Company Profile

Blackstone Valley Electric Company (Blackstone or the Company) is a retail
electric utility company. Blackstone supplies retail electric service to
approximately 85,000 customers in the cities of Central Falls, Pawtucket and
Woonsocket, and four surrounding towns in northern Rhode Island. Blackstone is
a wholly owned subsidiary of Eastern Utilities Associates (EUA). EUA owns
directly all of the shares of common stock of Blackstone, Eastern Edison
Company (Eastern Edison) and Newport Electric Corporation (Newport). Eastern
Edison and Newport are retail electric utility companies operating in
southeastern Massachusetts and south coastal Rhode Island, respectively.
Eastern Edison owns all of the permanent securities of Montaup Electric Company
(Montaup), a generation and transmission company, which supplies electricity to
Blackstone, to Eastern Edison, to Newport and to two unaffiliated utilities for
resale. EUA also owns directly all of the shares of common stock of EUA
Cogenex Corporation (EUA Cogenex), EUA Energy Investment Corporation (EUA
Energy), EUA Ocean State Corporation (EUA Ocean State), EUA Service Corporation
(EUA Service) and EUA Energy Services, Inc. (EUA Energy Services). EUA Service
provides various accounting, financial, engineering, planning, data processing
and other services to all EUA System companies. EUA Cogenex is an energy
services company. EUA Energy was organized to invest in energy-related
projects. EUA Ocean State owns a 29.9% interest in Ocean State Power's two
gas-fired generating units in northern Rhode Island. EUA Energy Services owns
an interest in a limited liability company which markets energy and energy
related services in New England. The holding company system of EUA, the three
retail subsidiaries, Montaup, EUA Service, EUA Cogenex, EUA Energy, EUA Energy
Services and EUA Ocean State is referred to as the EUA System.

Form 10-K

A copy of EUA's, Eastern Edison's and Blackstone's Co-Registrant 1996
Annual Report on Form 10-K, which is filed with the Securities and Exchange
Commission, is available to shareholders without charge by contacting us at:

EUA Service Corporation
Post Office Box 2333
Boston, MA 02107
(617) 357-9590

Internet Address

Visit EUA's Home Page on the worldwide web at: http://www.eua.com.

MARKET FOR BLACKSTONE'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of Blackstone's common stock is owned beneficially and of record by
EUA.

The dividends paid on common stock during the past two years are as
follows:

Dividends Paid Dividends Paid
1996 Per Share 1995 Per Share

First Quarter $5.91 First Quarter $5.35
Second Quarter 6.34 Second Quarter 5.69
Third Quarter 6.34 Third Quarter 5.74
Fourth Quarter 6.34 Fourth Quarter 5.74

No dividends may be paid on the common stock unless full dividends on the
outstanding preferred stock for all past and the current quarterly dividend
periods have been paid or declared and set apart for payment. Blackstone's
First Mortgage Indenture and Deed of Trust securing its First Mortgage Bonds
contains provisions which restrict the payment by Blackstone of cash dividends
on its common stock. See Notes C and D of Notes to Financial Statements and
Management's Discussion and Analysis of Financial Condition and Review of
Operations under Financial Condition and Liquidity.

SELECTED FINANCIAL DATA

For the Years Ended December 31,
(In Thousands) 1996 1995 1994 1993 1992

______________________________________________________________________________
Operating Revenues $136,911 $140,861 $140,611 $143,666 $138,604
Net Earnings 3,776 4,009 3,438 4,069 2,583
Total Assets 132,313 129,835 121,413 114,552 115,698
Capitalization:
Long-Term Debt 35,000 36,500 38,000 39,500 39,500
Non-Redeemable
Preferred Stock 6,130 6,130 6,130 6,130 6,130
Common Equity 36,232 37,045 37,180 35,378 34,551

Total Capitalization $ 77,362 $ 79,675 $ 81,310 $ 81,008 $ 80,181

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

Overview

Net Earnings for 1996 decreased approximately $200,000 to $3.8 million
compared to those of 1995. Earnings for 1995 include a one-time charge of
approximately $550,000, on an after-tax basis, related to the costs of a
voluntary retirement incentive (VRI) offer recorded in June 1995.
Kilowatthour sales (kWh) of electricity for 1996 decreased by 1.3% as
compared to 1995 largely due to milder weather. Sales to commercial and
industrial customers decreased by 3.0% and 2.5%, respectively, in 1996.

Blackstone's net earnings for 1995 increased approximately $600,000 to
$4.0 million compared to 1994 net earnings despite a one-time charge of
approximately $550,000, on an after-tax basis, related to the VRI. kWh
sales of electricity increased by 1.1% for 1995. Sales to residential
customers increased by 2.6% and sales to industrial customers were up 1.0% for
1995 largely due to colder weather in the fourth quarter as compared to 1994.

Comparison of Financial Results

Operating Revenues

Operating revenues for 1996 decreased by approximately $4.0 million as
compared to those of 1995. This change was primarily due to recoveries of
lower purchased power and conservation and load management (C&LM) expenses,
as discussed below, and decreased kilowatthour sales.

Operating Revenues for 1995 increased by approximately $300,000 as
compared to those in 1994 primarily due to an increase in base revenues,
attributable to a 1.1% increase in kWh sales. Purchased power recoveries
increased by approximately $800,000 (see Operating Expenses below) offset by
a $700,000 decrease in transmission rental revenue.

Voluntary Retirement Incentive Offer

On March 15, 1995, EUA announced a corporate reorganization which, among
other things, consolidated management of Eastern Edison, Blackstone and
Newport. As part of the reorganization, a VRI was offered to sixty-six
professionals of the EUA System, including nine employees of Blackstone.
Forty-nine of those eligible for the program, including five Blackstone
employees, accepted the incentive and retired effective June 1, 1995.
The cost of this incentive program amounted to a one-time $900,000 pre-tax
($550,000 after-tax) charge to Blackstone's second quarter 1995 earnings.

