialsandsupplies,ataveragecost 33,886 27,100 Accumulateddeferredincometaxbenefits,net – 33,969 Derivativeassets 278,855 7,420 Prepaymentsandothercurrentassets 92,613 86,306

total Current assets 1,930,558 1,422,111

utility Plant, at Original Cost Electric 5,403,134 5,282,828 Naturalgas 2,574,574 2,493,455 Common 450,641 420,372

8,428,349 8,196,655 Lessaccumulateddepreciation 2,764,399 2,602,013

net utility Plant in Service 5,663,950 5,594,642 Constructionworkinprogress 119,504 67,526

total utility Plant 5,783,454 5,662,168

Other Property and Investments, net 203,159 190,149

Regulatory and Other assets Regulatoryassets Nuclearplantobligations 309,888 356,072 Deferredincometaxes 13,482 – Unfundedfutureincometaxes 117,241 115,446 Environmentalremediationcosts 135,376 122,052 Unamortizedlossondebtreacquisitions 60,933 58,345 Nonutilitygeneratorterminationagreements 86,890 96,158 Other 384,173 419,214

Totalregulatoryassets 1,107,983 1,167,287

Otherassets Goodwill,net 1,525,353 1,525,353 Prepaidpensionbenefits 741,831 657,402 Derivativeassets 69,156 29,472 Other 126,214 142,680

Totalotherassets 2,462,554 2,354,907

total Regulatory and Other assets 3,570,537 3,522,194

total assets $11,487,708 $10,796,622

Thenotesonpages36through60areanintegralpartofourconsolidatedfinancialstatements.

Financials 33

Energy East Corporation Consolidated Balance Sheets

december 31 2005 2004

(Thousands)

liabilitiesCurrent liabilities Currentportionoflong-termdebt $326,527 $59,231 Notespayable 121,347 206,472 Accountspayableandaccruedliabilities 629,158 455,384 Interestaccrued 46,522 43,469 Taxesaccrued – 8,568 Accumulateddeferredincometax,net 80,984 – Other 188,471 175,896

total Current liabilities 1,393,009 949,020

Regulatory and Other liabilities Regulatoryliabilities Accruedremovalobligation 797,544 762,520 Deferredincometaxes – 21,487 Gainonsaleofgenerationassets 173,216 233,378 Pensionbenefits 22,798 25,354 Naturalgashedges 49,205 6,228 Other 124,251 110,034

Totalregulatoryliabilities 1,167,014 1,159,001

Otherliabilities Deferredincometaxes 1,033,287 973,599 Nuclearplantobligations 234,907 251,753 Otherpostretirementbenefits 428,691 419,885 Environmentalremediationcosts 166,462 150,263 Other 499,968 417,486

Totalotherliabilities 2,363,315 2,212,986

total Regulatory and Other liabilities 3,530,329 3,371,987

Debtowedtosubsidiaryholdingsolelyparentdebentures 355,670 355,670 Otherlong-termdebt 3,311,395 3,442,015

Totallong-termdebt 3,667,065 3,797,685

total liabilities 8,590,403 8,118,692

Commitments and Contingencies – –Preferred Stock of Subsidiaries Redeemablesolelyattheoptionofsubsidiaries 24,631 46,671Common Stock Equity Commonstock($.01parvalue,300,000sharesauthorized, 147,701sharesoutstandingatDecember31,2005,and 147,118sharesoutstandingatDecember31,2004) 1,478 1,472 Capitalinexcessofparvalue 1,489,256 1,477,518 Retainedearnings 1,294,580 1,201,533 Accumulatedothercomprehensiveincome(loss) 89,085 (43,561) Deferredcompensation – (5,020) Treasurystock,atcost(53sharesatDecember31,2005,and 29sharesatDecember31,2004) (1,725) (683)

total Common Stock Equity 2,872,674 2,631,259

total liabilities and Stockholders’ Equity $11,487,708 $10,796,622

Thenotesonpages36through60areanintegralpartofourconsolidatedfinancialstatements.

34 Financials

Energy East Corporation Consolidated Statements of Cash Flows

Year Ended december 31 2005 2004 2003

(Thousands)

Operating activities Netincome $256,833 $229,337 $210,446 Adjustmentstoreconcilenetincometonetcash providedbyoperatingactivities Depreciationandamortization 382,873 377,181 419,237 Incometaxesandinvestmenttaxcreditsdeferred,net 69,729 83,327 103,236 Incometaxesrelatedtogainonsaleofgenerationassets – 111,954 – Gainonsaleofgenerationassets – (340,739) – Deferralofassetsalegain – 228,785 – Pensionincome (29,967) (28,808) (40,128) Changesincurrentoperatingassetsandliabilities Accountsreceivable,net (107,308) (70,067) (56,188) Inventory (86,735) (43,579) (50,775) Prepaymentsandothercurrentassets (36,373) 1,326 8,732 Accountspayableandaccruedliabilities 198,932 91,527 (9,999) Taxesaccrued 1,376 (91,840) (15,315) Customerrefund (25,329) (58,219) – Othercurrentliabilities 11,448 (37,213) 15,941 Pensioncontributions (54,320) (19,661) (20,006) Otherassets (76,292) (82,874) (114,466) Otherliabilities (4,595) (11,337) 25,052

net Cash Provided by Operating activities 500,272 339,100 475,767

Investing activities Saleofgenerationassets – 453,678 – Excessdecommissioningfundsretained – 76,593 – Utilityplantadditions (331,294) (299,263) (289,320) Otherpropertyandinvestmentsadditions (2,507) (5,623) (39,060) Otherpropertyandinvestmentssold 25,704 6,161 72,478 Maturitiesofcurrentinvestmentsavailableforsale 1,635,005 994,680 – Purchasesofcurrentinvestmentsavailableforsale (1,692,275) (1,130,335) – Other (3,064) 1,062 (6,678)

net Cash (used in) Provided by Investing activities (368,431) 96,953 (262,580)

financing activities Issuanceofcommonstock 2,654 3,083 4,234 Repurchaseofcommonstock (6,492) (6,071) – Issuanceoffirstmortgagebonds 70,000 – – Repaymentsoffirstmortgagebondsandpreferredstock ofsubsidiaries,includingnetpremiums (47,260) (201,005) (242,066) Long-termnoteissuances 208,893 212,975 504,769 Long-termnoterepayments (120,061) (249,025) (488,654) Notespayablethreemonthsorless,net (85,124) (92,932) (7,044) Notespayableissuances – 4,000 11,000 Notespayablerepayments – (13,000) (17,750) Bookoverdraft 4,460 5,892 – Dividendsoncommonstock (150,367) (136,374) (127,940)

net Cash used in financing activities (123,297) (472,457) (363,451)

net Increase (decrease) in Cash and Cash Equivalents 8,544 (36,404) (150,264)Cash and Cash Equivalents, beginning of Year 111,465 147,869 298,133

Cash and Cash Equivalents, End of Year $120,009 $111,465 $147,869

Thenotesonpages36through60areanintegralpartofourconsolidatedfinancialstatements.

Financials 35

Energy East Corporation Consolidated Statements of Changes in Common Stock Equity Common Stock Outstanding Capital accumulated Other $.01 Par value in Excess Retained Comprehensive deferred treasury (Thousands,exceptpershareamounts) Shares amount of Par value Earnings Income (loss) Compensation Stock total

balance, january 1, 2003 144,966 $1,455 $1,444,941 $1,061,428 $(34,167) – $(15,768) $2,457,889

Netincome 210,446 210,446Othercomprehensive income,netoftax 22,953 22,953 Comprehensiveincome 233,399Amortizationofexcesscapital overpar 141 141Commonstockdividends declared($1.00pershare) (145,417) (145,417)Commonstockissued– InvestorServicesProgram 1,064 8 21,703 21,711Commonstockissued– restrictedstockplan 229 (1,893) $(4,401) 6,294 –Amortizationofdeferred compensationunder restrictedstockplan 1,581 1,581Capitalstockissueexpense (11) (11)Treasurystocktransactions,net 3 (9,046) 9,110 64Amortizationofcapital stockissueexpense 385 385

balance, december 31, 2003 146,262 1,463 1,456,220 1,126,457 (11,214) (2,820) (364) 2,569,742

Netincome 229,337 229,337Othercomprehensive income,netoftax (32,347) (32,347) Comprehensiveincome 196,990Commonstockdividends declared($1.055pershare) (154,261) (154,261)Commonstockissued– InvestorServicesProgram 872 9 20,962 20,971Commonstockrepurchased (250) (6,071) (6,071)Commonstockissued– restrictedstockplan 242 (132) (5,784) 5,916 –Amortizationofdeferred compensationunder restrictedstockplan 3,584 3,584Capitalstockissueexpense (11) (11)Treasurystocktransactions,net (8) 94 (164) (70)Amortizationofcapital stockissueexpense 385 385

balance, december 31, 2004 147,118 1,472 1,477,518 1,201,533 (43,561) (5,020) (683) 2,631,259

Netincome 256,833 256,833 Othercomprehensive income,netoftax 132,646 132,646 Comprehensiveincome 389,479 Commonstockdividends declared($1.115pershare) (163,786) (163,786)Commonstockissued– InvestorServicesProgram 607 6 16,066 16,072Commonstockrepurchased (250) (6,492) (6,492)Commonstockissued– restrictedstockplan 265 (6,404) (451) 6,855 –Amortizationofdeferred compensationunder restrictedstockplan 5,471 5,471Capitalstockissueexpense (11) (11)Treasurystocktransactions,net (39) 1,702 (1,405) 297Amortizationofcapital stockissueexpense 385 385

balance, december 31, 2005 147,701 $1,478 $1,489,256 $1,294,580 $89,085 – $(1,725) $2,872,674

Thenotesonpages36through60areanintegralpartofourconsolidatedfinancialstatements.

36 Notes

Energy East Corporation Notes to Consolidated Financial Statements

Note 1 Significant Accounting Policies

baCkGROundEnergyEastisapublicutilityholdingcompanyunderthePublicUtilityHoldingCompanyActof2005.Weareasuper-regionalenergyservicesanddeliverycompanywithoperationsinNewYork,Connecticut,Massachusetts,MaineandNewHampshireandcorporateofficesinNewYorkandMaine.Ourwholly-ownedsubsidiaries,andtheirprincipaloperatingutilities,are:BerkshireEnergy–BerkshireGas;CMPGroup–CMP;CNE–SCG;CTGResources–CNG;andRGSEnergy–NYSEGandRG&E.

aCCOuntS RECEIvablEAccountsreceivableincludeunbilledrevenuesof$315millionatDecember31,2005,and$227millionatDecember31,2004,andareshownnetofanallowancefordoubtfulaccountsof$53millionatDecember31,2005,and$45millionatDecember31,2004.Accountsreceivabledonotbearinterest,althoughlatefeesmaybeassessed.Baddebtexpensewas$63millionin2005,$45millionin2004and$48millionin2003.

Unbilledrevenuesrepresentestimatesofreceivablesforenergyprovidedbutnotyetbilled.Theestimatesaredeterminedbasedonvariousassumptions,suchascurrentmonthenergyloadrequirements,billingratesbycustomerclassificationanddeliverylossfactors.Changesinthoseassumptionscouldsignificantlyaffecttheestimatesofunbilledrevenues.Duringthethirdquarterof2005were-examinedthesetofestimatesusedforalltheoperatingcompaniesanddeterminedthatsomeoperatingcompaniesrequiredchangestotheassumptionsusedindeterminingtheirunbilledrevenueestimates.

Theallowancefordoubtfulaccountsisourbestestimateoftheamountofprobablecreditlossesinourexistingaccountsreceivable,determinedbasedonexperienceforeachserviceregionandoperatingsegmentandothereconomicdata.Eachmonththeoperatingcompaniesreviewtheirallowancefordoubtfulaccountsandpastdueaccountsover90daysand/oraboveaspecifiedamount,andreviewallotherbalancesonapooledbasisbyageandtypeofreceivable.Whenanoperatingcompanybelievesthatareceivablewillnotberecovered,itchargesofftheaccountbalanceagainsttheallowance.Changesinassumptionsaboutinputfactorssuchaseconomicconditionsandcustomerreceivables,whichareinherentlyuncertainandsusceptibletochangefromperiodtoperiod,couldsignificantlyaffecttheallowancefordoubtfulaccountsestimates.

aSSEt REtIREmEnt OblIGatIOn and fIn 47InaccordancewithFASBStatement143andFIN47,werecordthefairvalueoftheliabilityforanassetretirementobligationand/oraconditionalassetretirementobligationintheperiodinwhichitisincurredandcapitalizethecostbyincreasingthecarryingamountoftherelatedlong-livedasset.Weadjusttheliabilitytoitspresentvalueperiodicallyovertime,anddepreciatethecapitalizedcostovertheusefullifeoftherelatedasset.Uponsettlementwewilleithersettletheobligationatitsrecordedamountorincuragainoraloss.Ourrate-regulatedentitiesdeferanytimingdifferencesbetweenraterecoveryanddepreciationexpenseaseitheraregulatoryassetoraregulatoryliability.

Statement143providesthatiftherequirementsofStatement71aremet,aregulatoryliabilityshouldberecognized,forfinancialreportingpurposesonly,forthedifferencebetweenremovalcostscollectedinratesandactualcostsincurred.Weclassifythoseamountsasaccruedremovalobligations.

InMarch2005theFASBissuedFIN47,whichclarifiesthattheterm“conditionalassetretirementobligation”asusedinStatement143referstoanentity’s“legalobligationtoperformanassetretirementactivityinwhichthetimingand/ormethodofsettlementareconditionalonafutureeventthatmayormaynotbewithinthecontroloftheentity.”FIN47requiresthatifanentityhassufficientinformationtoreasonablyestimatethefairvalueoftheliabilityforaconditionalassetretirementobligation,itmust

Notes 37

recognizethatliabilityatthetimetheliabilityisincurred.Forcalendar-yearenterprisessuchasEnergyEastanditssubsidiaries,FIN47waseffectivenolaterthanDecember31,2005.WebeganapplyingFIN47effectiveDecember31,2005.OurapplicationofFIN47didnothaveamaterialeffectonourfinancialposition,andtherewasnoeffectonourresultsofoperationsorcashflows.

