<PAGE>
RULE NO.424(b)(5)
REGISTRATION NO. 33-51073
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MAY 13, 1994
6,000,000 SHARES
NIAGARA MOHAWK POWER CORPORATION
PREFERRED STOCK, 9 1/2% SERIES
($25 PAR VALUE)
----------------
Dividends on the Preferred Stock of Niagara Mohawk Power Corporation (the
"Company") offered hereby (the "New Preferred Stock") are cumulative from the
date of the original issuance and are payable quarterly on March 31, June 30,
September 30 and December 31 of each year, commencing December 31, 1994.
The New Preferred Stock will be redeemable at any time on or after September
30, 1999 at the option of the Company, in whole or in part, at the redemption
price of $25.00 per share, plus accumulated dividends to the redemption date.
See "Supplemental Description of New Preferred Stock--Optional Redemption".
Application will be made to list the New Preferred Stock on the New York
Stock Exchange.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) COMMISSION(2)(3) COMPANY(3)(4)
-------------- ---------------- -------------
<S> <C> <C> <C>
Per Share........................ $25.00 $0.7875 $24.2125
Total............................ $150,000,000 $4,725,000 $145,275,000
</TABLE>
- --------
(1) Plus accumulated dividends, if any, from August 8, 1994.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933.
(3) The Underwriting Commission will be $.50 per share of New Preferred Stock
with respect to any share sold to certain institutions. Therefore, to the
extent that the New Preferred Stock is sold to such institutions, the
actual total Underwriting Commission will be less than, and the actual
total Proceeds to Company will be greater than, the amounts shown above.
See "Underwriting".
(4) Before deducting estimated expenses of $250,000 payable by the Company.
----------------
The shares of New Preferred Stock offered hereby are offered severally by
the Underwriters as specified herein, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part. It is
expected that the certificates for the New Preferred Stock will be ready for
delivery in New York, New York on or about August 8, 1994.
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
----------------
The date of this Prospectus Supplement is August 1, 1994
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NEW PREFERRED
STOCK AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
CONSOLIDATED FINANCIAL INFORMATION
The following material is qualified in its entirety by the detailed
information appearing in the Prospectus and by the information and financial
statements (including the notes thereto) appearing in the documents incorporated
by reference in the Prospectus, as supplemented hereby. The capsule financial
data for the years ended December 31, 1993, 1992 and 1991 are derived from the
Company's financial statements audited by Price Waterhouse, independent
accountants. The capsule financial data as of and for the twelve months ended
June 30, 1994 are derived from the Company's unaudited financial information.
<TABLE>
<CAPTION>
12 Months
Ended
June 30, Year Ended December 31,
----------- ---------------------------------------
1994 1993 1992 1991
----------- ------------ ----------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating Revenues................ $4,083,405 $3,933,431 $3,701,527 $3,382,518
Operating Income.................. $ 538,134 $ 524,500 $ 524,326 $ 525,434
Net Income........................ $ 285,573 $ 271,831 $ 256,432 $ 243,369
Earnings Available for $ 256,011 $ 239,974 $ 219,920 $ 202,958
Common Stock...................
Average Number of Shares of 142,405 140,417 136,570 136,100
Common Stock Outstanding.......
Earnings Per Average Share of $ 1.80 $ 1.71 $ 1.61 $ 1.49
Common Stock...................
Cash Dividends Paid Per Share of $ 1.03 $ .95 $ .76 $ .32
Common Stock...................
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1994
--------------------------------------------------
(In thousands)
Actual As Adjusted*
----------------------- -----------------------
<S> <C> <C> <C> <C>
Long-Term Debt** $3,246,215 52.12% $3,246,215 50.89%
Preferred Stock*** $ 398,900 6.40% $ 548,900 8.61%
Common Stock Equity $2,583,604 41.48% $2,583,604 40.50%
---------- ---------- ---------- ----------
Total Capitalization $6,228,719 100.00% $6,378,719 100.00%
========== ========== ========== ==========
</TABLE>
Short-term debt aggregated $324 million at June 30, 1994 (excluding $218.3
million in long-term debt due within one year) and $342 million at July 27, 1994
(excluding $218.3 million in long-term debt due within one year).
- -----------------
* Reflects the issuance of the New Preferred Stock.
** Excludes $218.3 million of long-term debt due within one year.
*** Excludes $27.2 million of redemption and sinking fund requirements on
Preferred Stock due within one year.
S-2
<PAGE>
RECENT DEVELOPMENTS
SECURITIES RATINGS
Rating agencies and others following utility securities have recently
observed an increase in business risk as a result of a variety of factors.
Standard & Poor's Corporation ("S&P") revised its electric utility financial
ratio benchmarks in late 1993 to reflect the greater business risk provided by
accelerating competition. With respect to the Company, it also indicated
concern about environmental and nuclear operating cost pressure and slow
earnings growth prospects. S&P also segregated electric utility companies into
groups based upon competitive position, business prospects and predictability of
cash flows. In S&P's most recent classifications, the Company was included in
the "Below Average," or second lowest rated of the seven categories. Based on
these criteria, on February 23, 1994, S&P reduced the Company's credit ratings
to BBB- for secured debt and BB+ (below investment grade) for preferred stock,
while maintaining a negative ratings outlook pending demonstrated financial
improvement.
Moody's Investor's Service, Inc. ("Moody's") has also indicated that
it expects utility bond ratings to come under increasing pressure over the next
three to five years because of changes in the business environment, although in
February 1994 it maintained its ratings for the Company of Baa2 on all existing
secured debt, baa3 for preferred stock and P-2 for commercial paper. However,
in April 1994, Moody's indicated that further load loss, excessive discounting,
prolonged disruption of nuclear generation or a negative outcome in the pending
rate proceedings (described in "Significant Factors and Recent Developments --
Rate Matters -- 1995 Five-Year Rate Plan Filing" in the Prospectus) may have
unfavorable rating ramifications. Additionally, Moody's believes that in the
longer term, increasing competition within the electric utility industry,
coupled with the Company's high embedded cost structure, will place further
pressure on the Company's ratings. See "Construction and Financing Program" in
this Prospectus Supplement.
SALE OF SUBSIDIARY
On May 17, 1994, the Company announced that it is seeking a buyer for
its wholly-owned subsidiary, HYDRA-CO Enterprises Inc. ("HYDRA-CO"). HYDRA-CO,
an unregulated generator which develops, owns and operates electric generating
power plants, has equity ownership in 25 projects with a capacity of about 820
MW in operation or under construction in eight states, Canada and Jamaica. The
existing projects include 14 hydroelectric facilities, five cogeneration plants,
four biomass plants and two windpower facilities. At June 30, 1994, the
Company's investment in HYDRA-CO was approximately $130 million. The sale is
expected to be consummated by the end of 1994.
MERIT
A report supporting the achievement of the Company's Measured Equity
Return Incentive Term ("MERIT") program goals for 1993 was submitted in February
1994 to the parties to the 1991 Financial Recovery Agreement. On June 2, 1994,
the New York State Public Service Commission ("PSC") provided the Company an
$18.4 million MERIT award (of a maximum award of $30 million), to be billed to
customers over a twelve-month period. The Company had previously recorded $10
million of this award in 1993 based on management's assessment at that time of
the achievement of objectively measured criteria. The shortfall from the full
award reflects the increasing difficulty of achieving the targets established in
customer service and the introduction of cost benchmarking with other utilities
as a criterion. See "Significant Factors and Recent Developments -- Rate
Matters -- MERIT" in the Prospectus.
PSC'S COMPETITIVENESS PROCEEDING
On June 2, 1994, the PSC announced the adoption of guidelines to
govern flexible electric rates offered by utilities to retain qualified
customers in the face of growing competition from
S-3
<PAGE>
unregulated generators. The guidelines specify, among other things: (i) that
such rates should be available for customers who have "realistic competitive
alternatives," (ii) that utilities should not be mandated to offer such rates,
(iii) that there should be a sharing between stockholders and ratepayers of the
lost revenues resulting from such discounts, (iv) that a floor should be
calculated by each utility, which should generally be no lower than the marginal
cost of service plus one cent per kilowatt hour ($0.01/kwh), and (v) that such
flexible rate contracts should not be fixed for periods longer than seven years.
The PSC noted that the flexible rates being offered by the Company, as well as
New York State Electric & Gas Corporation and Rochester Gas and Electric
Corporation, should serve as models.
On June 20, 1994, the PSC announced the commencement of Phase II of
its proceeding, which will examine issues related to the establishment of a
"wholesale competitive market" to provide power that would be wheeled to local
utilities over the interconnected transmission line system in the state. The
PSC also asked parties to the proceeding, who include the PSC's staff,
independent power producers and industrial customer groups as well as
traditional utilities: (i) to explore the pros and cons of different market
structures, (ii) to identify the most efficient structure for competition among
electric providers and (iii) to help determine "whether or not utilities as
providers of transmission and distribution services should divest themselves of
their generating assets."
COMPETITIVENESS ISSUES
Under the terms of its 1994 Rate Agreement, the Company filed a
"competitiveness" study with the PSC on April 7, 1994, entitled "The Impacts of
Emerging Competition in the Electric Utility Industry." The assessment of
competition contained in the report describes the initial results of the
Company's CIRCA 2000 (Comprehensive Industry Restructuring and Competitive
Assessment for the 2000s) studies. Although there is considerable debate about
what changes should occur in the electric industry and even more uncertainty
about what will actually happen, the study explores the Company's best estimate
of how impacts would vary depending on the extent of changes in the industry and
the pace at which those changes are allowed to unfold.
Certain adversaries of the Company in New York State and certain
governmental officials have recently stated that the best way for the Company to
address competitive issues would be to take substantial but unspecified
writedowns of its assets, particularly its nuclear and fossil generating plants.
As described in the Prospectus under "Significant Factors and Recent
Developments -- Rate Matters -- 1994 Rate Agreement," the Company's position is
that any proper solution to the problems posed by increasing competition and
deregulation must be substantially more evenhanded, and will necessarily be more
complicated, than any such proposal. With respect to writedowns, the Company's
position continues to be that any revaluation of its assets needs to address the
entire catalogue of assets.
On July 29, 1994, the Company announced a plan to achieve further
substantial reductions in its staffing levels in an effort to bring the
Company's staffing levels and work practices more into line with other peer
group utilities and become more competitive in its cost structure. Among the
items involved in the plan for management employees are an early retirement
program and a voluntary separation program for those not eligible for early
retirement. A variety of issues remain to be resolved before the overall
program is put into place, including completion of negotiations, with the union
representing the Company's work force, as to a similar plan for union employees.
Management employees now have until October 17, 1994 to choose to participate in
the program. Once the plan is implemented with respect to both groups, the
Company expects to be able to estimate the size of the reduction in staff, any
charges to income associated with the implementation of the program, impacts on
the amount of rate relief requested in the presently pending rate case and the
savings and payback period during which such savings will be realized. Whatever
savings can be achieved through the program are intended to be reflected in a
downward revision of the Company's rate request for 1995. See "Rate Matters --
1995 Five-Year Rate Plan Filing" in the Prospectus. Based on current Company
estimates, 1994 cash outlays in connection with the program are not expected to
be material, although it is not known how many of the 2,600 eligible management
and union employees will participate in the program. Total costs of the program
will depend on the seniority and number
S-4
<PAGE>
of those employees who enroll. Although the staffing reductions are expected to
produce long term savings, the Company may record a charge against earnings in
the fourth quarter of 1994. In the event a charge against income would be
required, the Company expects to petition the PSC to defer any such charge and
amortize it over the period of the savings, although no assurance can be
provided that the PSC will act favorably on the Company's request.
UNIT 1 ECONOMIC STUDY
The next update of the Company's economic analysis of Nine Mile Point
Nuclear Station Unit No. 1 ("Unit 1") is scheduled to be filed with the PSC by
mid-October 1994. While nuclear operating performance has continued to improve
and costs have been significantly reduced, the existing substantial surplus of
power in the Northeast and Canada, combined with a sluggish economy, continue to
put upward pressure on the level of operating efficiency and downward pressure
on the level of costs required to economically justify the continued operation
of any given generating station, including Unit 1. In addition, costs to take
Unit 1 out of service have decreased as compared to the previous study, as a
result of utilizing information from the experience of other nuclear power
plants which have been shut down. On July 28, 1994, the Company's Board of
Directors approved the filing of a report which would call for the Unit's
continued operation for the foreseeable future. The report is in the course of
preparation for filing, which is anticipated prior to the October deadline.
Since the study was the second of the two required under the 1989 Agreement, no
further economic studies are currently required for this Unit, although the
Company will continue as a matter of course to examine the economic and
strategic issues related to operation of all its generating units. The Company
is unable to predict what reaction may ensue from its regulators and other
parties in connection with this study. The study is expected to indicate that
the necessary target capacity factor to economically justify continued operation
of Unit 1 would be approximately 75%. At the same time, the Company's operating
experience at Unit 1 has improved substantially since the prior study and the
Unit's capacity factor during its latest fuel cycle has been in excess of that
level. In addition to the improved performance of Unit 1, factors such as fuel
diversity, reliability and the relative economics of other generating units in
the New York Power Pool (of which the Company is a member and which dispatches
generating units on a statewide basis for the Company, the New York Power
Authority and the six other investor-owned electric utilities in New York State)
were also studied and had an impact on the decision with respect to Unit 1. See
"Significant Factors and Recent Developments -- Nuclear Operations -- Unit 1
Economic Study" in the Prospectus.