Expenses

Purchased Power expense, which is recovered through Blackstone's purchased
power adjustment clause and represented 70% of total 1996 operating expense,
decreased approximately $4.7 million or 4.9% as compared to 1995. Impacting
purchased power expense was a decrease in C&LM expenses of approximately $3.1
million, which were included in purchased power expenses in 1995 but included
in Other Operation and Maintenance expense in 1996, and decreased kWh
requirements. Purchased Power expense in 1995 increased approximately $800,000
or less than 1.0% as compared to 1994. The average cost of fuel increased 14.1%
in 1995 compared to 1994. This increase was partially offset by a wholesale
rate decrease by the company's supplier, Montaup effective May 21, 1994.

Other Operation and Maintenance expenses are comprised of two components,
Direct Controllable and Indirect. Direct Controllable expenses include expense
items such as salaries, fringe benefits, insurance, maintenance, etc. Indirect
expenses include items over which the Company has limited short-term control
including expenses related to accounting standards such as Statement of
Financial Accounting Standard No. 106, "Employers' Accounting for Post-
Retirement Benefits Other Than Pensions" (FAS106).

Other Operation and Maintenance expenses, including affiliated company
transactions, for 1996 increased by approximately $2.7 million or 13.8% when
compared to 1995. This change is primarily due to an increase of $1.4 million
in C&LM expenses recorded as Other Operation and Maintenance expenses, a
decrease in capitalized costs of approximately $500,000, and an increase in
FAS106 expense of approximately $200,000. Also impacting 1996 results were
increases in the provision for uncollectible accounts, legal and storm related
expenses aggregating approximately $700,000. Other Operation and Maintenance
expenses for 1995 decreased by approximately $2.0 million or 9.3% when compared
to 1994. This decrease is primarily due to the Company's continued strict
attention to cost control including on-going savings related to the VRI, lower
rent expense related to the March 1995 purchase of the Company's general office
and operations buildings which were previously leased and decreased FAS106
expenses.

Taxes Other than Income for 1996 decreased by $300,000 or 3.6% in 1996 and
$400,000 or 4.0% in 1995. These decreases were due primarily to 1% decreases
in the Rhode Island Gross Receipts Tax billed to industrial customers in both
1996 and 1995.

Net interest charges for 1996 decreased by approximately $300,000 or 6.3%.
This decrease was primarily due to lower interest on long-term debt due to
reductions in long-term debt balances resulting from required sinking fund
payments and decreased customer deposits interest. Net interest charges
for 1995 decreased by approximately $400,000 or 8.7%. This decrease was
primarily due to decreased customer deposits interest and reduced interest
related to Internal Revenue Service (IRS) audits of prior years' consolidated
income tax returns, which together aggregated over $300,000.

Financial Condition and Liquidity

The Company is required to make capital expenditures in order to meet the
needs of its existing and future customers. For 1996, 1995 and 1994, the
Company's cash construction expenditures were $4.2 million, $5.1 million, $5.7
million, respectively. In 1996, internally generated funds provided over 100%
of cash construction requirements.

Cash Construction expenditures are expected to be $4.2 million in 1997,
$4.4 million in 1998 and $4.5 million in 1999 and are expected to be financed
with internally generated funds. Traditionally, construction requirements in
excess of internally generated funds are obtained through short-term borrowings
which are ultimately funded with permanent capital.

EUA System companies, including Blackstone, maintain short-term lines of
credit with various banks aggregating approximately $140 million. At December
31, 1996, unused short-term lines of credit amounted to approximately $89
million. These credit lines are available to other EUA System companies under
joint credit line arrangements. Blackstone had $700,000 of short-term
borrowings outstanding at year end 1996, and $1.3 million at year-end 1995.

Blackstone's requirements for sinking fund payments and redemption of
securities for each of the five years following 1996 is $1.5 million in 1997,
1998, 1999 and 2000, and $3.3 million in 2001.

Electric Utility Industry Restructuring Initiatives

On August 7, 1996 the Governor of Rhode Island signed into law the Utility
Restructuring Act of 1996 (URA). The URA provides for customer choice of
electricity supplier to be phased-in commencing July 1, 1997 for large
manufacturing customers, certain new commercial and industrial customers, and
State of Rhode Island accounts. By July 1, 1998 or sooner, all customers will
have retail access. Under the URA the local distribution company will retain
the responsibility of providing distribution services to the ultimate
electricity consumer within its franchised service territory. For customers
who choose not to choose, the local distribution company would be allowed to
arrange for supply at a non-discriminatory, "standard offer" price.
Distribution companies will also be providers of last resort, required to
arrange for supply, at prevailing market prices, for customers who are unable
to do so.

Blackstone is currently an all requirements customer of Montaup for
generation services. This legislation provides for recovery of prudently
incurred embedded generation costs that may not be to recovered in a
competitive electric generation market, commonly referred to as "stranded
costs," through a non-bypassable transition charge initially set at 2.8 cents
per kWh. The transition charge recovers, among other things, costs of
depreciated generation net of its market value, regulatory assets, nuclear
decommissioning and above market payments to power suppliers. The costs of
net, above-market generation assets and regulatory assets will be recovered,
with a return, through a fixed component of the transition charge from July 1,
1997 through December 31, 2009. A variable component of the transition charge
will recover, on a reconciling basis, among other things, nuclear
decommissioning and above market purchased power commitments from July 1, 1997
through the life of the respective unit or contract. The URA also provides for
commitments to demand side management initiatives and renewables, low income
protections, divestiture of at least 15% of owned non-nuclear generating units
as a valuation basis for mitigation of stranded cost recovery, and performance
based rate making standards for electric distribution companies. These
performance based standards provide for a 6% minimum and an approximate 12.2%
maximum allowed return on equity for Blackstone and Newport. In addition, the
URA provides for adjustments to electric distribution companies' base rates
using the prior year's Consumer Price Index and other performance factors.
Under this provision of the law, base rates were increased 1.88% for customers
of Blackstone, and 2.18% for our Newport customers effective January 1, 1997.