Ourassetretirementobligationwas$30millionatDecember31,2005,andincludesourestimatedconditionalassetretirementobligationof$28million.Itprimarilyconsistsofobligationsrelatedtoremovalorretirementof:asbestos,polychlorinatedbiphenyl(PCB)contaminatedequipment,gaspipelineandcastirongasmains.Ourassetretirementobligationwas$2millionatDecember31,2004,andprimarilyconsistedofobligationsrelatedtocastirongasmains.ThetablebelowpresentsthevariousamountsrelatedtoourassetretirementobligationasofDecember31,2005.Changesintheassumptionsunderlyingtheitemsshowncouldaffectthebalancesheetamountsandfuturecostsrelatedtotheobligations.

Ourproformaconditionalassetretirementobligationwas$27millionatDecember31,2004,and$25millionatJanuary1,2004.

baSIC and dIlutEd EaRnInGS PER ShaREWedeterminebasicEPSbydividingnetincomebytheweighted-averagenumberofsharesofcommonstockoutstandingduringtheperiod.Theweighted-averagecommonsharesoutstandingfordilutedEPSincludetheincrementaleffectofrestrictedstockandstockoptionsissuedandexcludestockoptionsissuedintandemwithSARs.Historically,wehaveissuedstockoptionsintandemwithSARsandsubstantiallyallstockoptionplanparticipantshaveexercisedtheSARsinsteadofthestockoptions.ThenumeratorweuseincalculatingbothbasicanddilutedEPSforeachperiodisourreportednetincome.

Thereconciliationofbasicanddilutiveaveragecommonsharesforeachperiodfollows:

OptionsthathaveanexercisepricethatisgreaterthantheaveragemarketpriceofthecommonsharesduringtheyearareexcludedfromthedeterminationofEPS.SharesexcludedfromtheEPScalculationwere:0.4millionin2005,2.0millionin2004and2.9millionin2003.(SeeNote12foradditionalinformationconcerningstock-basedcompensation.)

Year Ended december 31 2005 2004 2003

(Thousands)

Basicaveragecommonsharesoutstanding 146,964 146,305 145,535Restrictedstockawards 510 408 195Potentiallydilutivecommonshares 343 313 197 OptionsissuedwithSARs (343) (313) (197)

Dilutiveaveragecommonsharesoutstanding 147,474 146,713 145,730

as of december 31 2005

(Thousands)

Assetretirementobligation $(29,895)Regulatoryasset $9,570Regulatoryliability $(7,656)Increaseinutilityplant $5,092Decreaseinaccumulateddepreciation $22,889

38 Notes

COnSOlIdatEd StatEmEntS Of CaSh flOwSWeconsiderallhighlyliquidinvestmentswithamaturitydateofthreemonthsorlesswhenacquiredtobecashequivalentsandthoseinvestmentsareincludedincashandcashequivalents.

Theamountofcapitalizedinterestwas$1millionin2005and2004and$4millionin2003.

dECOmmISSIOnInG ExPEnSEOtheroperatingexpensesfor2004and2003includenucleardecommissioningexpenseaccruals.AsaresultofthesaleofGinnainJune2004wenolongerhaveadecommissioningobligationandwillnotincuradditionaldecommissioningexpense.(SeeNote10forinformationaboutdecommissioningexpensesincurredbycompaniesthatarepartiallyownedbyCMP.)

dEPRECIatIOn and amORtIzatIOnWedeterminedepreciationexpensesubstantiallyusingthestraight-linemethod,basedontheaverageservicelivesofgroupsofdepreciableproperty,whichincludeestimatedcostofremoval,inserviceateachoperatingcompany.Theweighted-averageservicelivesofcertainclassificationsofpropertyare:transmissionproperty–53years,distributionproperty–48years,generationproperty–44years,gasproductionproperty–33years,gasstorageproperty–25years,andotherproperty–34years.RG&Edeterminesdepreciationexpenseforthemajorityofitsgenerationpropertyusingremainingserviceliferates,whichincludeestimatedcostofremoval,basedonoperatinglicenseexpirationoranticipatedclosingdates.TheremainingservicelivesofRG&E’sgenerationpropertyrangefrom2yearsforitscoalstationto29yearsforitshydroelectricstations.Ourdepreciationaccrualswereequivalentto3.3%ofaveragedepreciablepropertyfor2005and2004and3.4%for2003.

Wechargerepairsandminorreplacementstooperatingexpense,andcapitalizerenewalsandbetterments,includingcertainindirectcosts.Wechargetheoriginalcostofutilityplantretiredorotherwisedisposedoftoaccumulateddepreciation.

EStImatESPreparationoftheconsolidatedfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.

GOOdwIllTheexcessofthecostoverfairvalueofnetassetsofpurchasedbusinessesisrecordedasgoodwill.Weevaluatethecarryingvalueofgoodwillforimpairmentatleastannuallyandonaninterimbasisifthereareindicationsthatgoodwillmightbeimpaired.Wemayrecognizeanimpairmentifthefairvalueofgoodwillislessthanitscarryingvalue.(SeeNote4.)

InCOmE taxESWefileaconsolidatedfederalincometaxreturnandallocateincometaxesamongEnergyEastanditssubsidiariesinproportiontotheircontributiontoconsolidatedtaxableincome.ThedeterminationandallocationofourincometaxprovisionanditscomponentsareoutlinedandagreedtointhetaxsharingagreementsamongEnergyEastanditssubsidiaries.

Deferredincometaxesreflecttheeffectoftemporarydifferencesbetweentheamountofassetsandliabilitiesrecognizedforfinancialreportingpurposesandtheamountrecognizedfortaxpurposes.ITCsareamortizedovertheestimatedlivesoftherelatedassets.

Supplemental disclosure of Cash flows Information 2005 2004 2003

(Thousands)

CashpaidduringtheyearendedDecember31: Interest,netofamountscapitalized $247,434 $245,992 $245,223 Incometaxes,netofbenefitsreceived $102,647 $140,823 $(12,879)

Notes 39

OthER (InCOmE) and OthER dEduCtIOnS

PRInCIPlES Of COnSOlIdatIOn Thesefinancialstatementsconsolidateourmajority-ownedsubsidiariesaftereliminatingintercompanytransactions,exceptvariableinterestentitiesforwhichwearenottheprimarybeneficiary.

REClaSSIfICatIOnSCertainamountshavebeenreclassifiedinourconsolidatedfinancialstatementstoconformtothe2005presentation.

Werevisedthepresentationofourinvestmentsinauctionratesecurities,classifyingthemascurrentinvestmentsavailable-for-saleratherthanascashandcashequivalents.Weheldcurrentinvestmentsof$193millionatDecember31,2005,and$136millionatDecember31,2004,whichconsistedofauctionratesecuritiesclassifiedasavailable-for-sale.Ourinvestmentsinthesesecuritiesarerecordedatcost,whichapproximatesfairmarketvalueduetotheirvariableinterestrates,whichtypicallyresetevery7to35days.Despitethelong-termnatureoftheirstatedcontractualmaturities,wehavetheabilitytoquicklyliquidatesuchsecurities.Asaresult,wehavenocumulativegrossunrealizedholdinggains(losses)orgrossrealizedgains(losses)fromourcurrentinvestments.Allincomegeneratedfromthesecurrentinvestmentsisrecordedasinterestincome.

REGulatORY aSSEtS and lIabIlItIESPursuanttoStatement71ouroperatingutilitiescapitalize,asregulatoryassets,incurredandaccruedcoststhatareprobableofrecoveryinfutureelectricandnaturalgasrates.Substantiallyallregulatoryassetsforwhichfundshavebeenexpendedareeitherincludedinratebaseorareaccruingcarryingcosts.Theyalsorecord,asregulatoryliabilities,obligationstorefundpreviouslycollectedrevenueortospendrevenuecollectedfromcustomersonfuturecosts.

Unfundedfutureincometaxesanddeferredincometaxesareamortizedastherelatedtemporarydifferencesreverse.Unamortizedlossondebtreacquisitionsisamortizedoverthelivesoftherelateddebtissues.Nuclearplantobligations,DSMprogramcosts,gainonsaleofgenerationassets,otherregulatoryassetsandotherregulatoryliabilitiesareamortizedovervariousperiodsinaccordancewitheachoperatingutility’scurrentrateplans.

Otherregulatoryassetsconsistprimarilyofdeferrednaturalgascostsof$78million,thedeferredlossonthesaleofRG&E’sOswegogeneratingunitof$48millionthatisbeingrecoveredthroughJune2013,RG&E’s2003deferredicestormcostsof$32millionthatarebeingrecoveredthroughApril2014

Year Ended december 31 2005 2004 2003

(Thousands)

Interestanddividendincome $(15,802) $(12,421) $(6,457)Allowanceforfundsusedduringconstruction (1,552) (582) (1,965)Gainsfromhedgeactivity (2,701) (4,544) –2004RG&EElectricandNaturalGasRateAgreement – (6,117) –Earningsfromequityinvestments (3,959) (3,930) (4,702)Miscellaneous (8,890) (7,903) (4,102)

total other (income) $(32,904) $(35,497) $(17,226)

Retirementofdebt – $781 $22,784Lossesfromdispositionofnonutilityproperty $100 3,543 487Lossesfromhedgeactivity 40 5,727 –Donations,civicandpolitical 3,744 1,665 75Merger-enabledgassupplysavings 796 4,651 –Miscellaneous 4,178 (564) 5,049

total other deductions $8,858 $15,803 $28,395

40 Notes

anddeferredcostsof$24millionforRG&E’smergerwithEnergyEastthatarebeingrecoveredthroughDecember2007.Otherregulatoryliabilitiesconsistprimarilyofaccruedearningssharingamountsof$48millionthatwillbeaddedtoNYSEG’sandRG&E’srespectiveASGAsandultimatelyreturnedtocustomers.

REvEnuE RECOGnItIOnWerecognizerevenuesupondeliveryofenergyandenergy-relatedproductsandservicestoourcustomers.

PursuanttoMaineStateLaw,sinceMarch1,2000,CMPhasbeenprohibitedfromsellingpowertoitsretailcustomers.CMPdoesnotenterintopurchaseorsalesarrangementsforpowerwithISONewEngland,theNewEnglandPowerPool,oranyotherindependentsystemoperatororsimilarentity.AllofCMP’spowerentitlementsunderitsNUGandotherpurchasepowercontractsaresoldtounrelatedthirdpartiesunderbilateralcontracts.

NYSEGandRG&EenterintopowerpurchaseandsalestransactionswiththeNYISO.WhenNYSEGandRG&EsellelectricityfromownedgenerationtotheNYISO,andsubsequentlyrepurchaseelectricityfromtheNYISOtoservetheircustomers,theyrecordthetransactionsonanetbasisintheirstatementsofincome.

RISk manaGEmEnt Thefinancialinstrumentsweholdorissuearenotfortradingorspeculativepurposes.

Weuseinterestrateswapagreementstomanagetheriskofincreasesinvariableinterestratesandtomaintaindesiredfixed-to-floatingrateratios.Werecordamountspaidandreceivedundertheagreementsasadjustmentstotheinterestexpenseofthespecificdebtissues.Wealsousederivativeinstrumentstomitigateriskresultingfrominterestratechangesonanticipatedfuturefinancingsandweamortizeamountspaidorreceivedunderthoseinstrumentstointerestexpenseoverthelifeofthecorrespondingfinancing.

NYSEG,RG&Eandourtwoenergymarketingsubsidiariesfacerisksrelatedtocounterpartyperformanceonhedgingcontractsduetocounterpartycreditdefault.Wehavedevelopedamatrixofunsecuredcreditthresholdsthataredependentonacounterparty’sMoody’sorS&Pcreditrating.Whenourexposuretoriskforacounterpartyexceedstheunsecuredcreditthreshold,thecounterpartyisrequiredtopostadditionalcollateralorwewillnolongertransactwiththecounterpartyuntiltheexposuredropsbelowtheunsecuredcreditthreshold.

Weuseelectricitycontracts,bothphysicalandfinancial,tomanagefluctuationsinthecostofelectricity.Weincludethecostorbenefitofthosecontractsintheamountexpensedforelectricitypurchasedwhentheelectricityissold.

Allofournaturalgasoperatingutilitieshavepurchasedgasadjustmentclausesthatallowthemtorecoverthroughratesanychangesinthemarketpriceofpurchasednaturalgas,substantiallyeliminatingtheirexposuretonaturalgaspricerisk.Weusenaturalgasfuturesandforwardstomanagefluctuationsinnaturalgascommoditypricesandprovidepricestabilitytocustomers.Weincludethecostorbenefitofnaturalgasfuturesandforwardsinthecommoditycostwhentherelatedsalescommitmentsarefulfilled.

Werecognizethefairvalueofourfinancialelectricitycontracts,naturalgashedgecontractsandinterestrateswapagreementsascurrentandnoncurrentderivativeassetsorothercurrentandnoncurrentliabilities.Ourfinancialelectricitycontractsandinterestrateswapagreementsaredesignatedascashflowhedginginstruments,exceptforourfixed-to-floatinginterestrateswapagreementtotaling$125million,whichisdesignatedasafairvaluehedge.Werecordchangesinthefairvalueofthecashflowhedginginstrumentsinothercomprehensiveincome,totheextenttheyareconsideredeffective,untiltheunderlyingtransactionoccurs.WerecordtheineffectiveportionofanychangeinfairvalueofcashflowhedgestotheincomestatementaseitherOther(Income)orOtherDeductions,asappropriate.Wereportchangesinthefairvalueoftheinterestrateswapagreementonourconsolidatedstatementsofincomeinthesameperiodasthe

Notes 41

offsettingchangeinthefairvalueoftheunderlyingdebtinstrument.Werecordchangesinthefairvalueofnaturalgashedgecontractsasregulatoryassetsorregulatoryliabilities.