LITIGATION
On June 6, 1994, the U.S. Supreme Court refused to hear a case brought
by New York State against the Company regarding the imposition of environmental
regulations on hydropower plants which would be significantly more restrictive
than those called for under federal law. An adverse ruling by the U.S. Supreme
Court would have meant that New York State could specify the minimum flows in a
river affected by a hydropower plant. See "Significant Factors and Recent
Developments -- Litigation" in the Prospectus.
On June 23, 1994, a criminal indictment was filed in Ocean County, New
Jersey, against HYDRA-CO, together with Lakewood Cogeneration L.P., a limited
partnership, HCE Lakewood, its general partner, and several individuals,
including a former officer of HYDRA-CO. The indictment relates to monetary
contributions made to a private organization in an amount of $500,000. The
ultimate outcome of the indictment cannot presently be determined. Accordingly,
the Company cannot predict what effect, if any, it will have on its financial
condition or results of operations.
On July 19, 1994, the Supreme Court of the State of New York, Albany
County dismissed the lawsuit brought by Inter-Power of New York, Inc. ("Inter-
Power") against the Company. Inter-Power alleged, among other matters, fraud,
negligent misrepresentation and breach of contract in connection with the
Company's alleged termination of a power purchase agreement in January 1993.
Inter-Power has stated that it plans to appeal the dismissal. See "Significant
Factors and Recent Developments -- Litigation" in the Prospectus.
S-5
<PAGE>
GENERIC FINANCING PROCEEDING
The PSC is currently conducting a proceeding to consider financial
regulatory policies for all New York State utilities (the so-called "Generic
Financing Proceeding"). The Generic Financing Proceeding is intended to
address, among other things, the methodologies for determination of annual
allowed rates of return on equity for each regulated industry group in the
state. On July 19, 1994, the Co-Facilitators to the proceedings issued their
recommended decision to all parties to the proceeding. In their decision, the
Co-Facilitators recommended that, of the three methodologies proposed by the
participants for calculation of benchmark cost of equity (comparable earnings,
discounted cash flow and capital assets pricing method), the comparable earnings
method should be rejected because it has the least relevance to the actual cost
of equity. The Company is reviewing the recommended decision and evaluating its
response, if any. Briefs on exceptions to the decision are due by September 2,
1994 and briefs opposing exceptions are due by October 3, 1994.
MUNICIPALIZATION
Although no regulatory structure for by-pass currently exists in New
York State, in recent months, several New York State municipalities have begun
to explore in earnest the possibility of by-passing their regional regulated
power generators such as the Company. Although the threat of municipalization
is not new, either to the Company or to other utilities across the country, the
current and projected excess supply of electricity in the Northeast and Canada
has significantly depressed wholesale prices, which would be indicative of
retail prices in the near term if competition quickly expanded and which could
cause such municipalization efforts to intensify.
PROPOSED NYPA RESTRUCTURING
On June 22, 1994, the two most senior officials at the New York Power
Authority ("NYPA") presented a proposal for a major restructuring of New York
State's electric power system. Among other things, the plan calls for the
formation of a company (the "New York State Electrical Thruway") to operate
transmission lines owned by NYPA or by the seven investor-owned utilities in New
York State (including the Company). The plan also calls for the formation of
another body to run the state's six nuclear reactors. The Company cannot
predict the outcome of this proposal and accordingly cannot anticipate what
effect, if any, it will have on its financial condition or results of
operations. In any event, because of the magnitude and scope of the issues
presented, a substantial period of time can be expected to pass before any
definitive action is taken.
RECENT EMF DECISION
There are growing concerns about the effects of electromagnetic fields
("EMF"), including those produced by distribution, transmission and substation
installations, although the scientific evidence on possible health hazards of
EMF is not yet conclusive. However, on June 29, 1994, a court in the State of
Washington found an employer liable to an aluminum electric smelter worker for
EMF exposure based on a doctor's finding that the worker's condition was more
likely than not caused by EMF in his workplace. The impact or precedential
effect of this case is not determinable at this time. See "Significant Factors
and Recent Developments -- General" in the Prospectus.
S-6
<PAGE>
CONSTRUCTION AND FINANCING PROGRAM
The following table sets forth certain data, as of July 28, 1994,
concerning the Company's estimated sources and uses of capital for 1994:
<TABLE>
<CAPTION>
1994
--------
(In Thousands)
Uses of Capital:
<S> <C>
Construction....................................... $ 461,000
Nuclear Fuel....................................... 33,000
Allowance for Funds Used
During Construction ("AFC")...................... 16,000
----------
Total......................................... 510,000
Retirements of Securities,
Sinking Fund Obligations
and Other Requirements............................. 570,000
----------
Total......................................... $1,080,000
==========
Sources of Capital:
Long-Term Financing................................ $ 625,000
Changes in Other
Credit Facilities.................................. 50,000
Internal Sources,
including sale
of subsidiary.................................... 405,000
----------
Total......................................... $1,080,000
==========
</TABLE>
External financing of approximately $675 million is expected for 1994, of
which $545 million relates to scheduled and optional refundings. Based on the
Company's current approved budgets, such external financing is projected to
consist of approximately $325 million in long-term debt (which has been
completed), $100 million from sales of Common Stock, $200 million of preferred
stock (including the New Preferred Stock) and a $50 million increase in short-
term debt.
The amounts indicated in the above table for "Nuclear Fuel" include estimated
costs of acquisition, conversion, enrichment and fabrication, but exclude
financing costs.
Consistent with the Company's approach to its 1994 financing plan, external
financing plans for 1995 through 1998 are subject to revision as underlying
assumptions are changed to reflect new methodologies and developments; however,
the Company currently anticipates that long-term financing over this period will
decrease to approximately $180 million. These amounts, taken together with the
above-listed amounts of external financing for 1994, are currently estimated to
be lower than those previously announced by approximately $415 million.
Substantially all financing for the 1995 through 1998 period is expected to be
used for refunding, as cash provided by operations is generally expected to
provide sufficient funds for the Company's anticipated construction program.
The aggregate level of financing during this four year period will reflect,
among other things, the nature, timeliness and adequacy of rate relief and
uncertain energy demand due to economic conditions and capital expenditures
relating to distribution and transmission load reliability projects, as well as
expansion of the gas business. Costs associated with compliance with federal
and state environmental quality standards, including the Clean Air Act
Amendments of 1990 (the "Clean Air Act"), the effects of rate regulation and
various regulatory initiatives, the level of internally generated funds and
dividend payments, the availability and cost of capital and the ability of the
Company to meet its interest and preferred stock dividend coverage requirements,
to satisfy legal requirements and restrictions in governing instruments and to
maintain an adequate credit rating will also impact the amount and type of
future external financing.
S-7
<PAGE>
The Company presently anticipates that funds required for its construction
program, acquisition of nuclear fuel, AFC, other capitalized costs and
retirements of securities for the years 1995 through 1998 will be as set forth
below. The Company is currently reviewing its budget for these items with a
view to reducing costs where practicable and, accordingly, such figures may be
subject to upward or downward revision.
<TABLE>
<CAPTION>
1995 1996 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In Thousands)
Construction................ $342,000 $342,000 $343,000 $343,000
Nuclear Fuel................ 13,000 56,000 1,000 62,000
AFC......................... 8,000 7,000 7,000 8,000
Retirements of Securities,
Sinking Fund Obligations
and Other Requirements.... $ 79,000 $ 69,000 $ 50,000 $ 70,000
</TABLE>
The provisions of the Clean Air Act are expected to have an impact on
the Company's fossil generation plants during the period through 2000 and
beyond. The Company is studying options for compliance with the various
provisions of Phase I of the Clean Air Act, which becomes effective January 1,
1995 and continues through 1999, including a possible strategy that focuses on
fuel switching at its facilities. The potential for changing the coal burned at
the Dunkirk Steam Station to a lower sulfur content is under review. The
Company has included in the construction budget the cost of converting either
Oswego Unit 5 or Unit 6 from oil to co-firing with natural gas and oil
(including construction of a natural gas pipeline to the facility) and placing
the other Oswego unit in long-term cold standby with an expected return to
service at the end of the century. To meet compliance requirements, the Company
must also lower its nitrous oxide emissions and plans to install low nitrous
oxide burners at the Huntley and Dunkirk Steam Stations. For Phase I
compliance, the Company has included approximately $46 million in its
construction forecast for 1994 through 1997. Phase II of the Clean Air Act,
effective January 1, 2000, will require further reductions in sulfur dioxide
emissions. The Company has conducted studies indicating that the burning of
lower sulfur fuels at all of its coal and oil fired units is a possible
compliance method, but decisions on Phase II have not yet been made. The
Company's preliminary assessment of Phase II sulfur dioxide and nitrogen oxide
emission compliance costs is that additional capital expenditures on the order
of $124 million (1994 dollars) will be required and incremental annual fuel
costs and operating expenses of $21 million will be incurred. However, there
are a number of uncertainties that make it difficult to project these costs at
this time. The Company is continuing to study its options, taking into
consideration the impact of emerging environmental laws and regulations at both
the Federal and State levels and the effect of unregulated generator purchases
and demand-side management initiatives on load forecasts, as well as continuing
to examine the emerging market for trading emission allowances.
The Company believes that compliance with the new emission
restrictions can be achieved with currently available control technology and
fuel switching alternatives; however, until specific regulations implementing
the Clean Air Act are issued, the Company can provide no assurance in this
regard. The Company believes that all capital costs, as well as incremental
operating and maintenance costs and fuel costs, will be recoverable from its
ratepayers.
The Company's cost of financing and access to markets could be
negatively impacted by events outside its control. The Company's securities
ratings could be negatively impacted by, among other things, the growth in its
reliance on unregulated generator purchase power requirements. Rating agencies
have expressed concern about the impact on Company financial indicators and risk
that unregulated generator financial leveraging may have. See "Recent
Developments" in this Prospectus Supplement.
S-8
<PAGE>
The Company's securities ratings are:
<TABLE>
<CAPTION>
Credit Rating*
First
Mortgage Preferred Commercial
Bonds Stock Paper
----- ----- -----
<S> <C> <C> <C>
Standard & Poor's Corporation BBB- BB+ A-3
Moody's Investors Service Baa2 baa3 P-2
Duff & Phelps BBB BBB- Not Applicable
Fitch Investors Service BBB BBB- Not Applicable
- -----------------
</TABLE>
* The securities ratings set forth in the table are subject to revision
and/or withdrawal at any time by the respective rating organizations and
should not be considered a recommendation to buy, sell or hold securities
of the Company.
Certain of the Company's bank credit agreements contain a
representation as to earnings coverage and, in the event such representation
ceases to be true, the banks are not obligated to make loans to the Company
under such agreements. If the Company were unable to utilize its bank credit
arrangements to meet working capital requirements, it would be forced to issue
higher cost, longer-term securities, which in turn would put further pressure on
its credit ratings.
As of June 30, 1994, the Company had the ability to issue $2,163
million aggregate principal amount of additional First Mortgage Bonds under the
Mortgage Trust Indenture dated as of October 1, 1937 between the Company and
Marine Midland Bank, as Trustee (the "Mortgage"). This includes approximately
$1,121 million issuable on the basis of retired bonds and $1,042 million
issuable on the basis of Additional Property (as defined in the Mortgage)
currently certified and available, assuming an 8% interest rate. The Company
has authorized unissued Preferred Stock totaling $403.9 million. A total of
$200 million of Preference Stock is also currently available for sale. The
Company will also continue to explore and utilize, as appropriate, other methods
of raising funds.
Ordinarily, construction related short-term borrowings are refunded
with long-term securities on a continuing basis. Bank credit arrangements,
which, at June 30, 1994 totalled $445 million (including $260 million of
commitments under revolving credit agreements, $80 million in one-year
commitments under credit agreements, $5 million in lines of credit and a $100
million bankers acceptance facility agreement), are used by the Company to
enhance flexibility as to the type and timing of its long-term security sales.
In addition, the Company's Charter restricts the amount of unsecured
indebtedness which may be incurred by the Company to 10% of consolidated
capitalization plus $50 million. The Company has not reached this restrictive
limit.
SUPPLEMENTAL DESCRIPTION OF NEW PREFERRED STOCK
The following description of the particular terms of the New Preferred
Stock offered hereby supplements the description of the general terms and
provisions of the New Preferred Stock set forth in the Prospectus under
"Description of New Preferred Stock," to which description reference is hereby
made.
Dividends
- ---------
Dividends on the New Preferred Stock are cumulative from the date of
the original issuance and will be payable quarterly on the last day of March,
June, September and December, commencing December 31, 1994, when and as declared
by the Board of Directors out of funds legally available therefor, at the annual
rate set forth on the cover page of this Prospectus Supplement.
S-9
<PAGE>
Optional Redemption
- -------------------
Shares of New Preferred Stock are not redeemable prior to September
30, 1999. On and after that date, the shares will be redeemable, in whole or in
part, at the option of the Company, upon not less than 30 nor more than 60 days
prior written notice, at a redemption price of $25.00 per share, plus
accumulated dividends to the redemption date.