The implementation of the URA will require approvals from applicable
regulatory agencies, including the Federal Energy Regulatory Commission (FERC),
the Rhode Island Public Utilities Commission (RIPUC), and the Securities and
Exchange Commission (SEC).

In February 1997, Blackstone, Newport and Montaup reached settlement with
the Rhode Island Division of Public Utilities and Carriers and the Rhode Island
Attorney General with regard to implementation of a restructuring plan for
Blackstone, Newport and Montaup. In addition to complying with the URA, the
settlement provides for an immediate 10% rate reduction and a commitment by
Montaup to file a plan by July 1, 1997 to divest all of its generating assets.
Any disposition of generation assets resulting from the URA would also require
the approval of the SEC under the Public Utility Holding Company Act of 1935.

Historically, electric rates have been designed to recover a utility's
full costs of providing electric service including recovery of investment in
plant assets. Also, in a regulated environment, electric utilities are subject
to certain accounting rules that are not applicable to other industries. These
accounting rules allow regulated companies, in appropriate circumstances, to
establish regulatory assets and liabilities, which defer the current financial
impact of certain costs that are expected to be recovered in future rates. The
SEC has raised issues concerning the continued applicability of these standards
with certain other electric utilities, in other states, facing restructuring.
The Company believes that its operations will continue to meet the criteria
established in these accounting standards.

However, the potential exists that the final outcome of state and federal
agency determinations could result in the Company no longer meeting the
criteria of certain accounting standards which could trigger the discontinuance
of Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (FAS71). Should it be required to
discontinue the application of FAS71, the Company would be required to take an
immediate write down of the affected assets in accordance with FAS101,
"Accounting for the Discontinuation of Application of FAS71."

Environmental Matters

Blackstone and other companies owning generating units from which power is
obtained are subject, like other electric utilities, to environmental and land
use regulations at the federal, state and local levels. The federal
Environmental Protection Agency (EPA), and certain state and local authorities,
have jurisdiction over releases of pollutants, contaminants and hazardous
substances into the environment and have broad authority to set rules and
regulations in connection therewith, such as the Clean Air Act Amendments of
1990, which could require installation of pollution control devices
and remedial actions. In 1994, an environmental audit program designed to
ensure compliance with environmental laws and regulations and to identify and
reduce liability was instituted by EUA.

Because of the nature of Blackstone's business, various by-products and
substances are produced or handled which are classified as hazardous under the
rules and regulations promulgated by such authorities. Blackstone generally
provides for the disposal of such substances through licensed contractors, but
these statutory provisions generally impose potential joint and several
responsibility on the generators of the wastes for cleanup costs. Blackstone
has been notified with respect to a number of sites where they may be
responsible for such costs, including sites where they may have joint and
several liability with other responsible parties. It is the policy of the EUA
System companies to notify liability insurers and to initiate claims, however,
Blackstone is unable to predict whether liability, if any, will be assumed by,
or can be enforced against, the insurance carriers in these matters.

As of December 31, 1996, Blackstone had incurred costs of approximately
$4.9 million, in connection with these sites. These amounts have been financed
primarily by internally generated cash. Blackstone is currently recovering
certain of its incurred environmental costs in rates. As a result of the
recoverability in current rates of environmental costs, and the uncertainty
regarding both its estimated liability, as well as potential contributions from
insurance carriers, Blackstone does not believe that the ultimate impact of
environmental costs will be material to their financial position and thus, no
loss provision is required at this time.

Blackstone estimates that additional costs of up to $2.7 million may be
incurred at these sites through 1998. Estimates beyond 1998 cannot be made
since site studies, which are the basis of these estimates, have not been
completed.

In addition to the previously discussed costs, Blackstone is currently
litigating responsibility for clean-up costs and related interest aggregating
$5.9 million incurred by the Commonwealth of Massachusetts at a site in which
Blackstone has been named as the responsible party. See Note H of "Notes to
Financial Statements" for further discussion.

A number of scientific studies in the past several years have examined the
possibility of health effects from electric and magnetic fields (EMF) that are
found wherever there is electricity. While some of the studies have indicated
some association between exposure to EMF and health effects, many others have
indicated no direct association. The research to date has not conclusively
established a direct causal relationship between EMF exposure and human health.
Additional studies, which are intended to provide a better understanding of
EMF, are continuing. On October 31, 1996, the National Academy of Sciences
issued a literature review of all research to date, "Possible Health Effects of
Exposure to Residential Electric and Magnetic Fields." Its most widely
reported conclusion stated, "No clear, convincing evidence exists to show that
residential exposures to EMF are a threat to human health." Management cannot
predict the ultimate outcome of the EMF issue.

Other

The Company occasionally makes forward-looking projections of expected
future performance or statements of our plans and objectives. These forward-
looking statements may be contained in filings with the SEC, press releases and
oral statements. Actual results could differ materially from these statements,
therefore, no assurances can be given that such forward-looking statements and
estimates will be achieved.

Management's Discussion and Analysis of Financial Condition and Review of
Operations provides a summary of information regarding the Company's financial
condition and results of operation and should be read in conjunction with the
"Financial Statements" and "Notes to Financial Statements" in arriving at a
more complete understanding of such matters.