Weusequotedmarketpricestodeterminethefairvalueofderivativesandadjustforvolatilityandinflationwhentheperiodofthederivativeexceedstheperiodforwhichmarketpricesarereadilyavailable.

AsofDecember31,2005,themaximumlengthoftimeoverwhichwehadhedgedourexposuretothevariabilityinfuturecashflowsforforecastedenergytransactionswas48months.Weestimatethatgainsof$230millionwillbereclassifiedfromaccumulatedothercomprehensiveincomeintoearningsin2006,astheunderlyingtransactionsoccur.

WehavecommoditypurchasesandsalescontractsforbothcapacityandenergythathavebeendesignatedandqualifyforthenormalpurchasesandnormalsalesexceptioninStatement133,asamended.

StatEmEnt 123(R)InDecember2004theFASBissuedStatement123(R),whichisarevisionofStatement123.Statement123(R)requiresapublicentitytomeasurethecostofemployeeservicesthatitreceivesinexchangeforanawardofequityinstrumentsbasedonthegrant-datefairvalueoftheawardandrecognizethatcostovertheperiodduringwhichtheemployeeisrequiredtoprovideserviceinexchangefortheaward.Statement123(R)alsorequiresapublicentitytoinitiallymeasurethecostofemployeeservicesreceivedinexchangeforanawardofliabilityinstruments(e.g.,instrumentsthataresettledincash)basedontheaward’scurrentfairvalue,subsequentlyremeasurethefairvalueoftheawardateachreportingdatethroughthesettlementdateandrecognizechangesinfairvalueduringtherequiredserviceperiodascompensationcostoverthatperiod.AsamendedbytheSEC,apubliccompanyisrequiredtopreparefinancialstatementsinaccordancewithStatement123(R)beginningwiththefirstannualreportingperiodofitsfirstfiscalyearbeginningonorafterJune15,2005.TheFASBencouragedearlyadoption.

WeearlyadoptedStatement123(R)effectiveOctober1,2005,usingthemodifiedversionofprospectiveapplication.OuradoptionofStatement123(R)didnothaveamaterialeffectonourfinancialposition,resultsofoperationsorcashflows.AsofOctober1,2005,ourapplicationofStatement123(R)hadthefollowingeffects:reducedincomefromcontinuingoperationsbeforeincometaxes$3.4million,reducedincomefromcontinuingoperationsandnetincome$2.0millionandreducedbasicanddilutedEPSonecent.Wedescribeourshare-basedcompensationplansmorefullyinNote12.

AsrequiredbyStatement123(R),wenolongerrecorddeferredcompensationcostforawardsofrestrictedstock,butinsteadrecognizeadditionalpaid-incapitalandcompensationcostfortherestrictedstockovertheestimatedvestingperiod.Theestimatedvestingperiodistheperiodduringwhichtheemployeeisrequiredtoprovideserviceinexchangefortheawardasadjustedbasedontheexpectedachievementofperformanceconditions.

WeincuraliabilityforourstockoptionplanawardsinaccordancewithStatement123(R)becauseemployeescanrequestthattheawardsbesettledincashratherthanbyissuingequityinstruments.PriortoouradoptionofStatement123(R),weappliedAPB25,aspermittedbyStatement123,toaccountforourstock-basedcompensationtoemployees.WealsoincurredaliabilityforourstockoptionplanawardsunderABP25,butweusedtheintrinsicvaluemethodtodetermineourliabilityandtherelatedcompensationcost.Statement123requiredtheamountoftheliabilityforawardsthatcallforsettlementincashtobemeasuredeachperiodbasedonthecurrentstockprice,whichproducedthesameresultasusingtheintrinsicvaluemethodunderAPB25forsuchawards.

Duringthesecondquarterof2005theSECstaffprovideditsviewsconcerningvestingofstock-basedawardsbasedonretirementeligibilitycriteria.WepreviouslyappliedAPB25andfollowedthenominalvestingperiodapproachforourrestrictedstockawards,whichhavearetirementeligibilityprovision.Followingthenominalvestingperiodapproach,werecordcompensationexpenseovertheestimated

42 Notes

vestingperiodfortherestrictedstockaward,beginningonthegrantdate.Ifanemployeeretiresbeforetheendoftheestimatedvestingperiod,werecognizeatthedateofretirementanyremainingunrecognizedcompensationcostrelatedtothatemployee’srestrictedstock.

UponadoptionofStatement123(R)wenowfollowthenonsubstantivevestingperiodapproachforanynewawardsofrestrictedstock.Accordingtothatapproach,anawardisconsideredtobevestedforexpenserecognitionpurposeswhentheemployee’sretentionoftheawardisnolongercontingentonprovidingsubsequentservice.Therefore,thecompensationcostwillberecognizedimmediatelyforrestrictedstockgrantedtoanemployeewhoiseligibleforretirementonthedateofthegrant.WewillcontinuetofollowthenominalvestingperiodapproachforanyrestrictedstockawardsgrantedpriortoouradoptionofStatement123(R),includingtheremainingportionofnonvestedoutstandingawards.Theproformacompensationcostfor2005,2004and2003followingthenonsubstantivevestingperiodapproachisnotmateriallydifferentfromthecompensationcostrecognizedfollowingthenominalvestingperiodapproach.

StatEmEnt 150 InMay2003theFASBissuedStatement150,whichrequiresthatcertainfinancialinstrumentsbeclassifiedasliabilitiesinstatementsoffinancialposition.Underpreviousguidancesuchinstrumentscouldbeclassifiedasequity.WeadoptedStatement150asofJuly1,2003,andclassifiedasaliability,ratherthanasequity,RG&E’s$25millionofmandatorilyredeemablepreferredstock(whichRG&Eredeemedin2004).Wealsobegantorecognizeasinterestexpensedistributionsthatwehadpreviouslyrecognizedaspreferredstockdividends.TheadoptionofStatement150didnothaveamaterialeffectonourfinancialposition,resultsofoperationsorcashflows.

vaRIablE IntERESt EntItIESInDecember2003theFASBissuedFIN46(R),whichaddressesconsolidationofvariableinterestentities.Avariableinterestentityisanentitythatisnotcontrollablethroughvotinginterestsand/orinwhichtheequityinvestordoesnotbeartheresidualeconomicrisksandrewards.FIN46(R)requiresabusinessenterprisetoconsolidateavariableinterestentityiftheenterprisehasavariableinterestthatwillabsorbamajorityoftheentity’sexpectedlosses.AsofMarch31,2004,weappliedFIN46(R)toallentitiessubjecttotheinterpretation,asrequired.

Twoofouroperatingutilitieshaveindependent,ongoing,powerpurchasecontractswithNUGs.However,theywerenotinvolvedintheformationofanddonothaveownershipinterestsinanyNUGs.WehaveevaluatedallofthepowerpurchasecontractswithNUGswithrespecttoFIN46(R)anddeterminedthatmostofthepurchasecontractsarenotvariableinterestsforoneofthefollowingreasons:thecontractisbasedonafixedpriceoramarketpriceandthereisnootherinvolvementwiththeNUG,thecontractisshort-terminduration,thecontractisforaminorportionoftheNUG’scapacityortheNUGisagovernmentalorganizationoranindividual.WearenotabletoapplyFIN46(R)tosevenNUGsbecauseweareunabletoobtaintheinformationnecessaryto:(1)determineifanyofthesevenNUGsisavariableinterestentity,(2)determineifanoperatingutilityisaNUG’sprimarybeneficiaryor(3)performtheaccountingrequiredtoconsolidateanyofthoseNUGs.WeroutinelyrequestnecessaryinformationfromthesevenNUGs,andwillcontinuetodoso,butnoNUGhasyetprovidedtherequestedinformation.WedidnotconsolidateanyNUGsasofDecember31,2005or2004.

ThetwooperatingutilitiespurchaseelectricityfromthesevenNUGsatabove-marketprices.Wearenotexposedtoanylossasaresultofeitherofthetwocompanies’involvementwiththeNUGsbecausetheyareallowedtorecoverthroughratesthecostoftheirpurchases.Also,theyareundernoobligationtoaNUGifitdecidesnottooperateforanyreason.ThecombinedcontractualcapacityforthesevenNUGsisapproximately517MWs.ThecombinedpurchasesfromthesevenNUGstotaledapproximately$376millionin2005,$325millionin2004and$346millionin2003.

Notes 43

Note 2 Sale of Ginna

InJune2004,afterreceivingallregulatoryapprovals,RG&EsoldGinnatoCGG.RG&Ereceivedatclosing$429millionandreceivedinSeptember2004anadditional$25millionforpost-closingadjustments.Our2004statementofincomereflectsagainonthesaleofGinnaof$341million.Thedeferraloftheassetsalegain,afterrelatedtaxesof$112million,is$229million.

RG&E’sElectricRateAgreementresolvedallregulatoryandratemakingaspectsrelatedtothesaleofGinna,includingprovidingforanASGAof$378millionafterthepost-closingadjustments,andaddressingthedispositionoftheassetsalegain.UponclosingofthesaleofGinna,RG&Etransferred$201millionofdecommissioningfundstoCGG,whichhastakenresponsibilityforallfuturedecommissioningfunding.RG&Eretained$77millioninexcessdecommissioningfunds,whichwascreditedtoitscustomersaspartoftheASGA.

Note 3 Impairment of Assets and Disposal of Other Businesses

Inkeepingwithourfocusonregulatedelectricandnaturalgasdeliverybusinesses,duringrecentyearswehavebeensystematicallyexitingcertainnoncorebusinesses.AllbusinessessoldwerepreviouslyreportedinourOtherbusinesssegment.Inthefourthquarterof2005SouthGlensFallsEnergy,LLCdecidedtoshutdownoperationsofits67MWnaturalgas-firedpeakingco-generationfacilitylocatedinSouthGlensFalls,NewYork.Oursubsidiary,CayugaEnergy,owns85%ofSGF.ThedeterminationtoshutdownoperationswasbasedonSGF’sinabilitytorecovercostsgiventhecurrentandforecastedpricesfornaturalgasandelectricity.SGFalsohadanagreementtosellsteamthatwasresultinginongoinglosses.OnJanuary26,2006,SGFfiledforbankruptcyunderChapter7oftheUnitedStatesBankruptcyCode.SGFhasceasedoperationsandin2005werecordedanafter-taxlossof$5.2million,representingtheimpairmentofSGF’sassets.

InOctober2004EnergyEastSolutions,Inc.,asubsidiaryofTheEnergyNetwork,Inc.,completedthesaleofitsNewEnglandandPennsylvanianaturalgascustomercontractsandrelatedassetsatanafter-taxlossoflessthan$1million.InJuly2004UnionWaterPowerCompany,asubsidiaryofCMPGroup,soldtheassetsassociatedwithitsutilitylocatingandconstructiondivisionsatanafter-taxlossof$7million.In2004werecognizedalossfromdiscontinuedoperationsof$8millionor6centspershare.

In2003BerkshirePropane,Inc.,asubsidiaryofBerkshireEnergy,solditsassetsandEnergetix,asubsidiaryofRGSEnergy,solditssubsidiaryGriffithOilCo.,Inc.In2004werecordedachangeinestimatedtaxesof$1.2millionrelatedtothesaleofGriffithOiltoreflectactualtaxesinaccordancewiththefilingofour2003federalandstateincometaxreturns.

44 Notes

Theresultsofdiscontinuedoperationsofthebusinessessoldwere:

Year Ended december 31 2004 2003

(Thousands)

Component of Energy East Solutions, Inc. Revenues $48,634 $57,478

(Loss)incomefromoperationsofdiscontinuedbusiness $(859) $68 Incometaxes(benefits) (142) 27

(Loss)incomefromdiscontinuedoperations $(717) $41

Certain divisions of union water Power Company Revenues $13,156 $21,851

Lossfromoperationsofdiscontinuedbusiness $(6,250) $(2,147) Incometaxes(benefits) 151 (1,003)

Lossfromdiscontinuedoperations $(6,401) $(1,144)

Griffith Oil Co., Inc. Revenues – $321,447

Lossfromoperationsofdiscontinuedbusiness – $(7,798) Incometaxes(benefits) $1,166 (13,387)

(Loss)incomefromdiscontinuedoperations $(1,166) $5,589

berkshire Propane, Inc. Revenues – $5,494

Lossfromoperationsofdiscontinuedbusiness – $(2,155) Incometaxes – 375

Lossfromdiscontinuedoperations – $(2,530)

totals for discontinued operations Totalrevenues $61,790 $406,270

Totallossfromoperationsofdiscontinuedbusinesses $(7,109) $(12,032) Totalincometaxes(benefits) 1,175 (13,988)

total (loss) income from discontinued operations $(8,284) $1,956

Note 4 Goodwill and Other Intangible Assets

Wedonotamortizegoodwillorintangibleassetswithindefinitelives(unamortizedintangibleassets).Wetestgoodwillandunamortizedintangibleassetsforimpairmentatleastannually.Weamortizeintangibleassetswithfinitelives(amortizedintangibleassets)andreviewthemforimpairment.WecompletedourannualimpairmenttestinganddeterminedthatwehadnoimpairmentofgoodwillorunamortizedintangibleassetsatSeptember30,2005.

ThecarryingamountofgoodwillatDecember31,2005,wasthesameasatDecember31,2004.Theamountsofgoodwillbyoperatingsegment(inthousands)are:

OthER IntanGIblE aSSEtSOurunamortizedintangibleassetshadacarryingamountof$19millionatDecember31,2005,and$10millionatDecember31,2004,andprimarilyconsistedofpensionassets.Ouramortizedintangibleassetshadagrosscarryingamountof$31millionatDecember31,2005and2004,andprimarilyconsistedofinvestmentsinpipelinesandcustomerlists.Accumulatedamortizationwas$18millionatDecember31,2005,and$15millionatDecember31,2004.Estimatedamortizationexpenseforintangibleassetsisapproximately$1millionforeachofthenextfiveyears,2006through2010.