Liquidation Rights
- ------------------
The holders of New Preferred Stock are entitled to receive upon
dissolution, liquidation or winding up of the Company, whether voluntary or
involuntary, $25.00 per share, plus accumulated dividends, before any
distribution of the assets of the Company to the holders of the Common Stock or
the Preference Stock. If the assets of the Company are insufficient to permit
full payment to all holders of Preferred Stock of the amounts to which they are
entitled, such holders will share ratably in such assets. A sale of assets,
merger or consolidation is not deemed a dissolution, liquidation or winding up
for the purpose of these provisions.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters, for whom Goldman, Sachs & Co., Dean Witter Reynolds Inc., A.G.
Edwards & Sons, Inc., Lehman Brothers Inc., PaineWebber Incorporated, Prudential
Securities Incorporated, and Smith Barney Inc., are acting as representatives,
has severally agreed to purchase from the Company, the respective number of
shares of the New Preferred Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NEW
UNDERWRITERS PREFERRED STOCK
------------ ---------------
<S> <C>
Goldman, Sachs & Co.................................. 550,500
Dean Witter Reynolds Inc............................. 550,500
A.G. Edwards & Sons, Inc............................. 550,500
Lehman Brothers Inc.................................. 550,500
PaineWebber Incorporated............................. 550,500
Prudential Securities Incorporated................... 550,500
Smith Barney Inc..................................... 550,500
Bear, Stearns & Co. Inc.............................. 88,500
CS First Boston Corporation.......................... 88,500
Alex. Brown & Sons Incorporated...................... 88,500
Dillon, Read & Co. Inc............................... 88,500
Donaldson, Lufkin & Jenrette Securities Corporation.. 88,500
Kidder, Peabody & Co. Incorporated................... 88,500
Morgan Stanley & Co. Incorporated.................... 88,500
Oppenheimer & Co., Inc............................... 88,500
Salomon Brothers Inc................................. 88,500
Advest, Inc.......................................... 37,500
J.C. Bradford & Co................................... 37,500
JW Charles Securities, Inc........................... 37,500
Commerzbank Capital Markets Corporation.............. 37,500
Cowen & Company...................................... 37,500
Credit Lyonnais Securities (USA) Inc................. 37,500
Crowell, Weedon & Co................................. 37,500
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NEW
UNDERWRITERS PREFERRED STOCK
------------ ---------------
<S> <C>
Dain Bosworth Incorporated........................... 37,500
Davenport & Co. of Virginia, Inc..................... 37,500
Doft & Co., Inc...................................... 37,500
Fahnestock & Co., Inc................................ 37,500
First Albany Corporation............................. 37,500
Furman Selz Incorporated............................. 37,500
Gruntal & Co., Incorporated.......................... 37,500
J.J.B. Hilliard, W.L. Lyons, Inc..................... 37,500
Interstate/Johnson Lane Corporation.................. 37,500
Janney Montgomery Scott Inc.......................... 37,500
Josephthal Lyon & Ross Incorporated.................. 37,500
Legg Mason Wood Walker Incorporated.................. 37,500
McDonald & Company Securities, Inc................... 37,500
McGinn, Smith & Co., Inc............................. 37,500
Morgan Keegan & Company, Inc......................... 37,500
The Ohio Company..................................... 37,500
Olde Discount Corporation............................ 37,500
Parker/Hunter Incorporated........................... 37,500
Piper Jaffray Inc.................................... 37,500
Pryor, McClendon, Counts & Co., Inc.................. 37,500
Rauscher Pierce Refsnes, Inc......................... 37,500
Raymond James & Associates, Inc...................... 37,500
Redwood Securities Group, Inc........................ 37,500
The Robinson-Humphrey Company, Inc................... 37,500
Rodman & Renshaw, Inc................................ 37,500
Muriel Siebert & Co., Inc............................ 37,500
Stifel, Nicolaus & Company, Incorporated............. 37,500
Sturdivant & Co., Inc................................ 37,500
Wheat, First Securities, Inc......................... 37,500
---------
Total........................................... 6,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the New Preferred Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession of $.50 per share, except that such
concession will be $.30 per share for shares sold to certain institutions. The
Underwriters may allow, and such dealers may reallow, a concession not to exceed
$.25 per share to certain brokers and dealers, except that such concession will
be $.0625 per share for shares sold to certain institutions. After the shares
of the New Preferred Stock are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
representatives.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
LEGAL OPINIONS AND EXPERTS
The legality of the New Preferred Stock will be passed upon for the
Company by Winthrop, Stimson, Putnam & Roberts and for the Underwriters by
Simpson Thacher & Bartlett (a
S-11
<PAGE>
partnership which includes professional corporations). Paul J. Kaleta, Esq.,
Vice President-Law and General Counsel of the Company, and Winthrop, Stimson,
Putnam & Roberts have reviewed the legal conclusions in the Prospectus under the
caption "Description of New Preferred Stock."
The financial statements of the Company incorporated in the Prospectus
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 have been so incorporated in reliance on the report (which
contains an explanatory paragraph relating to the Company's involvement as a
defendant in lawsuits relating to actions with respect to certain purchased
power contracts, as described in Note 8 to the financial statements) of Price
Waterhouse, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
With respect to the unaudited consolidated financial information of
the Company for the three-month periods ended March 31, 1994 and 1993
incorporated by reference in this Prospectus Supplement, the Company's
independent accountants, Price Waterhouse, reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report dated May 12, 1994 states that
they did not audit and they do not express an opinion on that unaudited
consolidated financial information. Price Waterhouse has not carried out any
significant or additional audit tests beyond those which would have been
necessary if their report had not been included. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. Price Waterhouse is not
subject to the liability provisions of Section 11 of the Securities Act of 1933
(the "Act") for their report on the unaudited consolidated financial information
because that report is not a "report" or a "part" of the Registration Statement
prepared or certified by Price Waterhouse within the meaning of Sections 7 and
11 of the Act.
S-12
<PAGE>
PROSPECTUS
$950,000,000
NIAGARA MOHAWK POWER CORPORATION
First Mortgage Bonds,
Preferred Stock ($25 Par Value),
Preferred Stock ($100 Par Value) and/or
Common Stock ($1 Par Value)
Niagara Mohawk Power Corporation (the "Company") from time to time may
offer its First Mortgage Bonds (the "New Bonds"), its Preferred Stock ($25 par
value), its Preferred Stock ($100 par value) (collectively the "New Preferred
Stock") and its Common Stock ($1 par value) (the "Additional Common Stock" and,
together with the New Bonds and the New Preferred Stock, the "Securities") at
prices and on terms to be determined at the time of sale. The Securities
offered pursuant to this Prospectus may be issued in one or more series or
issuances and will be limited to an aggregate public offering amounting to
$950,000,000.
For each offering of Securities for which this Prospectus is being
delivered, there will be an accompanying Prospectus Supplement (the "Prospectus
Supplement") that sets forth, with respect to New Bonds, the specific series
designation, aggregate principal amount, rate (or method of calculation) and
time of payment of interest, maturity, any redemption terms, credit enhancement,
if any, and other specific terms, if any, of the series of New Bonds in respect
of which this Prospectus is being delivered; with respect to New Preferred
Stock, the number of shares, the specific title and par value, any dividend,
liquidation or redemption terms, the dividend payment dates and other specific
terms, if any, of the series of New Preferred Stock in respect of which this
Prospectus is being delivered; and with respect to Additional Common Stock, the
number of shares and the other specific terms, if any, of the offering thereof
in respect of which this Prospectus is being delivered. See "Description of New
Bonds," "Description of New Preferred Stock," and "Description of Additional
Common Stock."
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol NMK. See "Common Stock Dividends and Price Range."
The Company may sell the Securities through underwriters, through dealers,
directly to one or more institutional purchasers or through agents. If any
underwriters, dealers or agents are involved in any sale of the Securities in
respect of which this Prospectus is being delivered, the Prospectus Supplement
will set forth the terms of the offering of the Securities offered thereby,
including the name or names of any underwriters, dealers or agents, the purchase
price of such Securities and the proceeds to the Company from such sale, any
underwriting discounts and other items constituting underwriters' compensation
and any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers. See "Plan of Distribution."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 13, 1994
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("1934 Act"), and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Information as of particular dates concerning directors and
officers, their remuneration and any material interest of such persons in
transactions with the Company is disclosed in proxy statements distributed to
stockholders of the Company and filed with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 500 West
Madison, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, New
York, New York 10048; and copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Certain securities of the Company
are listed on the New York Stock Exchange. Reports, proxy statements and other
information concerning the Company may be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
=================
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are hereby incorporated by reference in this Prospectus the following
documents heretofore filed with the Commission pursuant to the 1934 Act:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1993, as amended by Form 10-K/A dated June 27, 1994;
2. The Company's Current Reports on Form 8-K dated February 18 and
February 24, 1994; and
3. The Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1994.
All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the 1934 Act after the date of this Prospectus and prior to the
termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in an incorporated
document shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed incorporated document modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each
person, including any beneficial owner, to whom a copy of this Prospectus has
been delivered, upon the written or oral request of any such person, a copy of
any or all of the documents referred to above which have been or may be
incorporated by reference in this Prospectus. Requests for such copies should
be directed to Mr. Leon T. Mazur, Manager-Investor Relations, Niagara Mohawk
Power Corporation, 300 Erie Boulevard West, Syracuse, New York 13202, telephone
number: (315) 474-1511.
-2-
<PAGE>
THE COMPANY
The Company, organized in 1937 under the laws of New York, is engaged
principally in the business of production and/or purchase, transmission,
distribution and sale of electricity and the purchase, distribution and sale of
gas in New York state. The Company renders electric service to the public in an
area of New York state having a total population of about 3,500,000, including,
among others, the cities of Buffalo, Syracuse, Albany, Utica, Schenectady,
Niagara Falls, Watertown and Troy. The Company distributes natural gas in areas
of central, northern and eastern New York having a total population of about
1,700,000, nearly all within the Company's electric service area. A Canadian
subsidiary is an electric company and has operations in the Province of Ontario,
Canada. A Texas subsidiary has an interest in a uranium mining operation in
Live Oak County, Texas which is now in the process of reclamation and
restoration. A New York subsidiary owns, develops and operates cogeneration and
small power plants. Another New York subsidiary engages in real estate
development. Each of these subsidiaries is wholly-owned by the Company. The
Company's principal executive offices are located at 300 Erie Boulevard West,
Syracuse, New York 13202 and its telephone number is (315) 474-1511.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratio of earnings to
fixed charges for the periods indicated:
<TABLE>
<CAPTION>
Twelve Months
Ended March 31, Year Ended December 31,
----------------- ----------------------------
1994 1993 1992 1991 1990 1989
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
2.38 2.31 2.24 2.09 1.41 1.71
</TABLE>
For the purpose of computing the historical ratio of earnings to fixed
charges in the above table, earnings consist of net income plus Federal and
foreign taxes based on income or profits, and fixed charges. Fixed charges
consist of interest charges plus a portion of rentals which is deemed
representative of the interest factor.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Twelve Months
Ended March 31, Year Ended December 31,
----------------- ----------------------------
1994 1993 1992 1991 1990 1989
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
2.07 2.00 1.90 1.77 1.17 1.41
</TABLE>
For the purpose of computing the historical ratio of earnings to
combined fixed charges and preferred stock dividends in the above table,
earnings consist of net income plus Federal and foreign taxes based on income or
profits, and fixed charges. Fixed charges consist of interest charges and
preferred stock dividend requirements of subsidiaries plus a portion of rentals
which is deemed representative of the interest factor. Preferred Stock
dividends have been increased by an amount representing the pre-tax earnings
required to cover such dividends.
-3-
<PAGE>
APPLICATION OF PROCEEDS
The proceeds to the Company from the sale of the Securities will be
used to finance the Company's construction program, to refund existing long-term
debt and preferred stock, to reduce short-term debt and for other corporate
purposes. See the Prospectus Supplement for a description of the Company's
construction program and its proposed refunding of long-term debt and preferred
stock and reduction of short-term debt.
SIGNIFICANT FACTORS AND RECENT DEVELOPMENTS
GENERAL
The utility industry continues to face a wide array of uncertainties
and challenges. The Company's electric generation business faces competition
from alternate energy sources, including cogeneration facilities. Its retail
sales business is under competitive pressures from potential self-generation by
industrial customers and from initiatives relating to possible transmission
access by others to the Company's system. Local gas distribution companies are
also responding to increasing competition in industrial and commercial markets
from pipelines and alternative energy sources. The adoption by regulators of a
combination of competitive bidding programs for new electric resources as well
as increased emphasis on demand-side management (conservation) proposals may
permit utility companies to serve their customers without the need to construct
base load generating facilities, while challenging them to maintain adequate
earnings for shareholders. Further, increased reliance on unregulated
generators raises concerns as to system reliability, excess capacity and fuel
mix. The Company's securities ratings could be negatively impacted by, among
other things, the growth in its reliance on unregulated generator purchase power
requirements. Rating agencies have expressed concern about the impact on the
Company's financial indicators and risk that unregulated generator financial
leveraging may have. Increased regulation of nuclear operations and the
attendant increased complexity of nuclear management and nuclear waste disposal
and storage have increased the financial risks of utilities with investments in
nuclear generating facilities.