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Financial Table of Contents

Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Statement of Retained Earnings . . . . . . . . . . . . . . . . . . . . . 10

Statement of Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . 11

Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Statement of Capitalization . . . . . . . . . . . . . . . . . . . . . . . 13

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . 15

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . 27

Blackstone Valley Electric Company
Statement of Income
Years Ended December 31,
(In Thousands)

1996 1995 1994

Operating Revenues $ 136,911 $ 140,861 $ 140,611

Operating Expenses:
Purchased Power (principally from an affiliate) 91,016 95,725 94,970
Other Operation and Maintenance 11,781 10,938 13,405
Affiliated Company Transactions 10,092 8,280 7,787
Voluntary Retirement Incentive 0 912
Depreciation 5,594 5,501 5,303
Taxes - Other than Income 8,506 8,821 9,202
Income and Deferred Taxes 2,156 2,347 1,885
Total Operating Expenses 129,145 132,524 132,552
Operating Income 7,766 8,337 8,059
Allowance for Other Funds Used During
Construction 50 33 39
Other Income (Deductions) - Net 30 (38) 78
Income Before Interest Charges 7,846 8,332 8,176
Interest Charges:
Interest on Long-Term Debt 3,313 3,481 3,476
Other Interest Expense 524 612 1,009
Allowance for Borrowed Funds Used
During Construction (Credit) (56) (59) (36)
Net Interest Charges 3,781 4,034 4,449
Net Income 4,065 4,298 3,727
Preferred Dividend Requirements 289 289 289
Net Earnings Applicable to Common Stock $ 3,776 $ 4,009 $ 3,438

Statement of Retained Earnings
Years Ended December 31,
(In Thousands)

1996 1995 1994
Restated
Retained Earnings - Beginning of Year $ 9,934 $ 10,069 $ 10,204
Net Income 4,065 4,298 3,727
Total 13,999 14,367 13,931
Dividends Paid:
Preferred 289 289 289
Common 4,589 4,144 3,573
Retained Earnings - End of Year $ 9,121 $ 9,934 $ 10,069

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

Blackstone Valley Electric Company
Statement of Cash Flows
Years Ended December 31,
(In Thousands)

1996 1995 1994

CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 4,065 $ 4,298 $ 3,727
Adjustments to Reconcile Net Income
to Net Cash Provided from Operating Activities:
Depreciation and Amortization 5,976 5,953 6,157
Deferred Taxes (561) 1,200 176
Investment Tax Credit, Net (182) (183) 253
Allowance for Funds Used During Construction (50) (34) (39)
Other - Net (555) 643 (6,072)

Net Changes in Operating Assets and Liabilities:
Accounts Receivable 2,389 (2,324) (603)
Materials and Supplies 66 (172) (27)
Accounts Payable (383) 7,540 1,484
Accrued Taxes (362) 337 (1,280)
Other - Net 740 (7,239) 5,454

Net Cash Provided from Operating Activities 11,143 10,019 9,230

CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (4,196) (5,064) (5,653)
Net Cash (Used in) Investing Activities (4,196) (5,064) (5,653)

CASH FLOW FROM FINANCING ACTIVITIES:
Redemptions:
Long-Term Debt (1,500) (1,500)
Premium on Reacquisition
and Financing Expenses
Common Share Dividends Paid (4,589) (4,144) (3,573)
Preferred Dividends Paid (289) (289) (289)
Net (Decrease) Increase in Short-Term Debt (524) 1,259
Net Cash (Used in) Financing Activities (6,902) (4,674) (3,862)

Net Increase (Decrease) in Cash 45 281 (285)
Cash and Temporary Cash Investments at
Beginning of Year 753 472 757
Cash and Temporary Cash Investments at
End of Year $ 798 $ 753 $ 472

Cash paid during the year for:
Interest (Net of Amounts Capitalized) $ 3,390 $ 3,565 $ 3,506
Income Taxes $ 3,301 $ 690 $ 1,836

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

Blackstone Valley Electric Company
Balance Sheet
December 31,
(In Thousands)

ASSETS

1996 1995

Utility Plant and Other Investments:
Utility Plant $ 139,366 $ 136,503
Less Accumulated Provision for Depreciation 51,952 48,023
Net Utility Plant 87,414 88,480
Non-Utility Property - Net 46 47
Total Utility Plant and Other Investments 87,460 88,527
Current Assets:
Cash and Temporary Cash Investments 798 753
Accounts Receivable:
Customers, Net 11,141 11,254
Accrued Unbilled Revenue 1,196 1,339
Others 2,541 4,726
Associated Companies 482 429
Plant Materials and Operating Supplies (at average cost) 873 939
Other Current Assets 417 393
Total Current Assets 17,448 19,833
Other Assets (Note A) 27,405 21,475
Total Assets $ 132,313 $ 129,835

LIABILITIES AND CAPITALIZATION

Capitalization:
Common Equity $ 36,232 $ 37,045
Non-Redeemable Preferred Stock 6,130 6,130
Long-Term Debt 35,000 36,500
Total Capitalization 77,362 79,675
Current Liabilities:
Long-Term Debt Due Within One Year 1,500 1,500
Notes Payable 735 1,259
Accounts Payable:
Public 509 282
Associated Companies 16,759 17,371
Customer Deposits 1,113 992
Taxes Accrued 1,415 1,777
Dividends Accrued 72 72
Interest Accrued 899 981
Other Current Liabilities 1,157 431
Total Current Liabilities 24,159 24,665
Deferred Credits:
Unamortized Investment Credit 2,561 2,743
Other Deferred Credits 14,002 13,836
Total Deferred Credits 16,563 16,579
Accumulated Deferred Taxes 14,229 8,916
Commitments and Contingencies (Note H)
Total Liabilities and Capitalization $ 132,313 $ 129,835

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

Blackstone Valley Electric Company
Statement of Capitalization
December 31,
(In Thousands)

1996 1995

Common Stock, $50 par value, authorized 233,000
shares, issued and outstanding 184,062 shares $ 9,203 $ 9,203
Other Paid-in Capital 17,908 17,908
Retained Earnings 9,121 9,934
Total Common Equity 36,232 37,045

Non-Redeemable Cumulative Preferred Stock:
4.25%, $100 par value, 35,000 shares <F1> 3,500 3,500
5.60%, $100 par value, 25,000 shares <F1> 2,500 2,500
Premium 130 130
Total Non-Redeemable Cumulative Preferred Stock 6,130 6,130

Long-Term Debt:
First Mortgage Bonds:
9 1/2% due 2004 (Series B) 12,000 13,500
10.35% due 2010 (Series C) 18,000 18,000
Variable Rate Demand Bonds Due 2014 <F2> 6,500 6,500
36,500 38,000
Less Portion Due Within One Year 1,500 1,500
Total Long-Term Debt 35,000 36,500
Total Capitalization $ 77,362 $ 79,675
<FN>
<F1> Authorized and Outstanding.
<F2> Weighted average interest rate was 3.5% for 1996 and 3.9% for 1995.
</FN>

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

BLACKSTONE VALLEY ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994

(A) Nature of Operations and Summary of Significant Accounting Policies:

General: Blackstone Valley Electric Company (Blackstone or the Company) is
principally engaged in the distribution and sale of electric energy.