Note 5 Income Taxes

Ourtaxexpensedifferedfromtheexpenseatthestatutoryrateof35%duetothefollowing:

Electric delivery natural Gas delivery Other total

$844,491 $676,588 $4,274 $1,525,353

Notes 45

Year Ended december 31 2005 2004 2003

(Thousands)

Taxexpenseatstatutoryrate $149,907 $172,465 $124,656Depreciationandamortizationnotnormalized 11,859 2,220 10,715ITCamortization (3,120) (8,071) (3,651)Trustpreferredsecurities – – (4,978)ASGA,Ginna – 80,075 –Statetaxes,netoffederalbenefit 19,654 23,875 12,641Other,net (8,303) (19,119) (10,720)

total for Continuing Operations $169,997 $251,445 $128,663

Year Ended december 31 2005 2004 2003

(Thousands)

Current Federal $87,058 $99,268 $19,920 State 14,800 19,186 392

Currenttaxeschargedtoexpense 101,858 118,454 20,312

Deferred Federal 55,821 123,517 92,945 State 15,438 17,545 19,057

Deferredtaxeschargedtoexpense 71,259 141,062 112,002ITCadjustments (3,120) (8,071) (3,651)

total for Continuing Operations $169,997 $251,445 $128,663

Goodwill by operating segment

Electric Delivery 55%Other 1%Natural Gas Delivery 44%

46 Notes

Theeffectivetaxrateforcontinuingoperationswas40%in2005,51%in2004and36%in2003.Theincreasein2004wasprimarilyaresultoftheregulatorytreatmentofthedeferredgainfromRG&E’ssaleofGinna.RG&Erecordedpretaxincomeof$112millionandincometaxexpenseof$112million.(SeeNote2.)

AtDecember31,2005and2004,ourconsolidateddeferredtaxassetsandliabilitiesconsistedof:

EnergyEastanditssubsidiarieshavenofederaltaxcreditorlosscarryforwardsandnovaluationallowances.

Note 6 Long-term Debt

dEbt OwEd tO SubSIdIaRY hOldInG SOlElY PaREnt dEbEntuRESThedebtowedtoasubsidiaryholdingsolelyparentdebenturesconsistsofEnergyEast’s8¼%juniorsubordinateddebtsecuritiesmaturingonJuly1,2031,thatareheldbyEnergyEastCapitalTrustI.

EnergyEastCapitalTrustIisaDelawarebusinesstrustthatisawholly-ownedfinancesubsidiaryofEnergyEast.Basedonthetrust’sstructurewearenotconsideredtheprimarybeneficiaryofthetrustanddonotconsolidatethetrust.Theassetsofthetrustconsistofour8¼%juniorsubordinateddebtsecurities.Thetrusthasissued$345millionofmandatorilyredeemabletrustpreferredsecuritiesthatare8¼%CapitalSecurities.Wehavefullyandunconditionallyguaranteedthetrust’spaymentobligationswithrespecttotheCapitalSecurities.InJuly2006EnergyEastisplanningtocall,atpar,its$345million,8¼%CapitalSecurities.Weexpecttowriteoffapproximately$11millionofunamortizeddebtexpensewhenthe8¼%CapitalSecuritiesarecalled.

2005 2004

(Thousands)

Current deferred Income tax assets (liabilities) Derivativeassets $(110,390) – Other 29,406 $33,969

total Current deferred Income tax assets (liabilities) $(80,984) $33,969

noncurrent deferred Income tax liabilities Depreciation $946,155 $869,919 Unfundedfutureincometaxes 136,059 148,116 AccumulateddeferredITC 38,604 41,723 Deferred(gain)lossonsaleofgenerationassets (49,715) (65,485) Pension 170,541 146,756 Statement106postretirementbenefits (135,205) (121,292) Derivative(liabilities)assets (11,132) 4,204 Other (75,502) (28,855)

total noncurrent deferred Income tax liabilities 1,019,805 995,086Lessamountsclassifiedasregulatoryliabilities Deferredincometaxes (13,482) 21,487

noncurrent deferred Income tax liabilities $1,033,287 $973,599

2003

2004

2005

36%

37% (excluding Ginna)

40%

Effective Tax Rate

OthER lOnG-tERm dEbt AtDecember31,2005and2004,ourconsolidatedotherlong-termdebtwas:

(1)Thefirstmortgagebondsaresecuredbyliensonsubstantiallyalloftherespectiveutility’sproperties.

Company Interest Rates maturity 2005 2004

first mortgage bonds (1) RG&E SeriesB,TT,UU&VV 5.84%-7.60% 2008-2033 $511,000 $511,000RG&E PCN2004SeriesA&B 3.00%-3.395% 2032 60,500 60,500SCG MediumTermNoteI,II&III 4.57%-7.95% 2006-2035 224,000 179,000SCG SeriesW 8.93% 2021 25,000 25,000BerkshireGas SeriesP 10.06% 2019 10,000 10,000

Totalfirstmortgagebonds 830,500 785,500

Pollution control notes, fixedNYSEG 1994SeriesA&E 5.90%-6.00% 2006 37,000 37,000NYSEG 1985SeriesA,B&D 4.00%-4.10% 2015 132,000 72,000NYSEG 1987SeriesA 6.15% 2026 – 65,000NYSEG 2004SeriesC 3.245% 2034 100,000 –RG&E 1998SeriesA 5.95% 2033 25,500 25,500CMP IndustrialDevelopmentAuthority ofthestateofNewHampshireNotes 5.375% 2014 19,500 19,500

Totalpollutioncontrolnotes,fixed 314,000 219,000

Pollution control notes, variableNYSEG 1985SeriesA 1.08% 2015 – 60,000NYSEG 2005SeriesA 3.55% 2026 65,000 –NYSEG 2004SeriesA,B&C 3.40%-3.51% 2027-2034 104,000 204,000NYSEG 1994SeriesB,C,D1&D2 3.05%-3.19% 2029 175,000 175,000RG&E 1997SeriesA,B&C 2.90%-3.10% 2032 101,900 101,900TENCos IndustrialRevenueVariableRate DemandBonds 3.59% 2025-2030 14,900 14,900

Totalpollutioncontrolnotes,variable 460,800 555,800

various long-term debtEnergyEast UnsecuredNote 5.75% 2006 232,350 232,850EnergyEast UnsecuredNote 8.05% 2010 200,000 200,000EnergyEast UnsecuredNote 6.75% 2012 400,000 400,000EnergyEast UnsecuredNote 6.75% 2033 200,000 200,000NYSEG UnsecuredNotes 4.375%-5.75% 2007-2023 450,000 450,000CMP SeriesE&FMediumTermNotes 4.25%-8.125% 2006-2035 310,700 255,700CNG MediumTermNotesSeriesA,B&C 5.63%-9.10% 2007-2035 149,000 104,000BerkshireGas UnsecuredNotes 4.76%-9.60% 2011-2021 36,000 36,000Energetix PromissoryNote 8.50% 2006 3,509 5,657TENCos SeniorSecuredTermNotes 6.90%-6.99% 2009-2010 35,000 40,000NORVARCO PromissoryandSeniorNote 7.05%-10.48% 2020 17,556 18,739

Totalvariouslong-termdebt 2,034,115 1,942,946

Obligationsundercapitalleases 26,855 29,268 Unamortizedpremiumanddiscountondebt,net (28,348) (31,268)

3,637,922 3,501,246 Lessdebtduewithinoneyear,includedincurrentliabilities 326,527 59,231

total $3,311,395 $3,442,015

Notes 47

Other Long-Term Debt Fixed-rate PCN 8%

First Mortgage Bonds 23%Various Long-Term Debt 56%

Variable-rate PCN 13%

amount(Thousands)

48 Notes

Therearefederalandstateregulatoryrestrictionsonourabilitytoborrowfundsfromourutilitysubsidiaries.Whilewemaybeabletoborrowfundsfromourutilitysubsidiariesbyobtainingregulatoryapprovalsandmeetingcertainconditions,wedonotexpecttoseeksuchloans.EnergyEasthasnosecuredindebtednessandnoneofitsassetsaremortgaged,pledgedorotherwisesubjecttolien.NoneofEnergyEast’sdebtobligationsareguaranteedorsecuredbyitssubsidiaries.

AtDecember31,2005,otherlong-termdebt,includingsinkingfundobligations,andcapitalleasepayments(inthousands)thatwillbecomedueduringthenextfiveyearsis:

CROSS-dEfault PROvISIOnSEnergyEasthasaprovisioninitsseniorunsecuredindenture,whichprovidesthatitsdefaultwithrespecttoanyotherdebtinexcessof$40millionwillbeconsideredadefaultunderitsseniorunsecuredindenture.EnergyEastalsohasaprovisioninitsrevolvingcreditfacility,whichprovidesthatitsdefaultwithrespecttoanyotherdebtinexcessof$50millionwillbeconsideredadefaultunderitsrevolvingcreditfacility.

Note 7 Bank Loans and Other Borrowings

EnergyEastisthesoleborrowerinarevolvingcreditfacilityprovidingmaximumborrowingsofupto$300million.Ouroperatingutilitiesarejointborrowersinarevolvingcreditfacilityprovidingmaximumborrowingsofupto$475millioninaggregate.Sublimitsthattotaltotheaggregatelimitapplytoeachjointborrowerandcanbealteredwithintheconstraintsimposedbymaximumlimitsthatapplytoeachjointborrower.Bothfacilitieshaveexpirationdatesin2010andrequirefeesonundrawnborrowingcapacity.Twoofouroperatingutilitieshaveuncommittedbilateralcreditagreementsforatotalof$10million.Thetworevolvingcreditfacilitiesandthetwobilateralcreditagreementsprovidedforconsolidatedmaximumborrowingsof$785millionatDecember31,2005.AtDecember31,2004,EnergyEastanditssubsidiarieshadrevolvingcreditagreementswithvariousexpirationdatesin2005and2009thatprovidedforconsolidatedmaximumborrowingsof$740million.EnergyEastpaysafacilityfeeof12.5basispointsannuallyonits$300millionrevolverandeachjointborrowerpaysafacilityfeeonitsrevolversublimit,rangingfrom8to12.5basispointsannuallydependingontheratingofitsunsecureddebt.

Weusecommercialpaperanddrawingsonourcreditfacilitiestofinanceworkingcapitalneeds,totemporarilyfinancecertainrefundingsandforothercorporatepurposes.Therewas$121millionofsuchshort-termdebtoutstandingatDecember31,2005,and$206millionoutstandingatDecember31,2004.Theweighted-averageinterestrateonshort-termdebtwas4.6%atDecember31,2005,and2.8%atDecember31,2004.

Inourrevolvingcreditfacilitywecovenantnottopermit,withouttheconsentofthelender,ourratioofconsolidatedindebtednesstoconsolidatedtotalcapitalizationtoexceed0.65to1.00atanytime.Thefacilitycontainsvariousothercovenants,includingarestrictionontheamountofsecuredindebtednessEnergyEastmaymaintain.Continuedunremediedfailuretocomplywiththosecovenantsfor15daysafterwrittennoticeofsuchfailurefromthelenderconstitutesaneventofdefaultandwouldresultinaccelerationofmaturity.Ourratioofconsolidatedindebtednesstoconsolidatedtotalcapitalizationpursuanttotherevolvingcreditfacilitywas0.54to1.00atDecember31,2005.Wearenotindefault,andnoconditionexiststhatislikelytocreateadefault,underthefacility.

Intherevolvingcreditfacilityinwhichouroperatingutilitiesarejointborrowers,eachjointborrowercovenantsnottopermit,withouttheconsentofthelender,itsratiooftotalindebtednesstototalcapitalizationtoexceed0.65to1.00atanytime.Thefacilitycontainsvariousothercovenants,including

2006 2007 2008 2009 2010

$326,527 $257,236 $96,326 $148,924 $261,339

Notes 49

arestrictionontheamountofsecuredindebtednesseachborrowermaymaintain.Continuedunremediedfailuretoobservethosecovenantsforfivebusinessdaysafterwrittennoticeofsuchfailurefromthelenderconstitutesaneventofdefaultandwouldresultinaccelerationofmaturityforthepartyindefault.Noborrowerisindefault,andnoconditionexiststhatislikelytocreateadefault,underthefacility.

Note 8 Preferred Stock Redeemable Solely at the Option of Subsidiaries

AtDecember31,2005and2004,ourconsolidatedpreferredstockwas:

(1)AtDecember31,2005,EnergyEastanditssubsidiarieshad16,731,356sharesof$100parvaluepreferredstock,16,800,000sharesof$25parvaluepreferredstock,775,609sharesof$3.125parvaluepreferredstock,600,000sharesof$1parvaluepreferredstock,10,000,000sharesof$.01parvaluepreferredstock,1,000,000sharesof$100parvaluepreferencestockand6,000,000sharesof$1parvaluepreferencestockauthorizedbutunissued.