Rating agencies and others following utility securities have recently
observed an increase in business risk as a result of these and other factors.
Standard & Poor's Corporation ("S&P") revised its electric utility financial
ratio benchmarks in late 1993 to reflect the greater business risk provided by
accelerating competition. With respect to the Company, it also indicated
concern about environmental and nuclear operating cost pressure and slow
earnings growth prospects. S&P also segregated electric utility companies into
groups based upon competitive position, business prospects and predictability of
cash flows to withstand greater financial risks. The Company was included in
the "Below Average," or lowest rated, group. Based on these criteria, on
February 23, 1994, S&P reduced the Company's credit ratings to BBB- for secured
debt and BB+ (below investment grade) for preferred stock, while maintaining a
negative ratings outlook pending demonstrated financial improvement.
Moody's Investor's Services has also indicated that it expects utility
bond ratings to come under increasing pressure over the next three to five years
because of changes in the business environment, although in February 1994 it
maintained its ratings of Baa2 on all existing secured debt, baa3 for preferred
stock and P-2 for commercial paper.
The Company is working vigorously to deal with the many social and
regulatory burdens that have developed over recent years and that may inhibit
its ability to compete effectively if its markets are opened to widespread
competition. Among other things, the Company has initiated a significant cost
control program and offered an industrial discount program to mitigate its cost
disadvantages. However, the passage of the National Energy Policy Act of 1992
("NEPA") is resulting in a rapid increase in wholesale competition and the
Company is unable to predict whether or to what extent its efforts will be
successful, or what the impact of increasing competition may be on its financial
condition, results of operations or ability to sustain or grow its level of
earnings and dividend
-4-
<PAGE>
payments. NEPA eases the way for additional categories of unregulated
generators to enter the marketplace and requires the utility owners of
electricity transmission systems to "wheel" power for wholesale transactions.
There continue to be actions by external entities with respect to the
protection of the environment, particularly in regard to acid rain, global
warming, remediation of waste disposal sites, disposal of hazardous waste and
emissions into the atmosphere, as demonstrated by the federal Clean Air Act
Amendments of 1990 ("Clean Air Act"). There are growing concerns about the
effects of electromagnetic fields ("EMF"), including those produced by
distribution, transmission and substation installations, although the scientific
evidence on possible health hazards of EMF is not yet conclusive.
There are also a number of emerging state and federal regulatory
developments and possible structural changes in the electric and gas industries
which may have a much broader and longer-lasting effect on the Company's
operations and the environment in which it conducts business. These issues
include: questions of open access to the Company's electric transmission
facilities by other parties and vice versa; possible "by-pass" of the Company's
electric and gas systems by large industrial and cogeneration customers (which
could have the dual effect of increasing rates to remaining system customers
while creating the possibility of excess electric capacity); initiatives
relating to "incentive regulation" which may change the manner in which rates
are set and which may ultimately affect how the consequences of regulation are
reflected in the Company's financial statements; the possibility of flexible
electric and gas utility rate pricing designed to help retain customers,
especially large industrial customers; and the compliance and implementation
considerations of the Clean Air Act as well as possible stricter state emissions
regulation.
In recent years, concerns have been raised about the possible health
effects of EMFs from transmission and distribution lines as well as household
wiring and appliances. Numerous studies on the effects of EMFs have been done
and are continuing throughout the world, with results that are often hard to
interpret and sometimes conflicting. On February 26, 1993, the Environmental
Protection Agency (the "EPA") called for significant additional research on
EMFs. The Company is taking a proactive approach and has already begun
investigating power lines which are near public school buildings to evaluate the
possibility of any health risks from EMFs. It is impossible to predict what
further effect, if any, continued research and epidemiological studies on EMFs
could have on the Company and the electric utility industry. The role of the
utility industry in addressing these environmental matters will be prominent and
could be costly.
While the Company believes that full recovery of its investment will
be provided through the rate setting process with respect to all of these
issues, a review of political and regulatory actions during the past 15 years
with respect to industry issues indicates that utility shareholders may
ultimately bear some of the burden of solving problems of this nature.
RATE MATTERS
1993 Rate Settlement. On January 27, 1993, the New York Public
Service Commission ("PSC") approved a 1993 Rate Settlement authorizing a 3.1%
increase in the Company's electric and gas rates providing for additional annual
revenues of $108.5 million (electric $98.4 million or 3.4%; gas $10.1 million or
1.8%). Retroactive application of the new rates to January 1, 1993 was
authorized by the PSC.
The increase reflects an allowed return on equity of 11.4%, as
compared to 12.3% authorized for 1992. The settlement also included extension
of the Niagara Mohawk Electric Revenue Adjustment Mechanism ("NERAM") through
December 1993 and provisions to defer expenses related to mitigation of
unregulated generator costs (aggregating $50.7 million at December 31, 1993),
including contract buyout costs and certain other items.
-5-
<PAGE>
The Company and the local unions of the International Brotherhood of
Electrical Workers agreed on a two-year nine-month labor contract effective June
1, 1993. The new labor contract includes general wage increases of 4% on each
June 1st through 1995 and changes to employee benefit plans including certain
contributions by employees. Agreement was also reached concerning several work
practices which should result in improved productivity and enhanced customer
service. The PSC approved a filing resulting from the union settlement and
authorized $8.1 million in additional revenues ($6.8 million electric and $1.3
million gas) for 1993.
NERAM. The NERAM requires the Company to reconcile actual results to
forecast electric public sales gross margin used in establishing rates. The
NERAM produces certainty in the amount of electric gross margin the Company will
receive in a given period to fund its operations. While reducing risk during
periods of economic uncertainty and mitigating the variable effects of weather,
the NERAM does not allow the Company to benefit from unforeseen growth in sales.
Recovery or refund of accruals pursuant to the NERAM is accomplished by a
surcharge (either plus or minus) to customers over a twelve-month period, to
begin when cumulative amounts reach certain levels specified in the Company's
1991 Financial Recovery Agreement. As of December 31, 1993, the Company had a
recoverable NERAM balance (amounts subject to reconciliation) of $21.4 million.
The Company has proposed discontinuation of NERAM beginning in 1995.
MERIT. The Company's Measured Equity Return Incentive Term ("MERIT")
program is the incentive mechanism which originally allowed the Company to earn
up to $180 million of additional return on equity through May 31, 1994. The
program was later amended to extend the performance period through 1995 and add
$10 million to the total available award.
The PSC granted the full $30 million of MERIT award the Company
claimed for the period January 1991 through May 1991, which was reflected in
earnings in the third quarter of 1991 ($.14 per common share). The second MERIT
period, June 1991 through December 1991, had a maximum award of $30 million. Of
this amount, the PSC granted $22.8 million, or approximately $.11 per share,
which the Company included in June 1992 earnings.
Measurement criteria for the $25 million of MERIT for 1992 focused on
implementation of self-assessment recommendations, including measurements of
responsiveness to customers, nuclear performance, cost management and
environmental performance. The Company claimed, and the PSC approved in 1993, a
MERIT award of approximately $14.3 million, of which $4 million was included in
1992 earnings. The shortfall from the full award available reflected the
increasing difficulty of achieving the targets established in customer service
and cost management, as well as lower than anticipated nuclear operating
performance.
Overall goal targets and criteria for the 1993-1995 MERIT periods are
results-oriented and are intended to measure change in key overall performance
areas. The targets emphasize three main areas: (1) responsiveness to customer
needs, (2) efficiency through cost management, improved operations and employee
empowerment and (3) aggressive, responsible leadership in addressing
environmental issues.
A report supporting the achievement of MERIT goals for 1993 was
submitted in February 1994 to the parties to the 1991 Financial Recovery
Agreement. The Company anticipates claiming an award of approximately $20
million, which would be expected to be billed to customers over a twelve-month
period, after PSC confirmation of the earned award. The Company recorded $10
million of this award in 1993 based on management's assessment of the
achievement of objectively measured criteria. The shortfall from the full award
reflects the increasing difficulty of achieving the targets established in
customer service and cost benchmarking with other utilities.
-6-
<PAGE>
1994 Rate Agreement. On February 2, 1994, the PSC approved an
increase in gas rates of $10.4 million or 1.7%. To comply with this rate order,
the Company filed tariffs with an effective date of February 12, 1994. The
Company was allowed to collect the revised rates retroactive to January 1, 1994,
through the implementation of a surcharge factor. The rate order also permitted
the Company to implement for the first time a weather normalization clause with
an effective date of February 12, 1994. The gas weather normalization clause
was not ordered to be implemented on a retroactive basis and therefore had very
little impact on financial condition and results of operations for the first
quarter of 1994.
The PSC also approved the Company's electric supplement agreement with
the staff of the PSC ("PSC Staff") and other parties to extend certain cost
recovery mechanisms in the 1993 Rate Settlement without increasing electric base
rates for calendar year 1994. An order has not yet been issued for PSC approval
of the electric or gas cases. The goal of the supplement is to keep total
electric bill impacts for 1994 at or below the rate of inflation. Modifications
were made to the NERAM and MERIT provisions which determine how these amounts
are to be distributed to various customer classes and also provide for the
Company to absorb 20% of margin variances (within certain limits) originating
from SC-10 rate discounts (as described below) and certain other discount
programs for industrial customers as well as 20% of the gross margin variance
from NERAM targets for industrial customers. The Company estimates its total
exposure at March 31, 1994, on such variances for 1994 to be approximately $13
million, depending on the amount of discounts given. The supplement also allows
the Company to begin recovery over three years of approximately $15 million of
unregulated generator buyout costs, subject to final PSC determination with
respect to the reasonableness of such costs.
The Company is experiencing a loss of industrial load through bypass
across its system. Several substantial industrial customers, constituting
approximately 85 MW of demand, have chosen to purchase generation from other
sources, either from newly constructed facilities or under circumstances where
they directly use the power they had been generating and selling to the Company
under power purchase contracts mandated by the Public Utilities Regulatory
Policies Act of 1978 ("PURPA"), New York laws and PSC programs.
As a first step in addressing the threat of a loss of industrial load,
the PSC approved a new rate (referred to as SC-10) under which the Company is
allowed to negotiate individual contracts with some of its largest industrial
and commercial customers to provide them with electricity at lower prices.
Under the new rate, customers must demonstrate that leaving the Company's system
is an economically viable alternative. At April 30, 1994, the Company estimated
that as many as 75 of its 235 largest customers may be inclined to bypass the
utility's system by making electricity on their own unless they receive price
discounts. Granting discounts would cost an estimated $20 million per year,
while losing those 75 customers would reduce net revenues by an estimated $80
million per year. As of April 30, 1994, the Company has offered annual SC-10
discounts to customers totaling $9.7 million, of which $5.3 million have been
accepted. The Company estimates that by the end of 1994 there may be as many as
50 customers subscribing to the rate, with a lost margin projection in 1994 of
$15 million ($3 million shareholder exposure).
Under the terms of its 1994 Rate Agreement, the Company filed a
"competitiveness" study with the PSC on April 7, 1994, entitled "The Impacts of
Emerging Competition in the Electric Utility Industry." The assessment of
competition contained in the report describes the initial results of the
Company's CIRCA 2000 (Comprehensive Industry Restructuring and Competitive
Assessment for the 2000s) studies. Started in 1993, the studies were undertaken
to assess the pace and direction of the growth of competition in the electric
utility industry, as well as the strengths and weaknesses of the Company in
relation to this assessment.
Although there is considerable debate about what changes should occur
in the electric industry and even more uncertainty about what will actually
happen, the study explores the Company's
-7-
<PAGE>
best estimate of how impacts would vary depending on the extent of changes in
the industry and the pace at which those changes are allowed to unfold.
The Company sells electricity generated from diverse supply sources to
reduce sensitivity to changes in the economics of any single fuel source.
However, the average cost of these diverse sources may be greater than that of a
single fuel source. While the Company's average generation costs are
competitive with costs of new suppliers of electricity, the current excess
supply of capacity in the Northeast and Canada has significantly depressed
wholesale prices, which may be indicative of retail prices in the near term if
competition quickly expanded. Under these circumstances, by-pass is a growing
threat, although no regulatory structure for bypass currently exists in New York
State. There is increasing public debate within several municipalities in the
Company's service territory on the issue of by-pass. The threat of
municipalization is not new, either to the Company or to other utilities across
the country.
Summary financial indicators associated with a base case forecast and
an alternative case which estimates one potential scenario of additional
competition under the existing regulatory framework are shown in the report.
The report concludes with a description of transition costs and methods for
dealing with them, and provides a roadmap for moving the monopoly-dominated
electric utility industry to fuller competition.
From a broader industry perspective, the assessment concludes that
selective discounting to avoid uneconomic by-pass is likely to be effective in
the current regulatory and competitive regime. Full retail competition, if not
managed appropriately and consistently, could create significantly higher prices
for core customers, jeopardize the financial viability of the electric utility
industry and devastate the social programs delivered by the industry. While
aggressive cost management must be part of any response to competition, it alone
cannot address the financial consequences that may arise from a sudden and
dramatic policy change. Regulators, legislators, and utilities must collaborate
to create a fair and equitable transition to increased competition that
addresses the obligation to serve, incumbent burdens, transition costs and exit
fees.