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

The accounting policies and practices of Blackstone are subject to
regulation by FERC and RIPUC with respect to its rates and accounting.
Blackstone conforms with generally accepted accounting principles, as applied
in the case of regulated public utilities, and conforms with the accounting
requirements and ratemaking practices of the RIPUC. A description of the
significant accounting policies follows.

Reclassifications: Certain prior period amounts on the financial
statements have been reclassified to conform with current presentation.

Transactions with Affiliates: The Company is a wholly-owned subsidiary of
EUA. In addition to its investment in the Company, EUA has interests in other
retail and wholesale utility companies, a service corporation, and four other
non-utility companies.

Transactions between Blackstone and other affiliated companies include the
following: purchased power costs billed by Montaup of approximately
$90,970,000 in 1996, $95,683,000 in 1995 and $94,944,000 in 1994; accounting,
engineering and other services rendered by EUA Service of approximately
$11,923,000 in 1996, $10,448,000 in 1995 and $9,524,000 in 1994; and operating
revenue from the rental of transmission facilities to Montaup of approximately
$2,501,000 in 1996, $3,047,000 in 1995 and $2,665,000 in 1994. Transactions
with affiliated companies are subject to review by applicable regulatory
commissions.

Utility Plant and Depreciation: Utility plant is stated at original cost.
The cost of additions to utility plant includes contracted work, direct labor
and material, allocable overhead, allowance for funds used during construction
and indirect charges for engineering and supervision. For financial statement
purposes, depreciation is computed on the straight-line method based on
estimated useful lives of the various classes of property. Provisions for
depreciation were equivalent to a composite rate of approximately 3.9% in 1996,
1995 and 1994, based on the average depreciable property balances at the
beginning and end of each year.

Other Assets: The components of Other Assets at December 31, 1996 and
1995 are detailed as follows:

(In Thousands)
1996 1995
Regulatory Assets:
Unamortized losses on reacquired debt $ 425 $ 455
Deferred SFAS 109 costs (Note B) 7,487 1,996
Deferred SFAS 106 costs 872 1,017
Mendon Road Judgment (Note H) 6,154 5,857
Other regulatory assets 1,234 959
Total regulatory assets 16,172 10,284
Other deferred charges and assets:
Unamortized debt expenses 639 710
Other 10,594 10,481
Total Other Assets $27,405 $21,475

Regulatory Accounting: Blackstone is subject to certain accounting rules
that are not applicable to other industries. These accounting rules allow
regulated companies, in appropriate circumstances, to establish regulatory
assets and liabilities, which defer the current financial impact of certain
costs that are expected to be recovered in future rates. Blackstone believes
that its operations continue to meet the criteria established in these
accounting standards. Effects of legislation and/or regulatory initiatives
or EUA's own initiatives could ultimately cause Blackstone to no longer follow
these accounting rules. In such an event, a non-cash write-off of regulatory
assets and liabilities could be required at that time.

Allowance for Funds Used During Construction (AFUDC): AFUDC represents
the estimated cost of borrowed and equity funds used to finance the Company's
construction program. In accordance with regulatory accounting, AFUDC is
capitalized, as a cost of utility plant, in the same manner as certain general
and administrative costs. AFUDC is not an item of current cash income, but is
recovered over the service life of utility plant in the form of increased
revenues collected as a result of higher depreciation expense. The rate used
in calculating AFUDC was 9.4% in 1996, 8.6% in 1995 and 10.0% in 1994.

Operating Revenues: Revenues are based on billing rates authorized by the
RIPUC. The Company follows the policy of accruing the estimated amount of
unbilled base rate revenues for electricity provided at the end of the month to
more closely match costs and revenues. In addition, the Company also accrues
the difference between fuel and purchased power costs incurred and fuel and
purchased power costs billed to its customers.

Income Taxes: The general policy of Blackstone with respect to accounting
for federal and state income taxes is to reflect in income the estimated amount
of taxes currently payable, as determined from the EUA consolidated tax return
on an allocated basis, and to provide for deferred taxes on certain items
subject to temporary differences to the extent permitted by the regulatory
commissions.

Blackstone has provided deferred income taxes on certain income and
expense items that are accounted for in different periods for financial
accounting purposes than for income tax purposes. Prior to 1987, AFUDC and
certain costs for pensions, employee benefits and payroll-related insurances
and payroll taxes applicable to construction activity, which were included in
utility plant, were deducted currently for income tax purposes. Deferred taxes
on these amounts and on certain differences created by the use of different
depreciation methods in the years prior to 1981 have not been provided. The
tax benefits on these items have been flowed through in accordance with
approved rate orders of the RIPUC.

As permitted by the regulatory commissions, it is the policy of the
Company to defer recognition of annual investment tax credits and to amortize
these credits over the productive lives of the related assets.

Cash and Temporary Cash Investments: Blackstone considers all highly
liquid investments and temporary cash investments with a maturity of three
months or less when acquired to be cash equivalents.