Oursubsidiariesredeemedorpurchasedthefollowingamountsofpreferredstockduringthethreeyears2003through2005:

vOtInG RIGhtSIfpreferredstockdividendsonanyseriesofpreferredstockofasubsidiary,otherthantheCMP6%seriesandtheCNG8.00%series,areindefaultinanamountequivalenttofourfullquarterlydividends,theholdersofthepreferredstockofsuchsubsidiaryareentitledtoelectamajorityofthedirectorsofsuchsubsidiary(and,inthecaseoftheCNG6.00%series,thelargestnumberofdirectorsconstitutingaminorityoftheboard)andtheirprivilegecontinuesuntilalldividendsindefaulthavebeenpaid.Theholdersofpreferredstock,otherthantheCMP6%seriesandtheCNG8.00%series,arenotentitledtovoteinrespectofanyothermattersexceptthose,ifany,inrespectofwhichvotingrights

Redemption Price Shares authorized amount(Thousands)Subsidiary and Series Par value Per Share Per Share and Outstanding(1) 2005 2004

CMP,6%Noncallable $100 – 5,180 $518 $518CMP,3.50% 100 $101.00 – – 22,000CMP,4.60% 100 101.00 30,000 3,000 3,000CMP,4.75% 100 101.00 50,000 5,000 5,000CMP,5.25% 100 102.00 50,000 5,000 5,000NYSEG,3.75% 100 104.00 78,379 7,838 7,838NYSEG,4.50%(1949) 100 103.75 11,800 1,180 1,180NYSEG,4.40% 100 102.00 7,093 709 709NYSEG,4.15%(1954) 100 102.00 4,317 432 432BerkshireGas,4.80% 100 100.00 2,044 204 244CNG,6.00% 100 110.00 4,104 411 411CNG,8.00%Noncallable 3.125 – 108,706 339 339

total $24,631 $46,671

Subsidiary date Series amount(Thousands)

CNG September16,2003 8.00% $0.4

BerkshireGas September9,2003 4.80% $7.5BerkshireGas September16,2004 4.80% $5.6 BerkshireGas September15,2005 4.80% $39.9

RG&E May5,2004 4.00%F $12,000RG&E May5,2004 4.10%H $8,000RG&E May5,2004 4.75%I $6,000RG&E May5,2004 4.10%J $5,000RG&E May5,2004 4.95%K $6,000RG&E May5,2004 4.55%M $10,000

CMP June10,2005 3.50% $22,000

2004

2005

2006

$299

$331

$442 (estimated)

Capital Spending (millions)

cannotbedeniedorwaivedundersomemandatoryprovisionoflaw,andexceptthatthechartersoftherespectivesubsidiariescontainprovisionstotheeffectthatsuchholdersshallbeentitledtovoteoncertainmattersaffectingtherightsandpreferencesofthepreferredstock.

HoldersoftheCMP6%seriesandtheCNG8.00%seriesareentitledtoonevotepershareandhavefullvotingrightsonallmatters.

Note 9 Commitments and Contingencies

CaPItal SPEndInGWehavecommitmentsinconnectionwithourcapitalspendingprogram.Weplantoinvestamountsinourenergydeliveryinfrastructureduringthenextfiveyears,includingamountsdedicatedtoelectricreliability.Capitalspendingin2006isexpectedtobepaidforprincipallywithinternallygeneratedfunds.Theprogramissubjecttoperiodicreviewandrevision.Ourcapitalspendingwillbeprimarilyfortheextensionofenergydeliveryservice,necessaryimprovementstoexistingfacilities,compliancewithenvironmentalrequirementsandgovernmentalmandates,andtheRG&Etransmissionproject.

nOnutIlItY GEnERatOR POwER PuRChaSE COntRaCtSWeexpensedapproximately$631millionforNUGpowerin2005,$613millionin2004and$608millionin2003.WeestimatethatourNUGpowerpurchaseswillbe$571millionin2006,$575millionin2007,$410millionin2008,$244millionin2009and$83millionin2010.

nuClEaR EntItlEmEnt POwER PuRChaSE COntRaCtSInconnectionwithoursalesofnucleargeneratingassetsin2004and2001,weenteredintofourentitlementcontractsunderwhichwepurchaseelectricityatafixedcontractprice.Weexpensedapproximately$263millionfornuclearentitlementpowerin2005,$199millionin2004and$106millionin2003.Weestimatethatournuclearentitlementpowerpurchaseswillbe$260millionin2006,$303millionin2007,$286millionin2008,$289millionin2009,and$306millionin2010.

nYISO bIllInG adjuStmEnt TheNYISOfrequentlybillsmarketparticipantsonaretroactivebasiswhenitdeterminesthatbillingadjustmentsarenecessary.Suchretroactivebillingscancoverseveralmonthsoryearsandcannotbereasonablyestimated.NYSEGandRG&Erecordtransmissionorsupplyrevenueorexpense,asappropriate,whenrevisedamountsareavailable.ThetwocompanieshavedevelopedanaccrualprocessthatincorporatesavailableinformationaboutretroactiveNYISObillingadjustmentsasprovidedtoallmarketparticipants.However,onanongoingbasis,theycannotfullypredicteitherthemagnitudeorthedirectionofanyfinalbillingadjustments.

TheFERCissuedanorderdirectingtheNYISOtomodifycertainenergypricesforMay8and9,2000,andtobackbillNYISOmarketparticipants,includingNYSEGandRG&E.TheNYISOandmanymarketparticipantsfiledrequestsforrehearingwiththeFERCconcerningthatorder.WhiletheFERChasnotruledonthoserequestsforrehearing,onJuly8,2005,andOctober7,2005,theNYISOissuedbackbillingsthatreflectedtheFERCorderconcerningtheMay2000issues.NYSEG’supdatedbackbillingrelatingtoMay8and9,2000,wasapproximately$2millionandRG&E’swasapproximately$1million.Inthethirdquarterof2005NYSEGandRG&Edeferredtheamountsassociatedwiththebackbillingsasregulatorymandates,pursuanttotheirElectricRateAgreementsapprovedbytheNYPSC.

50 Notes

Notes 51

Note 10 Environmental Liability and Nuclear Decommissioning

EnvIROnmEntal lIabIlItYFromtimetotimeenvironmentallaws,regulationsandcomplianceprogramsmayrequirechangesinouroperationsandfacilitiesandmayincreasethecostofelectricandnaturalgasservice.

TheEPAandvariousstateenvironmentalagencies,asappropriate,havenotifiedusthatweareamongthepotentiallyresponsiblepartieswhomaybeliableforcostsincurredtoremediatecertainhazardoussubstancesat22wastesites.The22sitesdonotincludesiteswheregaswasmanufacturedinthepast,whicharediscussedbelow.Withrespecttothe22sites,13sitesareincludedintheNewYorkStateRegistryofInactiveHazardousWasteDisposalSites,fourareincludedinMaine’sUncontrolledSitesProgram,oneisincludedontheMassachusettsNon-PriorityConfirmedDisposalSitelistandninesitesarealsoincludedontheNationalPrioritieslist.

Anyliabilitymaybejointandseveralforcertainofthosesites.Wehaverecordedanestimatedliabilityof$2millionrelatedto12ofthe22sites.Wehavepaidremediationcostsrelatedtotheremaining10sites,anddonotexpecttoincuranyadditionalliability.Wehaverecordedanestimatedliabilityof$2millionrelatedtoanother12siteswherewebelieveitisprobablethatwewillincurremediationcostsand/ormonitoringcosts,althoughwehavenotbeennotifiedthatweareamongthepotentiallyresponsibleparties.Theultimatecosttoremediatethesitesmaybesignificantlymorethantheaccruedamount.Factorsaffectingtheestimatedremediationamountincludetheremedialactionplanselected,theextentofsitecontaminationandtheportionattributedtous.

Wehaveaprogramtoinvestigateandperformnecessaryremediationatour59siteswheregaswasmanufacturedinthepast.EightsitesareincludedintheNewYorkStateRegistry,eightsitesareincludedintheNewYorkVoluntaryCleanupProgram,foursitesarepartofMaine’sVoluntaryResponseActionProgramandthreeofthosefoursitesarepartofMaine’sUncontrolledSitesProgram,threesitesareincludedintheConnecticutInventoryofHazardousWasteSites,andthreesitesareontheMassachusettsDepartmentofEnvironmentalProtection’slistofconfirmeddisposalsites.Wehaveenteredintoconsentorderswithvariousenvironmentalagenciestoinvestigateand,wherenecessary,remediate46ofthe59sites.

Ourestimateforallcostsrelatedtoinvestigationandremediationofthe59sitesrangesfrom$161millionto$296millionatDecember31,2005.Ourestimatecouldchangemateriallybasedonfactsandcircumstancesderivedfromsiteinvestigations,changesinrequiredremedialaction,changesintechnologyrelatingtoremedialalternativesandchangestocurrentlawsandregulations.

Theliabilitytoinvestigateandperformremediation,asnecessary,attheknowninactivegasmanufacturingsiteswas$161millionatDecember31,2005,and$140millionatDecember31,2004.Werecordedacorrespondingregulatoryasset,netofinsurancerecoveries,sinceweexpecttorecoverthenetcostsinrates.

Ourenvironmentalliabilitiesarerecordedonanundiscountedbasisunlesspaymentsarefixedanddeterminable.Nearlyallofourenvironmentalliabilityaccruals,whichareexpectedtobepaidthroughtheyear2017,havebeenestablishedonanundiscountedbasis.Someofouroperatingutilitysubsidiarieshavereceivedinsurancesettlementsduringthelastthreeyears,whichtheyaccountedforasreductionstotheirrelatedregulatoryassets.

nuClEaR dECOmmISSIOnInGCMPhasownershipinterestsinthreenucleargeneratingfacilitiesinNewEngland,whichitaccountsforundertheequitymethod.Allthreefacilitieshavebeenpermanentlyshutdown,andhavebeendecommissionedorareintheprocessofbeingdecommissioned.

EachofthethreenucleargeneratingfacilitieshasanestablishedNRClicensedindependentspentfuelstorageinstallationonsitetostorespentnuclearfuelindrycasksuntiltheDOEtakesthefuelfordisposal.

MaineYankee’sdecommissioningwascompletedin2005.YankeeAtomic’sdecommissioningisscheduledtobecompletedduring2006andConnecticutYankee’sdecommissioningisscheduledtobecompletedduring2007.YankeeAtomicincreaseditsdecommissioningandspentfuelstoragecostsinJanuary2006.ConnecticutYankeeincreaseditsdecommissioningcollectionsto$93millionannuallyasofJanuary2005.CMP’sshareofthatincreaseisapproximately$6million.UnderMainestatutes,CMPisallowedtorecoverinratesanyincreasesindecommissioningcostsandpursuanttoits2005strandedcostsettlementwiththeMPUC,CMPbegantocollectthehigherConnecticutYankeedecommissioningcostsinMarch2005andwillbegintocollectthehigherYankeeAtomicdecommissioningcostsinMarch2006.

Note 11 Fair Value of Financial Instruments

Thecarryingamountsandestimatedfairvaluesofourfinancialinstrumentsareshowninthefollowingtable.Thefairvaluesarebasedonthequotedmarketpricesforthesameorsimilarissuesofthesameremainingmaturities.

Thecarryingamountsforcashandcashequivalents,currentinvestmentsavailableforsale,notespayable,derivativeassets,derivativeliabilitiesandinterestaccruedapproximatetheirestimatedfairvalues.

Note 12 Share-Based Compensation

AsofDecember31,2005,wehavetwoshare-basedcompensationplans,whicharedescribedbelow.ThetotalcompensationcostchargedagainstincomeforthoseplansfortheyearsendedDecember31was:$4.5millionfor2005,$21.1millionfor2004and$4.5millionfor2003.Thetotalincometaxbenefitrecognizedintheincomestatementforshare-basedcompensationarrangementsfortheyearsendedDecember31was:$1.8millionfor2005,$8.4millionfor2004and$1.8millionfor2003.

StOCk OPtIOnS/SaRSUnderour2000StockOptionPlan(thePlan),whichisshareholderapproved,wemaygranttoseniormanagementandcertainotherkeyemployeesstockoptionsandSARsforupto13millionsharesofEnergyEast’scommonstock.Awardsareintendedtomorecloselyalignthefinancialinterestsofmanagementwiththoseofourshareholdersbyprovidinglong-termincentivestothoseindividualswhocansignificantlyaffectourfuturegrowthandsuccess.OurpolicyistograntSARsintandemwithanystockoptionsgranted.EmployeesmaychoosetoexerciseeithertheSARs,whicharesettledincash,orthestockoptions.Theexercisepriceofstockoptions/SARsgrantedisthemarketprice

52 Notes

december 31 2005 2004

Carrying amount Estimated fair value CarryingAmount EstimatedFairValue

(Thousands)

Noncurrentinvestments–classifiedasavailable-for-sale $88,432 $88,432 $67,310 $67,310Debtowedtoaffiliate $355,670 $358,817 $355,670 $379,571Firstmortgagebonds $829,551 $922,079 $784,065 $896,747Pollutioncontrolnotes,fixed $314,000 $322,510 $219,000 $229,280Pollutioncontrolnotes,variable $460,800 $460,800 $555,800 $555,800Variouslong-termdebt $2,006,716 $2,150,762 $1,913,113 $2,110,980

maine Yankee Yankee atomic Connecticut Yankee

($inMillions)

Ownershipshare 38% 9.5% 6%2005decommissioningandspentfuelstoragecosts $20.9 $5.2 $6.9Shareofremainingdecommissioningand othercosts(in2005dollars) $85.9 $12.8 $27.6EquityinterestatDecember31,2005 $10.5 – $2.7

Notes 53

ofEnergyEast’scommonstockonthelasttradingdatepriortothedateofgrant.Thestockoptions/SARsgenerallyvestone-thirdupongrant,one-thirdonthefirstdayofthenewyearfollowingtheirgrantandthelastthirdayearlater,subjectto,withcertainexceptions,continuousemployment.Allstockoptions/SARsexpire10yearsafterthegrantdate.TheCompensationandManagementSuccessionCommitteeofEnergyEast’sBoardofDirectors,whichadministersthePlan,mayinitsdiscretiontakeoneormoreofspecifiedactionsinordertopreserveaparticipant’srightsunderanawardintheeventofachangeincontrol(asdefinedinthePlan).

EffectivewithouradoptionofStatement123(R)onOctober1,2005,(seeNote1)webeganestimatingthefairvalueofeachstockoption/SARawardusingtheBlack-Scholes-Mertonoptionvaluationmodelandtheassumptionsdescribedbelow.InaccordancewithStatement123(R),wewillmeasurethefairvalueofthestockoptions/SARsonthedateofgrant,whenwewillbegintorecognizecompensationcost,andremeasurethefairvalueattheendofeachreportingperiod.Theliabilityatthereportingdateisbasedonthefairvalueatthatdate,andthecompensationcostforthereportingperiodthenendedisbasedonthepercentageofrequiredservicethathasbeenrenderedatthatdate.Webasetheexpectedvolatilityandthedividendyieldon36-monthhistoricaveragesforEnergyEast’scommonstock.Attheendof2005theexpectedvolatilitywas13.93%andtheexpecteddividendyieldwas4.46%.Theexpectedtermofoptions/SARsgrantedrepresentstheperiodoftimethatweexpecttheoptions/SARstobeoutstanding,whichwederiveusingthesimplifiedmethodallowedbytheSEC.Anexpectedtermderivedusingthesimplifiedmethodisessentiallyone-halfoftheremainingcontractualtermandrangesfromlessthanoneyeartofiveyears.Therisk-freerateforeachoptionisbasedontheU.S.Treasuryyieldcurveineffectattheendofthereportingperiodformaturitiesconsistentwiththeexpectedterm.