On July 28, 1993, the Company petitioned the PSC for permission to
offer competitively priced natural gas to customers who presently purchase gas
from non-utility sources. The new rate is designed to regain a share of the
industrial and commercial sales volume the Company lost in the 1980's when large
customers were allowed to buy gas from non-utility sources. The Company will
delay any implementation of this rate until the issues are further addressed in
a comprehensive generic investigation, currently being conducted by the PSC,
into issues involving the restructuring of gas utility services to respond to
emerging competition.
1995 Five-Year Rate Plan Filing. On February 4, 1994, the Company
made a combined electric and gas rate filing for rates to be effective January
1, 1995 seeking a $133.7 million (4.3%) increase in electric revenues and a
$24.8 million (4.1%) increase in gas revenues. The electric filing includes a
proposal to institute a methodology to establish rates beginning in 1996 and
running through 1999. The proposal would provide for rate indexing to a
quarterly forecast of the consumer price index as adjusted for a productivity
factor. The methodology sets a price cap, but the Company may elect not to
raise its rates up to the cap. Such a decision would be based on the Company's
assessment of the market. NERAM and certain expense deferrals would be
eliminated, while the fuel adjustment clause would be modified to cap the
Company's exposure to fuel and purchased power cost variances from forecast at
$20 million annually. However, certain items which are not within the Company's
control would be outside of the indexing; such items would include legislative,
accounting, regulatory and tax law changes as well as environmental and nuclear
decommissioning costs. These items and the existing balances of certain other
deferral items, such as MERIT and demand-side management, would be recovered or
returned using a temporary rate surcharge. The proposal would also establish a
minimum return on equity which, if not achieved, would permit the Company to
refile for new base rates subject to indexing or to seek some other form of rate
relief. Conversely, in the event earnings exceed an established maximum allowed
return on equity, such excess earnings would be used to
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accelerate recovery of regulatory or other assets. The proposal would provide
the Company with greater flexibility to adjust prices within customer classes to
meet competitive pressures from alternative electric suppliers while increasing
the risk that the Company will earn less than its allowed rate of return. Gas
rate adjustments beyond 1995 would follow traditional regulatory methodology.
The Company tentatively settled a motion filed by the PSC Staff to
reject the filing as deficient in support by agreeing to extend the date by
which the PSC must rule on the Company's rate request by twelve weeks. The
Company will absorb one-half of the costs (the lost margin) arising because of
the extension. The remainder of the costs will be recovered through a noncash
credit to income, and is dependent upon the amount of rate relief ultimately
granted by the PSC for 1995. Temporary gas rates will be instituted for the
full twelve weeks. This settlement of the PSC Staff's motion must ultimately be
approved by the PSC. The Administrative Law Judge in the case rejected a
Consumer Protection Board motion to dismiss the portion of the case related to
years two through five as being beyond the authority of the PSC.
NUCLEAR OPERATIONS
The Company is the owner and operator of Nine Mile Point Nuclear
Station Unit No. 1 ("Unit 1"), which has a design capability of 613 MW, and the
operator and a 41% co-owner of Nine Mile Point Nuclear Station Unit No. 2 ("Unit
2"), which has a design capability of 1,062 MW. Ownership of Unit 2 is shared
with Long Island Lighting Company (18%), New York State Electric & Gas
Corporation (18%), Rochester Gas and Electric Corporation (14%), and Central
Hudson Gas & Electric Corporation (9%). Output of Unit 2, and the cost of
operation and capital improvements, are shared in the same proportions as the
cotenants' respective ownership interests.
Unit 1 Economic Study. Under the terms of a previous regulatory
agreement, the Company agreed to prepare and update studies of the advantages
and disadvantages of continued operation of Unit 1 prior to the start of the
next two refueling outages. The first report, which recommended continued
operation of Unit 1 over the remaining term of its license (which expires in
2009), was filed with the PSC in March 1990.
On November 20, 1992 the Company submitted to the PSC an updated
economic analysis which indicated that Unit 1 can be expected to provide value
to customers and shareholders through its next fuel cycle, which will end in
early 1995. The study also indicated that the Unit could continue to provide
benefits for the full term of its license if operating costs can be reduced and
generating output improved above its historical average.
The study analyzed a number of scenarios resulting in break-even
capacity factors, ranging from 44% to 122%. The "base case" assumes a capacity
factor of 61%, consistent with the target reflected in the Unit 1 operating
incentive mechanism, and also assumes future operating and capital costs
slightly lower than historical performance. While a marginal benefit would be
realized from operating the Unit for at least the next two years (one fuel
cycle) under the "base case," there would be a negative net present value in
excess of $100 million if the Unit were to be operated over its remaining 17-
year license period. Under an "improved performance case," the Unit is assumed
to operate at a 70% capacity factor with future operating and capital costs
consistent with average industry performance. The Company believes these goals
are achievable for Unit 1, as indicated by Unit 1 operating and financial
performance in 1993 that was better than the improved performance case. The
"improved performance case" results in positive net present value in excess of
$100 million if the Unit is operated over its remaining life. Such results
demonstrate the volatility of the assumptions and uncertainties involved in
developing the Unit's economic forecast. These assumptions include various
levels of the Unit's capacity factor, operating and capital costs, demand for
electricity, supply of electricity including unregulated generator power,
implementation and compliance costs of the Clean Air Act and other federal and
state environmental requirements and fuel availability and prices, especially
natural gas. Given the potential for rapid and substantial change in any or all
of these
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assumptions, the Company has developed operational and external criteria, other
than refueling, which would initiate a prompt reassessment of the economic
viability of the Unit.
An agreement with the PSC allows recovery of all reasonable and
prudently-incurred sunk costs and costs of retirement, should a prudent decision
be made to retire Unit 1 before early 1995. All parties to the Company's 1991
Financial Recovery Agreement reserve the right to petition the PSC to institute
a formal investigation to review the prudence of any Company decision to retire
Unit 1. Any such decision by the Company will be made in consultation with
governmental and regulatory authorities. The Company's net investment in Unit
1 is approximately $580 million, exclusive of decommissioning costs.
Unit 1 Status. On February 20, 1993, Unit 1 was taken out of service
for a planned 55 day refueling and maintenance outage. On April 15, 1993, Unit
1 returned to service ahead of schedule. The next refueling outage is scheduled
to begin in February 1995. Unit 1's capacity factor for 1993 was approximately
81%.
Unit 2 Status. On October 2, 1993, Unit 2 was taken out of service
for a planned 60 day refueling and maintenance outage. On November 29, 1993,
Unit 2 returned to service ahead of schedule. The next refueling outage is
scheduled to begin in the spring of 1995. Unit 2's capacity factor for 1993 was
approximately 78%.
Nuclear Plant Decommissioning. Based on a 1989 study, the cost of
decommissioning Unit 1, which is expected to begin in the year 2009, is
estimated by the Company to be approximately $416 million at that time ($257
million in 1993 dollars). The Company's 41% share of the total cost to
decommission Unit 2, expected to begin in 2027, is estimated by the Company to
be approximately $316 million ($109 million in 1993 dollars). The annual
decommissioning allowance reflected in ratemaking is based upon these estimates
which include amounts for both radioactive and non-radioactive dismantlement
costs. The non-radioactive dismantlement costs are estimated in the 1989 study
to be $24 million for Unit 1 and $18 million for its share of Unit 2, in 1993
dollars.
Decommissioning costs recovered in rates are reflected in Accumulated
Depreciation and Amortization on the Balance Sheet and amount to $113.9 million
and $90.5 million at December 31, 1993 and 1992, respectively. The annual
allowance for Unit 1 and the Company's share of Unit 2 for the years ended
December 31, 1993, 1992 and 1991 was approximately $18.7, $23.1 and $23.0
million, respectively.
The Company will update its Unit 1 decommissioning study in 1994 in
support of the update of the Unit 1 economic study. The Unit 2 decommissioning
study is also expected to be updated in 1994. Rate allowance adjustments will
be sought when appropriate. There is no assurance that the decommissioning
allowance recovered in rates will ultimately aggregate a sufficient amount to
decommission the units. However, the Company believes that if decommissioning
costs are higher than currently estimated they would ultimately be recovered in
the rate process.
The Nuclear Regulatory Commission ("NRC") issued regulations in 1988
requiring owners of nuclear power plants to place funds into an external trust
to provide for the cost of decommissioning contaminated portions of nuclear
facilities as well as establishing minimum amounts that must be available in
such a trust for these specified decommissioning activities at the time of
decommissioning. As of December 31, 1993, the Company has accumulated in an
external trust $63.1 million for Unit 1 and $15.4 million for its share of Unit
2, which are included in Other Property and Investments. Earnings on such
investments aggregated $8.6 million through December 31, 1993 and, because they
are available to fund decommissioning, have also been included in Accumulated
Depreciation and Amortization. Amounts recovered for non-radioactive
dismantlement are accumulated in an internal reserve fund which has an
accumulated balance of $35.4 million at December 31, 1993.
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Based upon studies applying the 1988 NRC regulations, the Company had
estimated that the minimum funding requirements for Unit 1 and its share of Unit
2, respectively, would be $191 million and $87 million in 1993 dollars. In May
1993, the NRC established new labor, energy and burial cost factors for
determining the NRC minimum funding requirements. A substantial increase in
burial costs, partly offset by reduced estimates in the volumes of waste to be
disposed, increased the NRC minimum requirement for Unit 1 to $372 million in
1993 dollars and the Company's share of Unit 2 to $169 million in 1993 dollars.
The Company has requested an annual aggregate increase of approximately $10
million in the Unit 1 and Unit 2 decommissioning allowances as part of its 1995
rate request, to reflect the increased NRC minimum requirements.
Nuclear Fuel Storage Initiative. In April 1994, the Company joined a
spent nuclear fuel storage initiative with the Mescalero Apache Tribal Council,
32 other utilities and two nuclear industry contractors on Mescalero tribal
lands. Each of the utility companies has been guaranteed an opportunity to
become an equity partner with the Mescalero Apache Tribe in their efforts to
site a private spent nuclear fuel storage facility on the tribal lands.
The first phase is to determine by June 1, 1994, detailed costs and
schedules for the project. Once the estimates are complete, partners can decide
whether or not to continue to phase two, in which a business entity with the
Mescalero's as majority partner would be established.
The next step would be Tribal and the NRC licensing process. It is
estimated that approximately three to four years will be required to obtain a
license to store used fuel and cost in the range of $8 to $10 million. During
the NRC licensing process, an environmental impact statement will be developed
in conjunction with extensive public hearings.
The Mescalero Tribe has been involved in studying spent fuel storage
technologies and safety for approximately three years through the Voluntary
Monitored Retrievable Storage program authorized by Congress.
UNREGULATED GENERATORS
In recent years, a leading factor in the increases in customer bills
and deterioration of the Company's competitive position has been the requirement
to purchase power from unregulated generators at prices in excess of the
Company's internal cost of production and in volumes greater than the Company's
needs.
While the Company favors the availability of unregulated generators in
satisfying its generating needs, the Company also believes it is paying a
premium to unregulated generators for energy it does not currently need. The
Company estimates that it paid a premium of $206 million in 1993 and expects to
overpay by $352 million in 1994 and $421 million in 1995. The Company has
initiated a series of actions to address this situation, but expects that in
large part the higher costs will continue.
In order to control the growth of excess supply, the Company has taken
numerous actions to realign its supply with demand. These actions include plant
mothballing and retirements as well as the implementation of an aggressive
wholesale marketing effort. Such actions have been successful in bringing
installed capacity reserve margins down to more acceptable levels.
On August 18, 1992, the Company filed a petition with the PSC which
calls for the implementation of "curtailment procedures." Under existing
Federal Energy Regulatory Commission ("FERC") and PSC policy, this petition
would allow the Company to limit its purchases from unregulated generators when
demand is low.
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While the Administrative Law Judge has submitted recommendations to
the PSC, the Company cannot predict the outcome of this case. Also, the Company
has commenced settlement discussions with certain unregulated generators
regarding curtailments. On April 5, 1994, the Company requested the PSC to
expedite the consideration of its petition.
On October 23, 1992, the Company also petitioned the PSC to order
unregulated generators to post letters of credit or other firm security to
protect ratepayers' interests in advance payments made in prior years to these
generators. The PSC dismissed the original petition without prejudice, which
the Company believes would permit the Company to reinitiate its request at a
later date. The Company is conducting discussions with unregulated generators
representing over 1,600 MW of capacity, addressing the issues contained in its
petitions.
ENVIRONMENTAL ISSUES
The public utility industry typically utilizes and/or generates in its
operations a broad range of potentially hazardous wastes and by-products. These
wastes or by-products may not have previously been considered hazardous, and may
not be considered hazardous currently, but may be identified as such by Federal,
state or local authorities in the future. The Company believes it is handling
identified wastes and by-products in a manner consistent with Federal, state and
local requirements and has implemented an environmental audit program to
identify any potential areas of concern and assure compliance with such
requirements. The Company is also currently conducting a program to investigate
and restore, as necessary to meet current environmental standards, certain
properties associated with its former gas manufacturing process and other
properties which the Company has learned may be contaminated with industrial
waste, as well as investigating identified industrial waste sites as to which it
may be determined that the Company contributed. The Company has been advised
that various Federal, state or local agencies believe that certain properties
require investigation and has prioritized the sites based on available
information in order to enhance the management of investigation and remediation,
if determined to be necessary.