(B) Income Taxes:

Components of income and deferred tax expense for the years 1996, 1995,
and 1994 are as follows:

_______________________________________________________________________
(In Thousands) 1996 1995 1994

Federal:
Current $2,901 $1,329 $1,436
Deferred (531) 1,133 176
Investment Tax Credit, Net (182) (184) 253
$2,188 $2,278 1,865

State:
Current 2 1 20
Deferred (34) 68
(32) 69 20
Charged to Operations 2,156 2,347 1,885

Charged to Other Income:
Current 40 3 46
Total $2,196 $2,350 $1,931

Total income tax expense was different than the amounts computed by
applying federal income tax statutory rates to book income subject to tax for
the following reasons:
_____________________________________________________________________________
(In Thousands) 1996 1995 1994

Federal Income Tax Computed
at Statutory Rates $2,191 $2,327 $1,980
(Decreases) Increases in Tax from:
Equity Component of AFUDC (17) (12) (14)
Consolidated Tax Savings (32) (15) (125)
Depreciation Differences 283 262 260
Amortization and Utilization of ITC (182) (184) (194)
State Taxes, Net of Federal
Income Tax Benefit (21) 45 13
Cost of Removal (67) (110)
Other (26) (6) 121
Total Income Tax Expense $2,196 $2,350 $1,931

(B) Income Taxes (continued)

Blackstone adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (FAS109) which required recognition of deferred
income taxes for temporary differences that are reported in different years for
financial reporting and tax purposes using the liability method. Under the
liability method, deferred tax liabilities or assets are computed using the
tax rates that will be in effect when the temporary differences reverse.
Generally, for regulated companies, the change in tax rates may not be
immediately recognized in operating results because of rate making treatment
and provisions in the Tax Reform Act of 1986. Total deferred tax assets and
liabilities for 1996 and 1995 are comprised as follows:

Deferred Tax Deferred Tax
Assets Liabilities
($000) ($000)

1996 1995 1996 1995
Plant Related Plant Related
Differences $1,581 $1,730 Differences $ 14,593 $ 8,540
Pensions 425 501 Refinancing
Other 773 609 Costs 144 155
Total $2,779 $2,840 Pensions 436 556
Other 1,832 2,496
Total $17,005 $11,747

Blackstone has recorded on its Balance Sheets as of December 31, 1996 and
1995 a regulatory liability to ratepayers of approximately $3.0 million and
$3.4 million, respectively. This amount primarily represents excess deferred
income taxes resulting from the reduction in the federal income tax rate and
also includes deferred taxes provided on investment tax credits. Also at
December 31, 1996 and 1995, a regulatory asset of approximately $7.5 million
and $2.0 million, respectively, has been recorded, representing the cumulative
amount of federal income taxes on temporary depreciation differences which were
previously flowed through to ratepayers.

There were no changes in the number of shares of common or preferred stock
during the years ended December 31, 1996, 1995, and 1994.

In the event of involuntary liquidation, the holders of non-redeemable
preferred stock of Blackstone are entitled to $100 per share plus accrued
dividends. In the event of voluntary liquidation, or if redeemed at the option
of the Company, each share of the non-redeemable preferred stock is entitled to
accrued dividends and to: 4.25% issue, $104.40; 5.60% issue, $103.82.

Under the terms and provisions of the First Mortgage Indenture and of the
issues of preferred stock of Blackstone, certain restrictions are placed upon
the payment of dividends on common stock by the Company. At the years ended
December 31, 1996 and 1995, the respective capitalization ratios were in excess
of the minimum which would make these restrictions effective.

(D) Retained Earnings:

Under the provisions of Blackstone's First Mortgage Indenture, retained
earnings in the amount of $4,124,784 were unrestricted as to the payment of
cash dividends on its common stock at December 31, 1996.

(E) Long-Term Debt:

Blackstone's First Mortgage Bonds are collateralized by substantially all
of its utility plant.

Blackstone's Variable Rate Demand Bonds are collateralized by an
irrevocable letter of credit which expires on January 21, 1998. The letter of
credit permits extensions on an annual basis upon mutual agreement of the bank
and Blackstone.

The aggregate amount of Blackstone's cash sinking fund requirements and
maturities for long-term debt for each of the five years following 1996 is
$1.5 million in 1997, 1998, 1999, and 2000, and $3.3 million in 2001.

(F) Lines of Credit:

The EUA System Companies, including Blackstone maintain short-term lines
of credit with various banks aggregating approximately $140 million. At
December 31, 1996, unused short-term lines of credit amounted to approximately
$89 million. These credit lines are available to other EUA System companies
under joint credit line arrangements. In accordance with informal agreements
with various banks, commitment fees are required to maintain certain lines of
credit. Blackstone had $700,000 of short-term borrowings outstanding at year
end. During 1996, Blackstone's weighted average interest rate for short-term
borrowings was 5.6%.

(G) Fair Value of Financial Instruments:

The following methods were used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate.

Cash and Temporary Cash Investments: The carrying amount approximates
fair value because of the short-term maturity of those instruments.

(G) Fair Value of Financial Instruments (continued)

Long-Term Debt: The fair value of the Company's long-term debt was based
on quoted market prices for such securities.

The estimated fair values of the Company's financial instruments at
December 31, 1996 are as follows (In Thousands):

Carrying Fair
Amount Value
Cash and Temporary Cash Investments $ 798 $ 798
Long-Term Debt $36,500 $37,596

(H) Commitments and Contingencies:

Pensions: Blackstone participates with other EUA System companies in a
non-contributory, defined benefit pension plan covering substantially all of
their employees (Retirement Plan). Retirement Plan benefits are based on years
of service and average compensation over the four years prior to retirement.
It is the EUA System's policy to fund the Retirement Plan on a current basis in
amounts determined to meet the funding standards established by the Employee
Retirement Income Security Act of 1974.