WeappliedAPBOpinionNo.25,aspermittedbyStatement123,toaccountforourstock-basedcompensationpriortoOctober1,2005.Stockoptions/SARswereaccountedforasliabilityinstrumentsandrelatedcompensationwasdeterminedusingtheintrinsicvaluemethodduringtheninemonthsendedSeptember30,2005,andtheyears2004and2003.

Thefollowingtableprovidesasummaryofstockoption/SARactivityunderthePlanandotherinformation,fortheyearendedandasofDecember31,2005.

Theweighted-averagegrant-datefairvalueofstockoptions/SARsgrantedduringtheyearsendedDecember31was:$2.82for2005,$2.93for2004and$3.01for2003.Thetotalintrinsicvalueofshare-basedliabilitiespaidduringtheyearsendedDecember31was:$10.5millionfor2005,$13.4millionfor2004and$2.7millionfor2003.

weighted average aggregate Stock Options/ weighted-average Remaining Contractual Intrinsic value SaRs Exercise Price term (Years) (Thousands)

OutstandingatJanuary1,2005 4,356,682 $22.72

Options/SARsgranted 737,029 $24.62

SARsexercised (1,895,554) $21.60

Options/SARsforfeitedorexpired (38,169) $25.33

OutstandingatDecember31,2005 3,159,988 $23.81 6.8 $1,965

ExercisableatDecember31,2005 2,196,332 $23.38 6.0 $1,965

54 Notes

REStRICtEd StOCk WehaveaRestrictedStockPlanforourcommonstockunderwhichanaggregateoftwomillionsharesmaybegranted,subjecttoadjustment.Weawardsharesofrestrictedstocktoselectedemployees,whichsharesareissuedinthenameoftheemployee,whohasalltherightsofashareholdersubjecttocertainrestrictionsontransferabilityandariskofforfeiture.TherestrictedsharesgenerallyvestnolaterthanJanuary1ofthesixthyearaftertheawardisgrantedandbasedontheconditionsoutlinedintherestrictedstockawardgrants,includingtheachievementoftargetedshareholderreturns.WeissuesharesofrestrictedstockoutofEnergyEast’streasurystock.Werepurchased250,000sharesofourcommonstockinFebruary2006,primarilyforgrantsofrestrictedstock.Thegrant-datefairvalueofsharesofrestrictedstockawardedisbasedonthemarketpriceofEnergyEast’scommonstockonthedateoftherestrictedstockawardandisnotsubsequentlyremeasured.Wegenerallyexpensethecompensationcostforrestrictedstockratablyovertherequisiteserviceperiod;however,compensationcostforcertainsharesmaybeexpensedimmediatelyorovershorterperiodsbasedontheachievementofperformancecriteriaortheretirementprovisionincludedintheRestrictedStockPlan.Theweighted-averagegrantdatefairvaluepershareofrestrictedstockgrantedduringtheyearsendedDecember31was:$26.42for2005,$23.90for2004and$19.20for2003.

ThefollowingtableprovidesasummaryofrestrictedstockactivityandotherinformationfortheyearendedDecember31,2005:

AsofDecember31,2005,therewas$6.3millionoftotalunrecognizedcompensationcostrelatedtosharesgrantedpursuanttotheRestrictedStockPlan,whichweexpecttorecognizeoveraweighted-averageperiodoflessthantwoyears.ThetotalfairvalueofsharesvestedduringtheyearsendedDecember31was:$2.1millionfor2005,$0.7millionfor2004and$0.3millionfor2003.

weighted-average Restricted Stock Plan Shares Grant-date fair value

NonvestedatJanuary1,2005 418,168 $21.71

Granted 265,406 $26.42 Vested (106,115) $19.47 Forfeited (1,181) $26.12

NonvestedatDecember31,2005 576,278 $24.29

Notes 55

Note 13 Accumulated Other Comprehensive Income (Loss)

(SeeRiskmanagementinNote1.)

balance balance balance balance january 1 2003 december 31 2004 december 31 2005 december 31 2003 Change 2003 Change 2004 Change 2005

(Thousands)

Unrealizedgains(losses)oninvestments: Unrealizedholdinggainsduring period,netofincometax (expense)of$(253)for2003, $(316)for2004and$(210) for2005 $395 $491 $333

Netunrealized(losses)gains oninvestments $(1,291) 395 $(896) 491 $(405) 333 $(72)

Minimumpensionliabilityadjustment, netofincometaxbenefit(expense) of$(14,484)for2003,$8,114for 2004and$8,674for2005 (61,661) 21,541 (40,120) (7,915) (48,035) (16,983) (65,018)

Unrealizedgains(losses)onderivatives qualifiedashedges: Unrealizedgainsduringperiod onderivativesqualifiedas hedges,netofincometax (expense)of$(14,391)for 2003,$(5,061)for2004and $(107,041)for2005 22,320 8,964 167,352 Reclassificationadjustmentfor (gains)includedinnetincome, netofincometaxexpenseof of$14,123for2003,$22,037 for2004and$11,987for2005 (21,303) (33,887) (18,056)

Netunrealizedgains(losses)on derivativesqualifiedashedges 28,785 1,017 29,802 (24,923) 4,879 149,296 154,175

accumulated Other Comprehensive Income (loss) $(34,167) $22,953 $(11,214) $(32,347) $(43,561) $132,646 $89,085

56 Notes

Note 14 Retirement Benefits

EnergyEastsponsorsdefinedbenefitpensionplansandpostretirementbenefitplansapplicabletosubstantiallyallemployees.WeuseaDecember31measurementdateforourpensionandpostretirementbenefitplans.

Ouraccumulatedbenefitobligationforalldefinedbenefitpensionplanswas$2.2billionatDecember31,2005,and$2.0billionatDecember31,2004.ThesaleofGinnain2004resultedinadecreaseof$54millionintheprojectedbenefitobligation,and$51millionofpensionfundsweretransferredaspartofthesale.

CMP’s,CNG’sandSCG’spostretirementbenefitswerepartiallyfundedasofDecember31,2005and2004.

Pension benefits Postretirement benefits

2005 2004 2005 2004

(Thousands)

Change in benefit obligationBenefitobligationatJanuary1 $2,254,209 $2,140,119 $559,977 $611,236Servicecost 35,379 32,069 5,775 6,082Interestcost 127,785 130,891 30,719 34,672Planparticipants’contributions – – 642 –Planamendments 418 6,536 – (13,361)Actuarialloss(gain) 81,844 145,100 (23,686) (37,532)Divestitures – (54,444) – (6,071)Benefitspaid (132,887) (146,062) (36,430) (35,049)

BenefitobligationatDecember31 $2,366,748 $2,254,209 $536,997 $559,977

Change in plan assetsFairvalueofplanassetsatJanuary1 $2,475,494 $2,392,066 $32,105 $37,019Actualreturnonplanassets 187,449 260,652 1,516 3,047Employercontributions 54,469 19,661 26,463 26,617Divestitures – (50,823) – –Planparticipants’contributions – – 642 –Benefitspaid (132,887) (146,062) (29,598) (34,578)

FairvalueofplanassetsatDecember31 $2,584,525 $2,475,494 $31,128 $32,105

Fundedstatus $217,777 $221,285 $(505,869) $(527,872)Unrecognizednetactuarialloss 481,244 388,724 66,349 97,932Unrecognizedpriorservicecost(benefit) 42,810 47,393 (36,770) (44,372)Unrecognizednettransitionobligation – – 47,599 54,427

Prepaid(accrued)benefitcost $741,831 $657,402 $(428,691) $(419,885)

amounts recognized on the balance sheetPrepaidbenefitcost $741,831 $657,402 – –Accruedbenefitcost – – $(428,691) $(419,885)Additionalminimumliability (185,791) (166,418) – –Intangibleasset 6,595 7,016 – –Regulatoryliability 76,914 76,914 – –Accumulatedothercomprehensiveincome 102,282 82,488 – –

Netamountrecognized $741,831 $657,402 $(428,691) $(419,885)

Notes 57

Theminimumliabilityincludedinothercomprehensiveincomeforpensionbenefitsincreased$20millionin2005and$16millionin2004.Werecordedaminimumpensionliabilityof$186millionatDecember31,2005,asrequiredbyStatement87.Werecognizedtheeffectoftheminimumpensionliabilityinotherlong-termliabilities,intangibleassets,regulatoryliabilitiesandothercomprehensiveincome,asappropriate.Thattreatmentisprescribedwhentheaccumulatedbenefitobligationintheplanexceedsthefairvalueoftheunderlyingpensionplanassetsandaccruedpensionliabilities.Theincreaseintheunfundedaccumulatedbenefitobligationin2005wasprimarilyduetoadecreaseintheassumeddiscountrate.

AsofDecember31,2005,wedecreasedourdiscountratefrom5.75%to5.50%.Thediscountrateistherateatwhichthebenefitobligationscouldpresentlybeeffectivelysettled.Thediscountratewasdeterminedbydevelopingayieldcurvederivedfromaportfolioofhighgradenoncallablebondsthatcloselymatchesthedurationoftheexpectedcashflowsofourbenefitobligations.

Netperiodicbenefitcostisincludedinotheroperatingexpenses.Thenetperiodicbenefitcostforpostretirementbenefitsrepresentstheamountchargedtoexpenseforprovidinghealthcarebenefitstoretireesandtheireligibledependents.Theamountofpostretirementbenefitcostdeferredwas$59millionasofDecember31,2005,and$67millionasofDecember31,2004.Weexpecttorecoveranydeferredpostretirementcostsby2012.WeareamortizingthetransitionobligationforpostretirementbenefitsthatresultedfromtheadoptionofStatement106over20years.

Ourexpectedrateofreturnonplanassetsassumptionwasdevelopedbasedonareviewoflong-termhistoricalreturnsforthemajorassetclasses.Thatanalysisalsoconsideredbothcurrentcapitalmarketconditionsandprojectedfutureconditions.Giventhecurrentlowinterestrateenvironment,weselectedanassumptionof8.75%peryear,whichislowerthantheratethatwouldotherwisebedeterminedsolelybasedonhistoricalreturns.Theoperatingcompaniesamortizeunrecognizedactuarialgainsandlosses

weighted-average assumptions used Pension benefits Postretirement benefitsto determine benefit obligations at december 31 2005 2004 2005 2004

Discountrate 5.50% 5.75% 5.50% 5.75%Rateofcompensationincrease 4.00% 4.00% 4.00% 4.00%

Pension benefits Postretirement benefits

2005 2004 2003 2005 2004 2003

(Thousands)

Components of net periodic benefit costServicecost $35,379 $32,069 $31,216 $5,775 $6,082 $6,686Interestcost 127,785 130,891 132,491 30,719 34,672 36,712Expectedreturnonplanassets (214,012) (206,120) (204,173) (2,248) (2,480) (2,801)Amortizationofpriorservicecost 4,994 4,650 4,985 (7,577) (7,273) (6,879)Recognizednetactuarialloss(gain) 15,887 (1,106) (6,185) 8,630 4,968 6,729Amortizationoftransition(asset)obligation – (1,230) (7,238) 6,800 8,001 8,066Curtailment – (148) 403 – 230 (614)Settlementcharge – 12,186 – – (6,131) –

Netperiodicbenefitcost $(29,967) $(28,808) $(48,501) $42,099 $38,069 $47,899

weighted-average assumptions used to determine net periodic benefit cost Pension benefits Postretirement benefitsYear ended december 31 2005 2004 2003 2005 2004 2003

Discountrate 5.75% 6.25% 6.50% 5.75% 6.25% 6.50%Expectedreturnonplanassets 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%Rateofcompensationincrease 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

eitherovertenyearsfromthetimetheyareincurredorusingthestandardamortizationmethodology,underwhichamountsinexcessof10%ofthegreateroftheprojectedbenefitobligationormarketrelatedvalueareamortizedovertheplanparticipants’averageremainingservicetoretirement.

Weassumeda10.0%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitsfor2006thatgraduallydecreasesto5.0%bytheyear2011.Assumedhealthcarecosttrendrateshaveasignificanteffectontheamountsreportedforthehealthcareplans.Aonepercentagepointchangeinassumedhealthcarecosttrendrateswouldhavethefollowingeffects:

Ourweighted-averageassetallocationsatDecember31,2005and2004,byassetcategory,are:

Ourpensionplanassetsareheldinamastertrustwithatrusteeandareinvestedamongandwithinvariousassetclassesinordertoachievesufficientdiversificationinaccordancewithourrisktolerance.Thisisachievedthroughtheutilizationofmultipleassetmanagersandsystematicallocationtoinvestmentmanagementstyles,providingabroadexposuretodifferentsegmentsofthefixedincomeandequitymarkets.

OurpostretirementbenefitsplanassetsareheldwithvarioustrusteesinmultipleVEBAand401(h)arrangementsandareinvestedamongandwithinvariousassetclassesinordertoachievesufficientdiversificationinaccordancewithourrisktolerance.Thisisachievedthroughtheutilizationofmultipleinstitutionalmutualandmoneymarketfunds,whichprovideexposuretodifferentsegmentsofthefixedincome,equityandshort-termcashmarkets.

EquitysecuritiesdidnotincludeanyEnergyEastcommonstockasofDecember31,2005and2004.

AsofDecember31,2005and2004,theaccumulatedbenefitobligationandtheprojectedbenefitobligationexceededthefairvalueofpensionplanassetsforCMP’s,CNG’sandSCG’splans.Thefollowingtableshowstheaggregateprojectedandaccumulatedbenefitobligationsandthefairvalueofplanassetsforthosethreecompanies’plans.