The Company is currently aware of 89 sites with which it has been or
may be associated, including 49 which are Company-owned. The Company-owned
sites include 23 former coal gasification ("MGP") sites, 15 industrial waste
sites and 11 operating property sites where corrective actions may be deemed
necessary to prevent, contain and/or remediate contamination of soil and/or
water in the vicinity. Of these Company-owned sites, Saratoga Springs is on the
Federal National Priorities List for Uncontrolled Hazardous Waste Sites ("NPL")
published by the EPA in the Federal Register. The 40 non-owned sites with which
the Company has been or may be associated are generally industrial disposal
waste sites where some of the disposed waste materials are alleged to have
originated from the Company's operations. Pending the results of
investigations, the Company may be required to contribute some proportionate
share of remedial costs. Not included in the 89 sites are seven sites for which
the Company has reached final settlement agreements with other potentially
responsible parties ("PRP") and three sites where remediation activities have
been completed. The Company is also aware of approximately 20 formerly-owned
MGP sites with which the Company has been or may be associated and which may
require future investigation and possible remediation. Also, approximately 11
fire training sites used by the Company have been identified but not
investigated. Presently, the Company has not determined its potential
involvement with such sites and has made no provision for potential liabilities
associated therewith.
Investigations at each of the Company-owned sites are designed to (1)
determine if environmental contamination problems exist, (2) determine the
extent, rate of movement and concentration of pollutants, (3) if necessary,
determine the appropriate remedial actions required for site restoration and (4)
where appropriate, identify other parties who should bear some or all of the
cost of remediation. Legal action against such other parties, if necessary,
will be initiated. After site investigations have been completed, the Company
expects to determine site-specific remedial actions necessary and to estimate
the attendant costs for restoration. However, since technologies are still
developing and the Company has not yet undertaken any full-scale remedial
actions following
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regulatory requirements at any identified sites, nor have any detailed remedial
designs been prepared or submitted to appropriate regulatory agencies, the
ultimate cost of remedial actions may change substantially as investigation and
remediation progresses.
The Company estimates that 43 of the 49 owned sites will require some
degree of remediation and post-remedial monitoring. This conclusion is based
upon a number of factors, including the nature of the identified or potential
contaminants, the location and size of the site, the proximity of the site to
sensitive resources, the status of regulatory investigation and knowledge of
activities at similarly situated sites. Although the Company has not
extensively investigated many of those sites, it believes it has sufficient
information to estimate a range of cost of investigation and remediation. As a
consequence of site characterizations and assessments completed to date, the
Company has accrued a liability of $210 million for these owned sites,
representing the low end of the range of the estimated cost for investigation
and remediation. The high end of the range is presently estimated at
approximately $520 million.
The majority of these cost estimates relate to the MGP sites. Of the
23 MGP sites, the Harbor Point (Utica, NY) and Saratoga Springs sites are being
investigated and remediated pursuant to separate regulatory Consent Orders. The
remaining 21 MGP sites are the subject of an Order on Consent executed with the
New York State Department of Environmental Conservation ("DEC") providing for an
investigation and remediation program over approximately ten years. Preliminary
site assessments have been conducted or are in process at five of these 21
sites, with remedial investigations either currently in process or scheduled for
1994. Remedial investigations have been conducted for two industrial waste
sites and for three operating properties where corrective actions were
considered necessary.
The Company recently completed preliminary site assessments at the
fire training sites which it owns and determined five sites will require further
investigation. These sites and the costs to investigate them are included in
the sites discussed above and the amounts accrued at March 31, 1994.
The Company does not currently believe that a clean-up will be
required at the six remaining Company-owned sites, although some degree of
investigation of these sites is included in its investigation and remediation
program.
With respect to the 40 sites with which the Company has been or may be
associated as a PRP, nine are listed on the NPL. Total costs to investigate and
remediate these sites are estimated to be approximately $590 million; however,
the Company estimates its share of this total at approximately $30 million and
this amount has been accrued at March 31, 1994.
The seven sites for which final settlement agreements have been
executed resulted in payment by the Company of amounts not considered to be
material. Two of these sites (Ludlow Landfill and Wide Beach) are listed on the
NPL; the Company's aggregate liability for both was established in an amount
less than $300,000. For the nine sites included on the NPL, the Company's
potential contribution factor varies for each site. The estimated aggregate
liability for these sites is not material and is included in the determination
of the amounts accrued.
Estimates of the Company's potential liability for sites not owned by
the Company, but for which the Company has been identified as a PRP, have been
derived by estimating the total cost of site clean-up and then applying the
related Company contribution factor to that estimate. Estimates of the total
clean-up costs are determined by using all available information from
investigations conducted to date, negotiations with other PRPs and, where no
other basis is available at the time of estimate, the EPA figure for average
cost to remediate a site listed on the NPL as disclosed in the Federal Register
of June 23, 1993. The contribution factor is then calculated using either a per
capita share based upon the total number of PRPs named or otherwise identified,
which assumes all PRPs will contribute equally, or the percentage agreed upon
with other PRPs through steering committee
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negotiations or by other means. Actual Company expenditures for these sites are
dependent upon the total cost of investigation and remediation and the ultimate
determination of the Company's share of responsibility for such costs as well as
the financial viability of other identified responsible parties since clean-up
obligations are joint and several. The Company has denied any responsibility in
certain of these PRP sites and is contesting liability accordingly.
The EPA advised the Company by letter that it is one of 833 PRPs under
Superfund for the investigation and cleanup of the Maxey Flats Nuclear Disposal
Site in Morehead, Kentucky. The Company has contributed to a study of this site
and estimates that the cost to the Company for its share of investigation and
remediation based on its contribution factor of 1.3% would approximate $1
million, which the Company believes will be recoverable in the ratesetting
process.
On July 21, 1988, the Company received notice of a motion by Reynolds
Metals Company to add the Company as a third party defendant in an ongoing
Superfund lawsuit in Federal District Court, Northern District of New York.
This suit involves PCB oil contamination at the York Oil Site in Moira, New
York. Waste Oil was transported to the site during the 1960's and 1970's by
contractors of Peirce Oil Company (owners/operators of the site) who picked up
waste oil at locations throughout Central New York, allegedly including one or
more Company facilities. On May 26, 1992, the Company was formally served in a
Federal Court action initiated by the government against eight additional
defendants. Pursuant to the requirements of a case management order issued by
the Court on March 13, 1992, the Company has also been served in related third
and fourth-party actions for contribution initiated by other defendants. These
actions have been consolidated into a single action filed in February 1994 by
the federal government against several entities, including the Company, which
did not accept the government's final terms of settlement. The Company intends
to vigorously oppose and defend against the government's characterization of its
liability in this matter.
The Company believes that costs incurred in the investigation and
restoration process for both Company-owned sites and sites with which it is
associated will be recoverable in the ratesetting process. Rate agreements in
effect since 1991 provide for recovery of anticipated investigation and
remediation expenditures. The Company's 1994 rate settlement includes $21.7
million for site investigation and remediation. The PSC Staff reserves the
right to review the appropriateness of the costs incurred. While the PSC Staff
has not challenged any remediation costs to date, the PSC Staff asserted in the
recently-decided gas rate proceeding that the Company must, in future rate
proceedings, justify why it is appropriate that remediation costs associated
with non-utility property owned by the Company be recovered from ratepayers.
Based upon management's assessment that remediation costs will be recovered from
ratepayers, a regulatory asset has been recorded representing the future
recovery of remediation obligations accrued to date.
The Company also agreed in rate agreements to a cost sharing
arrangement with respect to one industrial waste site. The Company does not
believe that this cost sharing agreement, as it relates to this particular
industrial waste site, will have a material effect on the Company's financial
position or results of operations.
The Company is also in the process of providing notices of insurance
claims to carriers with respect to the investigation and remediation costs for
manufactured gas plant and industrial waste sites. The Company is unable to
predict whether such insurance claims will be successful.
TAX ASSESSMENTS
The Internal Revenue Service ("IRS") has conducted an examination of
the Company's federal income tax returns for the years 1987 and 1988 and has
submitted a Revenue Agents' Report to the Company. The IRS has proposed various
adjustments to the Company's federal income tax liability for these years which
could increase the federal income tax liability by approximately $80 million
before assessment of penalties and interest. Included in these proposed
adjustments are several significant issues involving Unit 2. The Company is
vigorously defending its position on each of these
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issues, and submitted a protest to the IRS in 1993. Pursuant to the Unit 2
settlement entered into with the PSC in 1990, to the extent the IRS is able to
sustain disallowances, the Company will be required to absorb a portion of any
disallowance. The Company believes any such disallowance will not have a
material impact on its financial position or results of operations.
LITIGATION
On March 22, 1993, a complaint was filed in the Supreme Court of the
State of New York, Albany County against the Company and certain of its officers
and employees. The plaintiff, Inter-Power of New York, Inc. ("Inter-Power"),
alleges, among other matters, fraud, negligent misrepresentation and breach of
contract in connection with the Company's alleged termination of a power
purchase agreement in January 1993. The power purchase agreement was entered
into in early 1988 in connection with a 200 MW cogeneration project to be
developed by Inter-Power in Halfmoon, New York. The plaintiff is seeking
enforcement of the original contract or compensatory and punitive damages on
fourteen causes of action in an aggregate amount that would not exceed $1
billion, excluding pre-judgment interest. The Company believes it has done no
wrong, and intends to vigorously defend against this action. On May 7, 1993,
the Company filed an answer denying liability and raising certain affirmative
defenses. Thereafter, the Company and Inter-Power filed cross-motions for
summary judgment. The court dismissed two of Inter-Power's fourteen causes of
action but otherwise denied the Company's motion. The court also dismissed two
of the Company's affirmative defenses and otherwise denied Inter-Power's cross-
motion. Inter-Power has appealed the dismissal of its two causes of action, and
the Company has appealed the denial of its motion to dismiss the remaining
twelve causes of action. On March 23, 1994, the Company filed a new summary
judgment motion, which remains pending with the Court. The ultimate outcome of
the litigation cannot presently be determined. Accordingly, no provision for
liability, if any, that may result from this suit has been made in the Company's
financial statements.
On June 22, 1993, the Company and twenty other industrial entities and
the owner/operator of the Pfohl Brothers Landfill near Buffalo, New York were
sued by a group of residents living in the vicinity of the landfill seeking
compensation and damages for economic loss and property damages claimed to have
resulted from contamination emanating from the landfill. To date, no
governmental action has been taken against the Company as a PRP. The Company
has undertaken to establish defenses to the allegations in the lawsuit and is
investigating its alleged connection to the landfill to determine whether
participation in an established and ongoing voluntary remedial program by
identified PRPs is warranted. The Company is unable to predict the ultimate
outcome of this proceeding.
On November 12, 1993, Fourth Branch Associates Mechanicville ("Fourth
Branch") filed suit against the Company and several of its officers and
employees in the New York Supreme Court, Albany County, seeking compensatory
damages of $50 million, punitive damages of $100 million and injunctive and
other related relief. The suit grows out of the Company's termination of a
contract for Fourth Branch to operate and maintain a hydroelectric plant the
Company owns in the Town of Halfmoon, New York. Fourth Branch's complaint also
alleges claims based on the inability of Fourth Branch and the Company to agree
on terms for the purchase of power from a new facility that Fourth Branch hoped
to construct at the Mechanicville site. On January 3, 1994, the defendants
filed a joint motion to dismiss Fourth Branch's complaint. This motion has yet
to be decided. On March 16, 1994, the Court denied Fourth Branch's motion for
preliminary judgment. The Company also notified Fourth Branch by letter dated
March 1, 1994 that the Licensing Agreement between Fourth Branch and the Company
is terminated. On March 15, 1994, Fourth Branch petitioned the FERC for
Extraordinary Relief. The Company has opposed this petition before the FERC.
On March 18, 1994, Fourth Branch filed a petition for bankruptcy and, on April
4, 1994, the bankruptcy court granted relief from the automatic bankruptcy stay
to allow the pending litigation to go forward. On April 27, 1994, the Company
served an answer and counterclaim in the Albany Supreme Court litigation seeking
$1 million in damages and removal of Fourth Branch from the Mechanicville site.
The Company believes that it has substantial defenses to Fourth Branch's claims,
but is unable to predict the outcome of this
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litigation. Accordingly, no provision for liability, if any, that may result
from this suit has been made in the Company's financial statements.
In November 1993, the New York Court of Appeals unanimously affirmed a
Supreme Court, Appellate division (Third Department) decision invalidating, in
part, a DEC Declaratory Ruling. In this Declaratory Ruling, the DEC claimed
that it could perform a full environmental review and condition the operation of
hydroelectric projects under the provisions of Clean Water Act Section 401 Water
Quality Certifications ("401 Certifications"). The Third Department held that
the Federal Power Act precluded the DEC from performing a broad environmental
review of federally licensed hydro projects under the 401 Certification process.