Total pension (income) expense for the Retirement Plan, including amounts
related to the 1995 Voluntary Retirement Incentive offer, for 1996, 1995 and
1994 includes the following components ($ In Thousands):

1996 1995 1994
Service cost - benefits earned
during the period $ 664 $ 606 $ 696
Interest cost on projected
benefit obligation 2,373 2,346 2,186
Actual (return) loss on assets (4,216) (9,560) 397
Net amortization and deferrals 1,063 6,470 (3,241)
Net periodic pension (income) expense $ (116) $ (138) $ 38
Voluntary retirement incentive 410
Total periodic pension (income) expense $(116) $ 272 $ 38

Assumptions used to determine pension cost:

Discount Rate 7.25% 8.25% 7.25%
Compensation Increase Rate 4.25% 4.75% 4.75%
Long-Term Return on Assets 9.50% 9.50% 9.50%

(H) Commitments and Contingencies (continued)

The discount rate used to determine pension obligations was changed
effective January 1, 1997 to 7.5%. The funded status of the Retirement Plan
cannot be presented separately for Blackstone as it participates in the
Retirement Plan with other subsidiaries of EUA.

The one-time voluntary retirement incentive also resulted in approximately
$310,000 of non-qualified pension benefits which were expensed in 1995. At
December 31, 1996, approximately $177,000 is included in other liabilities for
these unfunded benefits.

EUA also maintains non-qualified supplemental retirement plans for certain
officers of the EUA System (Supplemental Plans). Benefits provided under the
Supplemental Plans are based primarily on compensation at retirement date. EUA
maintains life insurance on the participants of the Supplemental Plans to fund
in whole, or in part, its future liabilities under the Supplemental Plans. For
the years ended December 31, 1996, 1995 and 1994, Blackstone's portion of
expenses related to the Supplemental Plans were approximately $284,000,
$306,000 and $147,000, respectively.

The Company also provides a defined contribution 401(k) savings plan for
substantially all employees. The Company's matching percentage of employees'
voluntary contributions to the plan, amounted to approximately $111,000 in
1996, approximately $148,000 in 1995 and approximately $181,000 in 1994.

Post-Retirement Benefits: Retired employees are entitled to participate
in health care and life insurance benefit plans. Health care benefits are
subject to deductibles and other limitations. Health care and life insurance
benefits are partially funded by Blackstone for all qualified employees.

Blackstone adopted FAS106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions," as of January 1, 1993. This standard
establishes accounting and reporting standards for such post-retirement
benefits as health care and life insurance. Under FAS106 the present value of
future benefits is recorded as a periodic expense over employee service periods
through the date they become fully eligible for benefits. With respect to
periods prior to adopting FAS106, EUA elected to recognize accrued costs (the
Transition Obligation) over a period of 20 years, as permitted by FAS106. The
resultant annual expense, including amortization of the Transition Obligation
and net of capitalized and deferred amounts, was approximately $1.5 million in
1996, $1.3 million in 1995 and $1.5 million in 1994.

(H) Commitments and Contingencies (continued)

The total cost of Post-Retirement Benefits other than Pensions, including
amounts related to the 1995 Voluntary Retirement Incentive offer, for 1996,
1995 and 1994 includes the following components ($ In Thousands):

1996 1995 1994

Service cost $ 216 $ 191 $ 299
Interest cost 1,060 1,170 1,323
Actual return on plan assets (6) (111) (20)
Amortization of transition obligation 835 829 866
Net other amortization & deferrals (274) (239) (10)
Net periodic post-retirement benefit costs 1,831 1,840 2,458
Voluntary retirement incentive 90
Total periodic post-retirement benefit costs $ 1,831 $ 1,930 $2,458

Assumptions:
Discount rate 7.25% 8.25% 7.25%
Health care cost trend rate-near-term 9.00% 11.00% 13.00%
Health care cost trend rate-long-term 5.00% 5.00% 5.00%
Compensation increase rate 4.25% 4.75% 4.75%
Rate of return on plan assets 7.50% 5.50% 5.50%

Reconciliation of funded status:
($ In Thousands) 1996 1995 1994
Accumulated post-retirement benefit obligation (APBO):
Retirees $(7,045) $(8,235) $ (7,498)
Active employees fully eligible for benefits (1,543) (2,825) (2,589)
Other active employees (2,413) (3,052) (4,093)
Total $(11,001) $(14,112) $ (14,180)
Fair Value of assets (primarily notes and bonds) 1,573 924 364
Unrecognized transition obligation 11,372 12,083 13,328
Unrecognized net (gain) loss (5,551) (2,217) (2,358)
(Accrued) prepaid post-retirement benefit cost $ (3,607) $ (3,322) $ (2,846)

The discount rate and compensation increase rate used to determine post-
retirement benefit obligations, effective January 1, 1997, are 7.5% and 4.25%,
respectively and were used to calculate the funded status of Post-Retirement
benefits at December 31, 1996.

Increasing the assumed health care cost trend rate by 1% each year would
increase the total post-retirement benefit cost for 1996 by approximately
$108,000 and increase the total accumulated post-retirement benefit obligation
by $1.2 million.

Blackstone has also established an irrevocable external Voluntary
Employee's Beneficiary Association (VEBA) Trust Fund as required by the
aforementioned regulatory decisions. Contributions to the VEBA fund commenced
in March 1993 and totaled approximately $1.2 million during 1996, $1.1 million
during 1995, and $800,000 during 1994.

Environmental Matters: The Comprehensive Environmental Response,
Compensation Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, and certain similar state statutes authorize
various governmental authorities to seek court orders compelling responsible
parties to take cleanup action at disposal sites which have been determined
by such governmental authorities to present an imminent and substantial
danger to the public and to the environment because of an actual or
threatened release of hazardous substances. Because of the nature of
Blackstone's business, various by-products and substances are produced or
handled which are classified as hazardous under the rules and regulations
promulgated by the EPA as well as state and local authorities.
Blackstone generally provides for the disposal of such substances through
licensed contractors, but these statutory provisions generally impose potential
joint and several responsibility on the generators of the wastes for cleanup
costs. Blackstone has been notified with respect to a number of sites where
they may be responsible for such costs, including sites where they may have
joint and several liability with other responsible parties. It is the policy
of Blackstone to notify liability insurers and to initiate claims. However, it
is not possible at this time to predict whether liability, if any, will be
assumed by, or can be enforced against, the insurance carriers in these
matters.