Ourfundingpolicyistomakeannualcontributionsofnotlessthantheminimumrequiredbyapplicableregulations.Weexpecttocontributebetween$10millionand$20milliontoourpensionplansandapproximately$10milliontoourotherpostretirementbenefitplansin2006.

58 Notes

benefit Obligation Exceeds fair value of Plan assets

december 31 2005 2004

(Thousands)

Projectedbenefitobligation $569,560 $529,433Accumulatedbenefitobligation $511,653 $474,250Fairvalueofplanassets $456,593 $397,714

Pension benefits Postretirement benefits asset Category target allocation 2005 2004 target allocation 2005 2004

Equitysecurities 60% 64% 62% 50% 56% 54%Debtsecurities 30% 28% 32% 45% 37% 40%Realestate 5% 2% – – – –Other 5% 6% 6% 5% 7% 6%

Total 100% 100% 100% 100% 100% 100%

1% Increase 1% decrease

(Thousands)

Effectontotalofserviceandinterestcostcomponents $1,944 $(1,714)Effectonpostretirementbenefitobligation $26,282 $(22,531)

Notes 59

ExpectedbenefitpaymentsandexpectedMedicarePrescriptionDrug,ImprovementandModernizationActof2003(MedicareAct)subsidyreceipts,whichreflectexpectedfutureservice,asappropriate,areasfollows:

Note 15 Segment Information

Selectedfinancialinformationforouroperatingsegmentsispresentedinthetablebelow.Ourelectricdeliverysegmentconsistsofourregulatedtransmission,distributionandgenerationoperationsinNewYorkandMaineandournaturalgasdeliverysegmentconsistsofourregulatedtransportation,storageanddistributionoperationsinNewYork,Connecticut,MaineandMassachusetts.Wemeasuresegmentprofitabilitybasedonnetincome.Otherincludesprimarilyourenergymarketingcompanies,andinterestincome,intersegmenteliminationsandourothernonutilitybusinesses. Electric delivery natural Gas delivery Other total

(Thousands)

2005OperatingRevenues $2,969,558 $1,783,547 $545,438 $5,298,543 DepreciationandAmortization $178,806 $85,049 $13,362 $277,217InterestCharges,Net $207,074 $81,365 $458 $288,897IncomeTaxes $116,310 $45,752 $7,935 $169,997NetIncome(Loss) $206,117 $70,121 $(19,405) $256,833TotalAssets $7,175,864 $4,136,568 $175,276 $11,487,708CapitalSpending $205,402 $119,266 $6,626 $331,294

2004OperatingRevenues $2,781,322 $1,549,150 $426,220 $4,756,692DepreciationandAmortization $196,782 $88,998 $6,677 $292,457InterestCharges,Net $194,744 $77,700 $4,446 $276,890IncomeTaxes $203,898 $38,229 $9,318 $251,445NetIncome(Loss) $171,653 $64,139 $(6,455) $229,337TotalAssets $6,738,511 $3,851,242 $206,869 $10,796,622CapitalSpending $185,544 $107,735 $5,984 $299,263

2003OperatingRevenues $2,758,695 $1,462,127 $293,668 $4,514,490DepreciationandAmortization $211,120 $81,433 $6,877 $299,430InterestCharges,Net $201,684 $76,113 $6,685 $284,482IncomeTaxes(Benefits) $89,337 $50,096 $(10,770) $128,663NetIncome(Loss) $152,720 $70,837 $(13,111) $210,446TotalAssets $7,309,267 $3,544,162 $477,012 $11,330,441CapitalSpending $184,019 $95,396 $9,905 $289,320

Segment operating revenues

Electric Delivery 56%Other 10%

Natural Gas Delivery 34%

medicare act Pension benefits Postretirement benefits Subsidy Receipts

(Thousands)

2006 $129,872 $47,714 $3,212 2007 $133,671 $50,905 $3,5692008 $139,097 $54,254 $4,0202009 $146,110 $57,711 $4,4232010 $153,376 $61,209 $4,7812011–2015 $865,901 $344,778 $28,782

Note 16 Quarterly Financial Information (Unaudited)

(1)OurcommonstockislistedontheNewYorkStockExchange.Thenumberofshareholdersofrecordwas31,461atDecember31,2005.

Quarter Ended march 31 june 30 September 30 december 31

(Thousands,exceptpershareamounts)

2005OperatingRevenues $1,637,278 $1,081,945 $1,095,931 $1,483,389OperatingIncome $320,817 $98,301 $94,359 $179,678IncomefromContinuingOperations $154,366 $17,365 $21,324 $63,778NetIncome $154,366 $17,365 $21,324 $63,778EarningsperShare,basic $1.05 $.12 $.14 $.43EarningsperShare,diluted $1.05 $.12 $.14 $.43DividendsperShare $.275 $.275 $.275 $.29AverageCommonSharesOutstanding,basic 146,875 146,831 147,008 147,125AverageCommonSharesOutstanding,diluted 147,196 147,390 147,588 147,701CommonStockPrice(1)

High $26.95 $30.07 $29.35 $25.95 Low $24.98 $25.09 $24.82 $22.50

2004OperatingRevenues $1,551,356 $968,938 $967,805 $1,268,593OperatingIncome $267,692 $230,635 $94,660 $156,966IncomefromContinuingOperations $120,929 $42,823 $17,500 $56,369NetIncome $120,552 $38,066 $15,973 $54,746EarningsperShare,basic $.83 $.26 $.11 $.37EarningsperShare,diluted $.82 $.26 $.11 $.37 DividendsperShare $.26 $.26 $.26 $.275AverageCommonSharesOutstanding,basic 146,085 146,148 146,385 146,597AverageCommonSharesOutstanding,diluted 146,428 146,596 146,807 147,015CommonStockPrice(1)

High $25.49 $26.05 $25.25 $27.08 Low $22.29 $21.85 $23.48 $24.75

Quarterly Earnings per Share, basic

Second Quarter 7%First Quarter 60%

Third Quarter 8%

Fourth Quarter 25%

60 Notes

Reports 61

Report of Independent Registered Public Accounting Firm

TotheShareholdersandBoardofDirectorsofEnergyEastCorporationandSubsidiaries:

WehavecompletedintegratedauditsofEnergyEastCorporation’s2005and2004consolidatedfinancialstatementsandofitsinternalcontroloverfinancialreportingasofDecember31,2005,andanauditofits2003consolidatedfinancialstatementsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Ouropinions,basedonouraudits,arepresentedbelow.

COnSOlIdatEd fInanCIal StatEmEntS

Inouropinion,theaccompanyingconsolidatedbalancesheetsandtherelatedconsolidatedstatementsofincome,ofcashflowsandofchangesincommonstockequitypresentfairly,inallmaterialrespects,thefinancialpositionofEnergyEastCorporationanditssubsidiariesatDecember31,2005and2004,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,2005inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.WeconductedourauditsofthesestatementsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditoffinancialstatementsincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.

IntERnal COntROl OvER fInanCIal REPORtInG

Also,inouropinion,management’sassessment,includedinEnergyEastManagement’sAnnualReportonInternalControlOverFinancialReportingappearingonpage63,thattheCompanymaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2005basedoncriteriaestablishedinInternal Control – Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),isfairlystated,inallmaterialrespects,basedonthosecriteria.Furthermore,inouropinion,theCompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2005,basedoncriteriaestablishedinInternal Control – Integrated FrameworkissuedbytheCOSO.TheCompany’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.Ourresponsibilityistoexpressopinionsonmanagement’sassessmentandontheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.Weconductedourauditofinternalcontroloverfinancialreportinginaccordancewiththestandards

62 Reports

ofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Anauditofinternalcontroloverfinancialreportingincludesobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsidernecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinions.

Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(i)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(ii)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(iii)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

NewYork,NewYorkMarch1,2006

Reports 63

Energy East Management’s Annual Report on Internal Control Over Financial ReportingEnergyEast’smanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting.InternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Underthesupervisionandwiththeparticipationofmanagement,includingtheprincipalexecutiveofficerandprincipalfinancialofficer,anevaluationwasconductedoftheeffectivenessoftheinternalcontroloverfinancialreportingbasedontheframeworkinInternal Control – Integrated FrameworkissuedbyTheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.BasedonEnergyEast’sevaluationundertheframeworkinInternal Control – Integrated Framework,managementconcludedthatEnergyEast’sinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2005.

EnergyEastmanagement’sassessmentoftheeffectivenessofitsinternalcontroloverfinancialreportingasofDecember31,2005,hasbeenauditedbyPricewaterhouseCoopersLLP,anindependentregisteredpublicaccountingfirm,asstatedintheirreportonpage61.

Required CertificationsOnJune27,2005,EnergyEastsubmittedtotheNewYorkStockExchangeitsAnnualChiefExecutiveOfficerCertificationunderSection303AoftheNewYorkStockExchangeCorporateGovernanceRules.

EnergyEastfiledwiththeSecuritiesandExchangeCommissiontheCertificationsofitsChiefExecutiveOfficerandChiefFinancialOfficerasrequiredunderSection302oftheSarbanes-OxleyActof2002.ThecertificationswerefiledasExhibits31-1and31-2toEnergyEast’sForm10-KforthefiscalyearendedDecember31,2005,datedMarch1,2006.

Glossary

64 Glossary

abbreviations for the Energy East companies mentioned in this report:

berkshire EnergyBerkshireEnergyResources

berkshire GasTheBerkshireGasCompany

Cayuga EnergyCayugaEnergy,Inc.

CmPCentralMainePowerCompany

CmP GroupCMPGroup,Inc.

CnEConnecticutEnergyCorporation

CnGConnecticutNaturalGasCorporation

CtG ResourcesCTGResources,Inc.

EnergetixEnergetix,Inc.

Energy East, the company, we, our or usEnergyEastCorporation

mnGMaineNaturalGasCorporation

nYSEGNewYorkStateElectric&GasCorporation

RG&ERochesterGasandElectricCorporation

RGS EnergyRGSEnergyGroup,Inc.

SCGTheSouthernConnecticutGasCompany

SGfSouthGlensFallsEnergy,LLC

tEn CosTENCompanies,Inc.

abbreviations or acronyms frequently used in this report:

aljAdministrativeLawJudge

aPb 25AccountingPrinciplesBoardOpinionNo.25,AccountingforStockIssuedtoEmployees

aRP 2000AlternativeRatePlan2000

aSGaAssetSaleGainAccount

bechtelBechtelPowerCorporation

CGGConstellationGenerationGroup,LLC

Connecticut YankeeConnecticutYankeeAtomicPowerCompany

dOEUnitedStatesDepartmentofEnergy

dPuCConnecticutDepartmentofPublicUtilityControl

dSmdemand-sidemanagement

dtEMassachusettsDepartmentofTelecommunicationsandEnergy

Electric Rate agreementElectricportionofRG&E’s2004ElectricandNaturalGasRateAgreements

EPaUnitedStatesEnvironmentalProtectionAgency

EPSearningspershare

ESCOenergyservicecompany

faSbFinancialAccountingStandardsBoard

fERCFederalEnergyRegulatoryCommission

fIn 46(R)FASBInterpretationNo.46(revisedDecember2003),ConsolidationofVariableInterestEntities,aninterpretationofAccountingResearchBulletinNo.51

fIn 47FASBInterpretationNo.47,AccountingforConditionalAssetRetirementObligations,aninterpretationofFASBStatementNo.143

Ginna RobertE.GinnaNuclearPowerPlant,anuclearpowerplantsoldbyRG&EinJune2004

IRPIncentiveRatePlan

Glossary 65

ISO new EnglandISONewEnglandInc.

ItCinvestmenttaxcredit

lICaPlocationalinstalledcapacity(pricingmechanismintheNewEnglandmarketascurrentlyproposed)

md&aManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperations

mPuCMainePublicUtilitiesCommission

mwmegawatt

natural Gas Rate agreementNaturalgasportionofRG&E’s2004ElectricandNaturalGasRateAgreements

nRC UnitedStatesNuclearRegulatoryCommission

nuGnonutilitygenerator

nYISONewYorkIndependentSystemOperator

nYPaNewYorkPowerAuthority

nYPSCNewYorkStatePublicServiceCommission

nYPSC february 2002 OrderNYPSCorderissuedinFebruary2002approvingNYSEG’sfive-yearelectricrateplan,whichextendsthroughDecember31,2006

OCCTheOfficeofConsumerCounselintheStateofConnecticut

PCnPollutioncontrolnotes

Policy StatementNYPSCStatementofPolicyonFurtherStepsTowardCompetitioninRetailEnergyMarkets

ROEreturnonequity

RtORegionalTransmissionOrganization

Russell StationAcoal-firedelectricgenerationfacilityinGreece,NY

SaRstockappreciationright

SECUnitedStatesSecuritiesandExchangeCommission

Statement 71StatementofFinancialAccountingStandardsNo.71,AccountingfortheEffectsofCertainTypesofRegulation

Statement 87StatementofFinancialAccountingStandardsNo.87,Employers’AccountingforPensions

Statement 106StatementofFinancialAccountingStandardsNo.106,Employers’AccountingforPostretirementBenefitsOtherThanPensions

Statement 123StatementofFinancialAccountingStandardsNo.123,AccountingforStock-BasedCompensation

Statement 123(R)StatementofFinancialAccountingStandardsNo.123(revised2004),Shared-BasedPayment

Statement 133 StatementofFinancialAccountingStandardsNo.133,AccountingforDerivativeInstrumentsandHedgingActivities

Statement 143StatementofFinancialAccountingStandardsNo.143,AccountingforAssetRetirementObligations

Statement 150 StatementofFinancialAccountingStandardsNo.150,AccountingforCertainFinancialInstrumentswithCharacteristicsofbothLiabilitiesandEquity

vEbavoluntaryemployees’beneficiaryassociation

Yankee companiesMaineYankeeAtomicPowerCompany,ConnecticutYankeeAtomicPowerCompanyandYankeeAtomicElectricPowerCompany

voice Your ChoiceRG&E’sandNYSEG’selectriccommodityoptionprogram

Selected Financial Data

Year Ended december 31 2005 2004 2003 2002(3) 2001

(Thousands,exceptpershareamounts)