The decision limits the DEC's ability to regulate federally licensed
hydroelectric projects under the guise of 401 Certifications. In so limiting
the DEC's regulatory role, the DEC is unable to impose specific operating
requirements which impair the project's ability to generate low cost electricity
and require significant capital additions to the projects. The Court found that
the DEC's attempt to enlarge its scope of review under the Clean Water Act to
include certain aspects of New York Environmental Conservation Law (Article 15)
was "unfounded."
In April 1994, New York State asked the U.S. Supreme Court to hear a
case against the Company which imposes tougher environmental regulations on
hydropower plants than called for under federal law. An adverse ruling would
mean that New York State could specify the minimum flows in a river affected by
a hydropower plant. The State also could impose regulations regarding how
hydropower plants affect fish in those rivers. Proposed New York State
regulations would affect 35 of the Company's hydropower generating plants soon
to be up for relicensing. These regulations would also limit the generating
capacity of the hydro plants. The ultimate outcome of the litigation cannot
presently be determined.
On February 4, 1994, the Company notified the owners of nine projects
with contracts that provide for front-end loaded payments of the Company's
demand for adequate assurance that the owners will perform all of their future
repayment obligations, including the obligation to deliver electricity in the
future at prices below the Company's avoided cost and the repayment of any
advance payment which remains outstanding at the end of the contract. The
projects at issue total 426 MW. The Company's demand is based on its assessment
of the amount of advance payment to be accumulated under the terms of the
contracts, future avoided costs and future operating costs of the projects. As
of March 31, 1994, the Company has received the following responses to these
notifications:
On March 4, 1994, Encogen Four Partners, L.P. ("Encogen") filed a
complaint in the United States District Court for the Southern District of New
York alleging breach of contract and prima facie tort by the Company. Encogen
seeks compensatory damages of approximately $1 million and unspecified punitive
damages. In addition, Encogen seeks a declaratory judgment that the Company is
not entitled to assurances of future performance from Encogen;
On March 4, 1994, Sterling Power Partners, L.P., Seneca Power
Partners, L.P., Power City Partners, L.P. and AG-Energy, L.P. filed a complaint
in the Supreme Court of the State of New York, County of New York seeking a
declaratory judgment that: (a) the Company does not have any legal right to
demand assurances of plaintiffs' future performance; (b) even if such a right
existed, the Company lacks reasonable insecurity as to plaintiffs' future
performance; (c) the specific forms of assurances sought by the Company are
unreasonable; and (d) if the Company is entitled to any form of assurances,
plaintiffs have provided adequate assurances; and
On March 7, 1994, NorCon Power Partners, L.P. filed a complaint in the
United States District Court for the Southern District of New York seeking to
enjoin the Company from terminating a power purchase agreement between the
parties and seeking a declaratory judgment that the Company has no right to
demand additional security or other assurances of NorCon's future
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performance under the power purchase agreement. NorCon sought a temporary
restraining order against the Company to prevent the Company from taking any
action on its February 4 letter. On March 14, 1994, the Court entered the
interim relief sought by NorCon.
The Company cannot predict the outcome of these actions or the
response otherwise to its February 4, 1994 notifications, but will continue to
press for adequate assurance that the owners of these projects will honor their
repayment obligations.
CALIFORNIA OPEN COMPETITION PLAN
On April 20, 1994, the California Public Utilities Commission (the
"CPUC") announced a new electric utility regulation plan which is intended to
create open competition among power suppliers in the California electric markets
by 2002. The plan, which is to be implemented by final rules to be adopted in
August 1994, provides that utility customers who currently receive more than 50
kilovolts at the transmission level may choose their power supplier after
January 1, 1996 and that the same choice will be provided to all other classes
of customers on a phased-in basis from 1997 through 2002. Although the
announced goals of the CPUC's plan are to lower energy costs, reduce regulatory
oversight and encourage competition, the CPUC has also stated that the plan will
not saddle remaining customers with the burden of stranded investment costs from
their traditional utilities but will permit those utilities to recover all of
their prudently incurred costs. The exact mechanism through which these goals
can be accomplished have not been set forth and the CPUC has indicated that the
portion of its plan calling for unbundling of retail rates and assigning of
different costs to various services involves a "gray area" relating to whether
the CPUC or the FERC has jurisdiction over such matters.
Because California is recognized as a leader in utility regulatory
matters, and given that this plan to implement further deregulation and
competition is consistent with predictions from a wide variety of opinion
leaders in the industry, these initiatives could accelerate the pace of change
from single source provision of electric service to full competition in the
Company's service territory. This in turn would also accelerate the necessity
to determine how and to what extent cost recovery will be accomplished among the
Company's various classes of customers. However, the Company is not able to
predict at this time what means would be adopted by regulators, the time period
in which these issues will be addressed or resolved, or the effects thereof on
the Company's financial condition or results of operations.
SITHE/ALCAN
In April 1994, the PSC ruled that, in the event that Sithe
Independence Power Partners Inc. ("Sithe") ultimately obtains authority to sell
electric power at retail, those retail sales will be subject to a lower level of
regulation than the PSC presently imposes on the Company. Sithe, which will
sell electricity to Con Ed and the Company on a wholesale basis from its 1,040
MW natural gas cogeneration plant, will provide steam to Alcan Rolled Products
("Alcan"). Sithe also proposes to sell a portion of its electricity output on a
retail basis to Alcan, currently a customer of the Company.
The PSC has previously ruled that, under the Public Service Law, Sithe
must obtain a PSC certificate before it may use its electricity generating
facilities to serve any retail customers. Although Sithe continues to contend
that these retail sales are not subject to regulation by the PSC, Sithe has
filed an application for authority to provide such services subject to PSC
regulation.
The next step is another pre-hearing conference at which a procedural
schedule for discovery and the submission of testimony and legal briefs will be
developed.
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FERC ORDER 636
In 1992, the FERC issued Order 636, which requires interstate
pipelines to unbundle pipeline sales services from pipeline transportation
service. These changes enable the Company to arrange for its gas supply
directly with producers, gas marketers or pipelines, at its discretion, as well
as arrange for transportation and gas storage services.
As a result of these structural changes, pipelines face "transition"
costs from implementation of the Order. The principal costs are: unrecovered
gas costs that would otherwise have been billable to pipeline customers under
previously existing rules, costs related to restructuring existing gas supply
contracts and costs of assets needed to implement the Order (such as meters,
valves, etc.). Under the Order, pipelines are allowed to recover 100% of
prudently incurred costs from customers. Prudence will be determined by FERC
review.
The amount of restructuring costs ultimately billed to the Company
will be determined in accordance with pipeline restructuring plans which have
been submitted to the FERC for approval. There are four pipelines to which the
Company has some liability. The Company is actively participating in FERC
hearings on these matters, to ensure an equitable allocation of costs. The
restructuring costs will be primarily reflected in demand charges paid to
reserve space on the various interstate pipelines and will be billed over a
period of approximately seven years, with billings more heavily weighted to the
first three years.
Based upon information presently available to the Company from the
petitions filed by the pipelines, the Company's participation in settlement
negotiations, and the three settlements to which it is a party, its liability
for the pipelines' unrecovered gas costs is expected to be as much as $31
million and its liability for pipeline restructuring costs could be as much as
$38 million. The Company has recorded a liability of $31 million at December
31, 1993, representing the low end of the range of such transition costs. The
Company is unable to predict the final outcome of current pipeline restructuring
settlements and the ultimate amounts for which it will be liable or the period
over which this liability will be billed.
Based upon Management's assessment that transition costs will be
recovered from ratepayers, a regulatory asset has been recorded representing the
future recovery of transition costs accrued to date. Currently, such costs
billed to the Company are treated as a cost of purchased gas and recoverable
through the operation of the gas adjustment clause mechanism.
DESCRIPTION OF NEW BONDS
The New Bonds are to be issued under a mortgage indenture between the
Company and Marine Midland Bank, as Trustee (the "Trustee"), dated as of October
1, 1937, as heretofore supplemented and amended and as to be supplemented by a
separate supplemental indenture (the "Supplemental Indenture") creating each
series of New Bonds to be offered under this Prospectus and the accompanying
Prospectus Supplement. The Mortgage Trust Indenture dated as of October 1, 1937
between the Company and the Trustee (the "Mortgage"), including the form of the
Supplemental Indenture, has been filed or incorporated by reference as an
exhibit to the registration statement. The following brief summaries of certain
provisions contained in the Mortgage do not purport to be complete, use certain
capitalized terms (not otherwise defined herein) defined in the Mortgage, and
are qualified in their entirety by express reference to the cited provisions of
the Mortgage.
TERMS OF NEW BONDS
Reference is made to the Prospectus Supplement which accompanies this
Prospectus for the following terms and other information with respect to the New
Bonds being offered thereby: (1) the designation and aggregate principal amount
of such New Bonds; (2) the date on which such
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New Bonds will mature; (3) the rate per annum at which such New Bonds will bear
interest and the date from which such interest shall accrue; (4) the dates on
which such interest will be payable; and (5) any redemption terms or other
specific terms applicable to the New Bonds. The New Bonds will be issued only
in the form of registered Bonds without coupons in denominations of $1,000 and
multiples thereof. The New Bonds may be exchanged for Bonds of the same series
without service charge. (Supplemental Indenture, Part I.)
------------------------------
SECURITY
The New Bonds, when issued, are to be secured by the Mortgage, which,
in the opinion of counsel, will constitute a direct lien on substantially all
gas and electric properties presently owned by the Company and used or useful in
the operation of the Company's properties as an integrated system, together with
all rights appertaining thereto. The Mortgage provides that substantially all
after-acquired property of such character shall become subject to the lien
thereof (except, unless the Company elects otherwise, those acquired through
merger or consolidation or through purchase of all or substantially all the
properties of any other corporation).
There are expressly reserved from the lien of the Mortgage: (1)
revenues and profits of the Mortgaged Property, cash (except cash deposited with
the Trustee), book accounts, bills and notes, materials or supplies, merchandise
and other property held for sale or resale in the usual course of business,
except to the extent permitted by law in the event of a completed default
followed by the Trustee or a receiver or trustee entering upon or taking
possession of the Mortgaged Property; (2) securities and contracts; and (3) all
oil, gas and other minerals, together with the right to remove the same.
The lien of the Mortgage is subject to (1) liens for taxes and
assessments not due and payable or being contested in good faith; (2)
obligations to public authorities as to any franchise, consent, grant, license
or permit; (3) various easements, contracts and other outstanding rights; (4)
leases and other rights of tenants and of licensees; and (5) liens on property
acquired for transmission or distribution systems or right-of-way purposes,
securing indebtedness neither assumed by the Company nor on which it customarily
pays interest charges. (Granting Clauses of Mortgage.)
----------------------------
In the opinion of counsel, the New Bonds will rank pari passu with
---- -----
the other Mortgage Bonds of the Company.
The title to certain of the properties of the Company is subject to
rights and claims of parties in possession not disclosed of record, any facts
which accurate surveys would disclose, the effect of zoning ordinances, the lien
of any unpaid taxes or assessments, rights of the public in the use of streets,
roads and waterways abutting on or extending through parts of said lands,
leases, covenants, easements, liens and rights of various types (including
mineral and gas rights), and other types of encumbrances, none of which
materially interferes with the operations of the Company and its subsidiaries.
CREDIT ENHANCEMENT
If any series of New Bonds is entitled to the benefits of a surety
bond or other form of credit enhancement, information with respect thereto will
be set forth in a Prospectus Supplement.
ISSUE OF ADDITIONAL BONDS
The Mortgage provides that no securities may be created by the Company
which will rank ahead of the New Bonds as to security. However, the Company
may, with stated exceptions, acquire property subject to prior liens and may
mortgage after-acquired property which is not subject to the lien of the
Mortgage. Additional Bonds may be issued under the Mortgage in an unlimited
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amount which will, as to security, rank pari passu with the New Bonds, but only
---- -----
as follows (Mortgage, Article Fourth):
------------------------
1. Bonds may be issued in a principal amount equal to 60% of the Cost
(as defined) to the Company of Additional Property (as defined), after
specified deductions for Additional Property theretofore made the basis of
authentication of Bonds, withdrawal of cash, release of property or other
action under the Mortgage (including compliance with the debt retirement
and maintenance funds) and for prior liens thereon. The amount of
Additional Property as of December 31, 1993 against which Bonds may be
issued was approximately $1.6 billion.
2. Bonds of a like principal amount may, subject to certain
limitations, be issued in exchange for Bonds outstanding under the Mortgage
or in substitution for Bonds previously authenticated and delivered under
the Mortgage and retired. The amount of Bonds which were reacquired by the
Company either through purchases, retirements or sinking fund payments and
were available as the basis for issuance of additional Bonds as of December
31, 1993 was approximately $921 million.
3. Bonds may be issued in a principal amount equal to cash deposited
with the Trustee. Such cash may be withdrawn, subject to certain
limitations, in lieu of Bonds to which the Company may then be entitled
under the Mortgage, or may be applied to the purchase, payment or
redemption of prior lien bonds or Bonds issued under the Mortgage.
The New Bonds will be issued on the basis of Additional Property
and/or purchases, retirements or sinking fund payments of the Bonds pursuant to
paragraphs 1 and 2 above.