On December 13, 1994, the United States District Court for the District of
Massachusetts (District Court) issued a judgment against Blackstone, finding
Blackstone liable to the Commonwealth of Massachusetts (Commonwealth) for the
full amount of response costs incurred by the Commonwealth in the cleanup of a
by-product of manufactured gas at a site at Mendon Road in Attleboro,
Massachusetts. The judgment also found Blackstone liable for interest and
litigation expenses calculated to the date of judgment. The total liability is
approximately $5.9 million, including approximately $3.6 million in interest
which has accumulated since 1985. Due to the uncertainty of the ultimate
outcome of this proceeding and anticipated recoverability, Blackstone recorded
the $5.9 million District Court judgment as a deferred debit. This amount is
included with Other Assets at December 31, 1996 and 1995.

Blackstone filed a Notice of Appeal of the District Court's judgment and
filed its brief with the United States Court of Appeals for the First Circuit
(Circuit Court) on February 24, 1995. On October 6, 1995, the Circuit Court
vacated the District Court's $5.9 million judgement. Rather than remand the
case to the District Court for a trial on the issue of whether ferric
ferrocyanide (FFC) is a hazardous substance, the Circuit Court exercised its
primary jurisdictional powers to send the matter to the EPA for an
administrative determination on the issue. If the EPA determines that FFC is
not a hazardous substance, given the present posture of the case, Blackstone
may not be liable to reimburse the Commonwealth for the Mendon Road cleanup
costs. On January 9, 1997, Blackstone met with representatives of EPA and the
Commonwealth to discuss the procedure EPA would follow in resolving the FFC
issue. In January 1997, Blackstone submitted written comments to be followed
by the Commonwealth's written reply.

(H) Commitments and Contingencies (continued)

The EPA will determine whether FFC is a hazardous substance. Further court
proceedings are likely.

On January 20, 1995, Blackstone entered into an escrow agreement with the
Commonwealth whereby Blackstone deposited $5.9 million with an escrow agent who
transferred the funds into an interest bearing money market account. The
distribution of the proceeds of the escrow account will be determined upon the
final resolution of the judgment. No additional interest expense will accrue
on the judgment amount.

On January 28, 1994, Blackstone filed a complaint in the Massachusetts
District Court, seeking, among other relief, contribution and reimbursement
from Stone & Webster Inc., of New York City and several of its affiliated
companies (Stone & Webster), and Valley Gas Company of Cumberland, Rhode
Island (Valley) for any damages incurred by Blackstone regarding the Mendon
Road site. On November 7, 1994, the court denied motions to dismiss the
complaint which were filed by Stone & Webster and Valley. This proceeding was
stayed in December 1995 pending final EPA determination as to whether FFC is
hazardous.

In addition, Blackstone has notified certain liability insurers and has
filed claims with respect to the Mendon Road site, as well as other sites.
Blackstone reached settlement with one carrier for reimbursement of legal costs
related to the Mendon Road case. In January 1996, Blackstone received the
proceeds of the settlement.

As of December 31, 1996, Blackstone had incurred costs of approximately
$4.9 million (excluding the $5.9 million Mendon Road judgment) in connection
with these sites. These amounts have been financed primarily by internally
generated cash. Blackstone is currently amortizing all of its incurred
costs over a five-year period consistent with prior regulatory recovery periods
and is recovering certain of those costs in rates. The Company estimates that
additional costs (excluding the Mendon Road judgment) may be incurred at these
sites through 1998 of up to approximately $2.7 million by it and the other
responsible parties. Estimated amounts after 1998 are not now determinable
since site studies which are the basis of these estimates have not been
completed.

As a result of the recoverability of cleanup costs in rates and the
uncertainty regarding both its estimated liability, as well as potential
contributions from insurance carriers and other responsible parties, Blackstone
does not believe that the ultimate impact of the environmental costs will be
material to its financial position and thus, no loss provision is required at
this time.

Some states have enacted regulations to limit the strength of EMF at the
edge of transmission line rights-of-way. Rhode Island enacted a statute which
authorizes and directs the Rhode Island Energy Facility Siting Board to
establish rules and regulations governing construction of high voltage
transmission lines of 69 kv or more. Management cannot predict the impact, if
any, which legislation or other developments concerning EMF may have on
Blackstone.

In April 1992, NESCAUM, an environmental advisory group for eight
northeast states, including Massachusetts and Rhode Island, issued
recommendations for nitrogen oxide controls for existing utility boilers
required to meet the ozone non-attainment requirements of the Clean Air Act.
The NESCAUM recommendations are more restrictive than EPA's requirements. The
Massachusetts Department of Environmental Management has amended its
regulations to require that Reasonably Available Control Technology (RACT) be
implemented at all stationary sources potentially emitting 50 or more tons per
year of oxides of nitrogen. Rhode Island has also issued similar regulations.
Montaup has initiated compliance through, among other things, selective,
noncatalytic reduction processes.

Other: In early 1997, ten plaintiffs brought suit against numerous defendants,
including EUA, for injuries and illness allegedly caused by exposure to
asbestos over approximately a thirty-year period, at premises, including some
owned by EUA companies. The total damages claimed in all of these complaints
is $25 million in compensatory and punitive damages, plus exemplary damages and
interest and costs. Each names between fifteen and twenty-eight defendants,
including EUA. These complaints have been referred to the applicable insurance
companies, and EUA is consulting with those insurers to determine the
availability and extent of coverage. EUA cannot predict the ultimate outcome
of this matter at this time.

Report of Independent Accountants

To the Directors and Shareholder of
Blackstone Valley Electric Company:

We have audited the accompanying balance sheet and statement of capitalization
of Blackstone Valley Electric Company (the Company) as of December 31, 1996 and
1995, and the related statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

/s/Coopers & Lybrand L.L.P.

Boston, Massachusetts
March 5, 1997

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