Operating Revenues Utility $4,753,105 $4,330,472 $4,220,822 $3,600,786 $3,531,020 Nonutility 545,438 426,220 293,668 177,240 150,593

total Operating Revenues 5,298,543 4,756,692 4,514,490 3,778,026 3,681,613

Operating Expenses Electricitypurchasedandfuelusedingeneration Utility 1,457,746 1,321,081 1,192,397 1,192,829 1,232,161 Nonutility 360,621 249,330 145,972 83,258 100,074 Naturalgaspurchased Utility 1,161,059 952,806 862,452 525,036 644,051 Nonutility 107,755 77,508 77,012 44,758 9,418 Otheroperatingexpenses 797,015 799,460 813,133 667,190 535,385 Maintenance 197,704 173,191 203,043 160,291 139,315 Depreciationandamortization 277,217 292,457 299,430 240,306 202,721 Othertaxes 246,271 252,860 269,238 229,158 192,345 Restructuringexpenses – – – 40,567 – Gainonsaleofgenerationassets – (340,739) – – (84,083) Deferralofassetsalegain – 228,785 – – 71,803

total Operating Expenses 4,605,388 4,006,739 3,862,677 3,183,393 3,043,190

Operating Income 693,155 749,953 651,813 594,633 638,423writedown of Investment – – – 12,209 78,422Other (Income) (32,904) (35,497) (17,226) (25,332) (34,661)Other deductions 8,858 15,803 28,395 29,260 20,216Interest Charges, net 288,897 276,890 284,482 256,161 216,387Preferred Stock dividends of Subsidiaries 1,474 3,691 19,009 32,129 14,455

Income from Continuing Operations before Income taxes 426,830 489,066 337,153 290,206 343,604Income taxes 169,997 251,445 128,663 100,277 154,865

Income from Continuing Operations 256,833 237,621 208,490 189,929 188,739

discontinued Operations Lossfromdiscontinuedoperations(includinglosson disposalof$(7,565)in2004and$(13,360)in2003) – (7,109) (12,032) (3,079) (1,618) Incometaxes(benefits) – 1,175 (13,988) (1,753) (486)

(loss) Income from discontinued Operations – (8,284) 1,956 (1,326) (1,132)

net Income 256,833 229,337 210,446 188,603 187,607Common Stock dividends 163,786 154,261 145,417 125,456 107,342

Retained Earnings Increase $93,047 $75,076 $65,029 $63,147 $80,265

average Common Shares Outstanding, basic 146,964 146,305 145,535 131,117 116,708Earnings per Share from Continuing Operations, basic(1) $1.75 $1.63 $1.43 $1.45 $1.62Earnings per Share, basic(2) $1.75 $1.57 $1.45 $1.44 $1.61dividends Paid per Share $1.115 $1.055 $1.00 $.96 $.92

book value per Share of Common Stock at Year End $19.45 $17.89 $17.57 $16.97 $15.26Capital Spending $331,294 $299,263 $289,320 $229,387 $222,875total assets $11,487,708 $10,796,622 $11,330,441 $10,944,347 $7,269,232long-term Obligations, Capital leases and Redeemable Preferred Stock $3,667,065 $3,797,685 $4,017,846 $3,721,959 $2,816,278

66 Statistics

Reclassifications:CertainamountsincludedinSelectedFinancialDatahavebeenreclassifiedtoconformtothe2005presentation.(1)EPSfromcontinuingoperations,dilutedis:$1.74for2005,$1.62for2004,andthesameasbasicforallotheryears.(2)EPS,dilutedis:$1.74for2005,$1.56for2004,$1.44for2003,andthesameasbasicforallotheryears.(3)Duetothecompletionofourmergertransactionduring2002theconsolidatedfinancialstatementsincludeRGSEnergy’sresultsbeginningwithJuly2002.(4)IncludesthewritedownofourinvestmentinNEONCommunications,Inc.thatdecreasednetincome$7millionandEPS6centsandtheeffectofrestructuringexpensesthatdecreasednetincome$24millionandEPS19cents.(5)IncludesthewritedownofourinvestmentinNEONCommunications,Inc.thatdecreasednetincome$46millionandEPS39cents.(6)Includesgoodwillamortizationof$25million.(7)Doesnotreflectthereclassificationofaccruedremovalcostsfromaccumulateddepreciationtoaregulatoryliability.

(5)

(4) (5)(6)

(4)

(4)

(5)

(5)

(7)

Statistics 67

Energy Distribution Statistics

2005 2004 2003 2002 2001

(Thousands)

Electric deliveries(Megawatt-hours) Residential 12,601 11,848 11,676 10,226 8,594 Commercial 9,805 9,480 9,266 8,019 6,527 Industrial 7,334 7,446 7,412 6,694 6,525 Other 2,279 2,245 2,239 1,930 1,592

total Retail 32,019 31,019 30,593 26,869 23,238 Wholesale 9,466 7,855 5,734 5,330 6,048

total Electric deliveries 41,485 38,874 36,327 32,199 29,286

Electric Revenues Residential $1,284,606 $1,163,887 $1,204,228 $1,073,586 $998,846 Commercial 536,779 565,976 667,802 609,165 622,996 Industrial 268,647 284,608 344,352 313,622 314,527 Other 160,073 177,029 191,756 175,130 162,987

total Retail 2,250,105 2,191,500 2,408,138 2,171,503 2,099,356

Wholesale 568,746 402,122 233,331 190,090 238,094 Other 150,707 187,700 117,226 206,654 167,446

total Electric Revenues $2,969,558 $2,781,322 $2,758,695 $2,568,247 $2,504,896

natural Gas deliveries(Dekatherms) Residential 80,049 82,574 85,401 62,748 52,846 Commercial 26,733 26,493 25,938 21,190 20,699 Industrial 3,951 4,062 3,458 2,934 2,847 Other 11,020 11,276 11,301 14,507 12,726 Transportationofcustomer-ownednaturalgas 82,924 84,039 86,647 80,480 58,882

total Retail 204,677 208,444 212,745 181,859 148,000 Wholesale 883 1,593 5,360 7,074 9,298

total natural Gas deliveries 205,560 210,037 218,105 188,933 157,298

natural Gas Revenues Residential $1,150,187 $1,020,544 $944,010 $594,279 $576,115 Commercial 349,596 287,926 266,409 192,023 226,215 Industrial 42,588 36,147 27,312 20,883 26,220 Other 130,488 100,440 86,162 83,735 89,524 Transportationofcustomer-ownednaturalgas 91,376 89,843 99,896 84,927 73,213

total Retail 1,764,235 1,534,900 1,423,789 975,847 991,287

Wholesale 643 182 21,070 17,260 37,748 Other 18,669 14,068 17,268 39,432 (2,911)

total natural Gas Revenues $1,783,547 $1,549,150 $1,462,127 $1,032,539 $1,026,124

68 Directors and Officers

Board of Directors

jOhn t. CaRdIS,adirectorsince2005,formerlyapartnerofDeloitte&ToucheUSA,LLP,NewYork,

NewYork,isadirectorofEdwardsLifesciencesCorporation,inIrvine,CaliforniaandAveryDennison

CorporationinPasadena,California.

jOSEPh j. CaStIGlIa,adirectorsince1995,isChairmanofHealthNowNewYork,Inc.,DBABlueCross

&BlueShieldofWesternNewYorkinBuffalo,NewYorkandBlueShieldofNortheasternNewYorkin

Albany,NewYork.

lOIS b. dEflEuR,adirectorsince1995,isPresidentofBinghamtonUniversityinBinghamton,NewYork.

G. jEan hOwaRd,adirectorsince2002,isChiefofStaff,OfficeoftheMayor,CityofRochesterin

Rochester,NewYork.

davId m. jaGGER,adirectorsince2000,isPresidentandTreasurerofJaggerBrothers,Inc.in

Springvale,Maine.

SEth a. kaPlan,adirectorsince2005,formerlyapartnerofWachtell,Lipton,Rosen&Katz,NewYork,

NewYork,isaCoadjutantmemberofthefacultyatRutgersUniversitySchoolofLaw–Newarkin

Newark,NewJersey.

bEn E. lYnCh,adirectorsince1987,isPresidentofWinchesterOpticalCompanyinElmira,NewYork.

PEtER j. mOYnIhan,adirectorsince2000,formerlySeniorVicePresidentandChiefInvestmentOfficer

ofUNUMCorporationinPortland,Maine.

waltER G. RICh,adirectorsince1997,isChairman,President,ChiefExecutiveOfficerandadirector

ofDelawareOtsegoCorporationinCooperstown,NewYork,anditssubsidiary,TheNewYork,

Susquehanna&WesternRailwayCorporation.

wESlEY w. vOn SChaCk,adirectorsince1996,isChairman,President&ChiefExecutiveOfficerof

thecorporation.

Committees (Chairpersonlistedfirst)

Audit:Lynch,Castiglia,Jagger,Kaplan,Moynihan

Compensation and Management Succession:Castiglia,Cardis,Lynch,Rich

Corporate Responsibility:Rich,DeFleur,Howard,Kaplan,Moynihan

Nominating and Corporate Governance:DeFleur,Cardis,Howard,Jagger

Directors and Officers 69

Energy East Officers

StEvEn R. adamS,VicePresident–RegulatoryPolicy

RObERt m. allESSIO,ChairmanandChiefExecutiveOfficer–BerkshireGasandPresident

andChiefExecutiveOfficer–CNGandSCG

RIChaRd R. bEnSOn,VicePresidentandChiefAdministrativeOfficer

SaRa j. buRnS,PresidentandChiefExecutiveOfficer–CMP

Paul k. COnnOllY, jR.,VicePresident–GeneralCounsel

ElaInE t. dubRava,Secretary

RObERt d. kumP,VicePresident,Controller&ChiefAccountingOfficer

jamES P. lauRItO,PresidentandChiefExecutiveOfficer–NYSEGandRG&E

f. mIChaEl mCClaIn,VicePresident–Finance,Treasurer&ChiefIntegrationOfficer

PatRICk t. nEvIllE,VicePresident–InformationTechnology

ClIftOn b. OlSOn,VicePresident–Supply

jESSICa S. RaInES,VicePresident–ProcurementandContracts

RObERt E. RudE,SeniorVicePresidentandChiefRegulatoryOfficer

anGEla m. SPaRkS-bEddOE,VicePresident–PublicAffairs

CaRl a. taYlOR,President–TheEnergyNetwork,Inc.

kaREn l. zInk,President,Treasurer&ChiefOperatingOfficer–BerkshireGas

70 Shareholder Services

Shareholder ServicesMellonInvestorServicesLLC(Mellon)istransferagent,registrar,recordkeeper,disbursingagentand

administratoroftheInvestorServicesProgramforallEnergyEastcommonstock.

Mellon Internet Address: www.melloninvestor.com

Mellon’sInternetWebsiteprovidesshareholdersaccesstoInvestorServiceDirect(ISD).ThroughISD,shareholderscanviewtheiraccountprofiles,stockcertificateandbook-entryhistories,dividendreinvestmenttransactions,currentstockpricequoteandhistoricalstockclosingprices.Shareholdersmayrequestareplacementdividendcheck,theissuanceofstockcertificatesorthesaleofsharesfromtheirInvestorServicesProgramaccount.ShareholdersmayalsoutilizealivechatfeaturewithaMelloncustomerservicerepresentativeduringregularbusinesshoursasreflectedbelow.

ShareholdersmayalsocontactMellonbytelephoneat1-800-542-7480.Mellon’sautomatedtelephoneserviceisavailable24hoursaday,sevendaysaweek.Mellon’scustomerservicerepresentativesareavailableonregularbusinessdaysbetween9:00a.m.and7:00p.m.(EasternTime).

Shareholders may obtain a free copy of Form 10-K, which is filed each year with the Securities and Exchange Commission, by contacting Investor Relations.

Investor Relations

MembersofthefinancialcommunitymaycontactourManager,InvestorRelationsbytelephoneat207-688-4336orbyfaxat207-688-4354.

Annual Meeting

Formalnoticeofthemeeting,aproxystatementandformofproxywillbemailedtoshareholders.

Trading Symbol: EAS

EASisthetradingsymbolforEnergyEastCorporationcommonstocklistedontheNewYorkStockExchange.

Energy East Internet Address: www.energyeast.com

Informationofinteresttoshareholders,includingfinancialdocumentsandnewsreleases,isavailable

atourWebsite.

EASEAS is the trading symbol for Energy East

Corporation common stock listed on the New York Stock Exchange.

Electricity customers 589,000 860,000 359,000

natural gas customers 36,000 155,000 254,000 296,000 175,000

Electricity delivered (gwh) 11,738 19,121 10,626

natural gas delivered (000 dth) 7,287 33,254 58,176 53,040 29,232

Electricity revenue ($ million) 636 1,646 691

natural gas revenue ($ million) 76 418 478 414 398

assets ($ million) 235 1,849 912 4,156 2,382 1,063

the berkshire Gas Company

(berkshire Gas)

115CheshireRoadPittsfield,MA

01201

www.berkshiregas.com

Central maine Power Company

(CmP)

83EdisonDriveAugusta,ME

04336

www.cmpco.com

Connecticut natural Gas Corporation

(CnG)

77HartlandStreet4thFloor

EastHartford,CT06108

www.cngcorp.com

new York State Electric & Gas

Corporation (nYSEG)

J.A.CarriggCenter18LinkDrive

P.O.Box5224Binghamton,NY

13902-5224

www.nyseg.com

Rochester Gas and Electric Corporation

(RG&E)

89EastAvenueRochester,NY

14649-0001

www.rge.com

the Southern Connecticut Gas

Company (SCG)

855MainStreetBridgeport,CT

06604

www.soconngas.com

Energy East Service Area

Energy East Corporation

52 farm view drivenew Gloucester, mE

04260-5116

www.energyeast.com

energyeast.com

Printed on recyclable paper