Bonds may not be issued in the circumstances described in paragraphs 1
and 3 above unless the Net Earnings Available for Interest Charges (defined as
the amount by which gross income for the applicable period, computed in
accordance with the Uniform Systems of Accounts for Electric and Gas
Corporations prescribed by the PSC, excluding gains from dispositions of capital
assets, exceeds expenses and other proper income charges for such period
including depreciation, obsolescence and amortization, but excluding (i) losses
from dispositions of capital assets, (ii) interest on Funded Indebtedness (as
hereinafter defined), (iii) income taxes and (iv) the effect of any increase or
decrease in income or surplus due to readjustments of property accounts on
properties existing on January 1, 1938 or changes in depreciation reserves on
properties for any period before January 1, 1944, and with the proviso that if
gross non-operating income exceeds 15% of the net earnings computed as provided
above, such excess shall be deducted from net earnings and only the balance
thereof shall be Net Earnings Available for Interest Charges) during any 12
consecutive months out of the 15 preceding months shall have been equal to at
least 1.75 times the then interest charges for one year on Funded Indebtedness
(defined to include the Bonds then to be issued and other bonds of, or assumed
by, the Company secured by liens on any property owned by the Company).
(Mortgage, Article First, (S) 1(q); (S) 1(r); Article Fourth, (S) 6, (S) 8.)
- --------------------------------------------------------------------------
RELEASES OF PROPERTY
Subject to certain limitations, the Company, without notice to
Bondholders, may obtain the release from the lien of the Mortgage of property
(other than cash and certain prior lien bonds) sold, exchanged, contracted to be
sold or exchanged, condemned, taken or expropriated. Any property (other than
cash or securities) received by the Company upon the release of Mortgaged
Property shall be subject to the lien of the Mortgage, and any cash or
securities so received shall, unless otherwise disposed of pursuant to some
prior lien, become part of the security for the Bonds issued under the Mortgage.
Any moneys received by the Trustee as principal of obligations held by it
subject to the Mortgage or as proceeds of released property shall at the
Company's request be used to reimburse the Company for retirement of Bonds and
certain prior lien bonds, or to pay, purchase or redeem the same. Such cash
shall also on request be delivered to the Company in an amount equal to 166 2/3%
of the principal amount of Bonds which could have been issued under the Mortgage
in
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respect of Additional Property and as to which the Company forgoes the right to
issue such Bonds in exchange for the Trustee's release to it of such cash. In
the ordinary course of business and otherwise, the Company regularly obtains
from the Trustee the release of various properties from the lien of the
Mortgage. In the case of exchanges of property, no exchange shall be made if
the Funded Indebtedness of the Company is thereby increased. (Mortgage,
---------
Articles Sixth and Seventh.)
- --------------------------
MAINTENANCE FUND PROVISIONS
The Company is required, within 90 days after the close of each fiscal
year, to (a) certify the Cost of Additional Property; (b) deposit with the
Trustee cash, Bonds or certain prior lien bonds; or (c) waive its right to the
authentication and delivery of the principal amount of Bonds to which it is then
entitled under the Mortgage, to the extent that the aggregate amount of
expenditures for maintenance, repairs, renewals and replacements for the period
commencing January 1, 1977 is less than the sum of 2.25% of the depreciable
property (as defined) of the Company on January 1 of each year during such
period. (Mortgage, Article Fifth, (S) 22.)
-------------------------------
RESTRICTION OF COMMON STOCK DIVIDENDS
To the extent that the aggregate amount of expenditures for
maintenance and repairs, plus the aggregate amount credited to depreciation,
retirements and other like reserves, for the period commencing January 1, 1977
is less than the sum of 2.25% of the depreciable property of the Company on
January 1 of each year during such period, an equivalent amount of surplus of
the Company must be reserved and held unavailable for distribution as a dividend
on the common stock of the Company. (Mortgage, Article Fifth, (S) 23.)
-------------------------------
MODIFICATION OF MORTGAGE
The Mortgage may be modified without action by or notice to the
holders of Bonds by supplemental indenture between the Company and the Trustee,
for purposes which are not inconsistent with the terms of the Mortgage and which
shall not impair the security thereof, including corrections of property
descriptions, modifications of the Mortgage or form of bonds and coupons to
facilitate stock exchange listing requirements, or the curing of ambiguities or
manifest errors in the Mortgage. (Mortgage, Article Twelfth, (S) 1.)
--------------------------------
The holders of 66-2/3% of the outstanding Bonds affected (exclusive of
Bonds owned by the Company or any affiliate) may by consent effect any
amendment, repeal, or modification of the Mortgage which shall not (1) alter or
impair the Company's obligation to pay the principal and interest on any Bond at
the time and place and at the rate and in the currency prescribed therein; (2)
permit the creation by the Company of any mortgage, or lien in the nature of a
mortgage, ranking prior to or pari passu with the lien of the Mortgage; (3)
---- -----
alter adversely to the Bondholders the character of the lien of the Mortgage;
(4) affect the Trustee without its consent; or (5) permit a reduction of the
percentage required for any change or modification of the Mortgage. (Mortgage,
---------
Article Twelfth, (S) 2.) The Supplemental Indenture creating the New Bonds
- ----------------------
reserves to the Company the right to amend the Indenture to provide for using
written consents, in addition to the existing provisions for bondholder
meetings, as a means of supplementing or amending the Indenture, but subject to
the restrictions contained in the preceding sentence. (Supplemental Indenture,
-----------------------
Part III.)
- --------
EVENTS OF DEFAULT AND NOTICE THEREOF
The Mortgage provides that each of the following shall be a "default"
thereunder: (a) default in payment of the principal on any Bond when due; (b)
default in the payment of interest on any Bond continuing for 60 days; (c)
default in the observance by the Company of any other agreement in the Mortgage
continuing unremedied for 90 days after written notice thereof to the Company by
the Trustee, unless the Company shall have commenced and be continuing
proceedings to remedy such default--the notice of such default may be given by
the Trustee in its discretion, and
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shall be given upon the written request of the holders of a majority in
principal amount of the Bonds; (d)(1) adjudication of the Company as a bankrupt
by decree of a court of competent jurisdiction, or (2) the approval by order of
a petition or answer seeking reorganization or readjustment of the Company under
the Federal bankruptcy laws or other Federal or state statute, or (3) the
appointment by court order (unstayed and in effect for 60 days) of a trustee in
bankruptcy or a receiver of substantially all of the property of the Company or
of any part of the property of the Company subject to the lien of the Mortgage;
or (e)(1) the filing by the Company of a petition in voluntary bankruptcy, or
(2) the making by the Company of an assignment for the benefit of creditors, or
(3) the consent by the Company to the appointment of a receiver of any part of
its property, or (4) the filing by the Company of a petition seeking
reorganization or readjustment under the Federal bankruptcy laws or other
Federal or state statute, or (5) the filing by the Company of a petition to take
advantage of any debtors' act. (Mortgage, Article Ninth, (S) 1.) Prior to
------------------------------
exercising the powers conferred upon it to enforce the provisions of the
Mortgage, the Trustee is entitled to be provided with indemnity satisfactory to
it. (Mortgage, Article Ninth, (S) 5.)
------------------------------
The Trustee shall, within 90 days after occurrence of any default
(exclusive of any periods of grace provided in the definitions of defaults),
give to the holders of Bonds issued under the Mortgage (in the manner provided
in the Mortgage) notice of all defaults known to the Trustee, unless such
defaults shall have been cured. In cases of default referred to in (b) and (c)
above, such notice shall not be given until at least 60 days after the
occurrence of such default. Except in the case of default in payment of
principal or interest, or in the payment of any installment upon any retirement,
improvement, sinking or purchase fund, the Trustee shall be protected in
withholding such notice if and so long as the Board of Directors, Executive
Committee, Trust Committee of directors or responsible officers of the Trustee
in good faith determine that the withholding of such notice is in the interest
of the holders of the Bonds. (Mortgage, Article Ninth, (S) 18.)
-------------------------------
The Mortgage does not contain a requirement for periodic certification
as to the absence of default or compliance with the terms of the Mortgage;
however, it is a condition to the issuance of additional Bonds (including the
New Bonds) pursuant to Article Fourth of the Mortgage that the Company not be in
default with respect to the performance or observance of any covenant or
agreement contained in the Mortgage.
CONCERNING THE TRUSTEE
Marine Midland Bank has extended a line of credit to the Company and
also serves as Trustee under the Mortgage. The Company maintains bank accounts,
borrows money and has other customary banking relationships with Marine Midland
Bank in the ordinary course of business. Mr. Edward W. Duffy, a director of the
Company, and Mr. John M. Endries, a director and President of the Company, are
also directors of Marine Midland Bank.
DESCRIPTION OF NEW PREFERRED STOCK
The New Preferred Stock will be fully paid and nonassessable. The
Transfer Agent is Chemical Bank, 450 West 33rd Street, New York, New York 10001.
The Company acts as dividend disbursing agent and maintains stockholder records.
The Company's Certificate of Incorporation, as amended (the "Charter")
at present authorizes four classes of capital Stock: Preferred Stock $25 par
value, Preferred Stock, $100 par value, Preference Stock, $25 par value, and
Common Stock, $1 par value. As of December 31, 1993 (i) 3,400,000 shares of the
Preferred Stock, $100 par value, were authorized and 2,394,000 shares were
outstanding, (ii) 19,600,000 shares of the Preferred Stock, $25 par value, were
authorized and 8,040,005 shares were outstanding; (iii) 8,000,000 shares of
Preference Stock, $25 par value, were authorized and no shares were outstanding;
and (iv) 150,000,000 shares of the Common Stock, $1 par value, were authorized,
and 142,427,057 shares were outstanding. The Preferred Stock ranks
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prior to the Common Stock and Preference Stock with respect to the payment of
dividends, mandatory redemption and liquidation.
The following brief summaries of certain provisions contained in the
Charter and in the form of Certificate of Amendment to the Charter relating to
the New Preferred Stock (copies of which are filed as exhibits to the
Registration Statement or incorporated by reference) do not purport to be
complete, use certain capitalized terms (not otherwise defined herein) defined
in the Charter and in the form of Certificate of Amendment to the Charter and
are qualified in their entirety by express reference to the cited provisions of
the Charter and in the form of Certificate of Amendment to the Charter.
DIVIDENDS AND DIVIDEND RIGHTS
Dividends on the New Preferred Stock are cumulative from the date
fixed by the Board of Directors and will be payable, when and as declared by the
Board of Directors out of funds legally available therefor, at the annual rate
set forth on the cover page of the Prospectus Supplement. Payment of dividends
on the Preferred Stock is not restricted by the Company's Mortgage or any other
agreement of the Company. If dividends on any series of Preferred Stock are not
paid in full, the holders of shares of all series of Preferred Stock then
outstanding will be entitled to share ratably in the amounts available for
payment.
SINKING FUND, REDEMPTION AND LIQUIDATION
Reference is made to the Prospectus Supplement which accompanies this
Prospectus for any sinking fund, redemption terms, liquidation rights or other
specific terms applicable to the New Preferred Stock.
VOTING RIGHTS
Except as indicated below or provided by statute, the New Preferred
Stock has no voting rights. Holders of Preferred Stock, $25 par value, are
entitled to one-quarter vote per share, and holders of Preferred Stock, $100 par
value, are entitled to one vote per share. At any time when dividends payable
on the Preferred Stock are in default in an aggregate amount equivalent to four
full quarterly dividends on all shares of Preferred Stock then outstanding and
thereafter until all dividends thereon are paid or declared and set aside for
payment, the holders of the Preferred Stock are entitled, voting as a class and
regardless of series, to elect a majority of the Board of Directors as then
constituted. Consent of the holders of two-thirds of the votes of the then
outstanding Preferred Stock is required prior to the taking of certain corporate
action by the Company or its subsidiaries, including (in addition to
restrictions upon the issuance or sale of preferred stock of a subsidiary) (1)
payments or distributions out of capital or capital surplus (other than
dividends payable in stock ranking junior to the Preferred Stock) to any holder
of any stock ranking junior to the Preferred Stock; (2) payment of any Common
Stock dividend (as defined) if (a) the Common Stock dividends during a
prescribed 12-month period would exceed 75% of the net income applicable to the
Common Stock (as defined) for a related 12-month period and the pro forma stock
equity Junior to the Preferred Stock (as defined) would be less than 25% of the
Company's pro forma total capitalization, each determined as of the end of such
related 12-month period, or if (b) such Common Stock dividends would exceed 50%
of such income and such pro forma stock equity junior to the Preferred Stock
would be less than 20% of the Company's pro forma total capitalization, each
determined as of the end of such related 12-month period; (3) creation or
authorization of any stock ranking prior to the Preferred Stock with respect to
the payment of dividends or upon dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, or any obligation or security
convertible into shares of any such stock; (4) amendment, alteration, change or
repeal of any of the express terms of the Preferred Stock so as to affect the
holders thereof adversely; and (5) issuance of any shares of any series of
Preferred Stock or shares ranking on a parity with them, unless such shares are
issued in connection with the redemption of, or in exchange for, at least an
equal number of outstanding shares of another series of Preferred Stock, or
unless (x) the pro forma annual interest requirements on all indebtedness of the
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Company and its subsidiaries and the annual dividend requirements on the
Preferred Stock and any stock of the Company ranking prior to or on a parity
with the Preferred Stock are covered at least one and one-half times by
consolidated income (as defined) for any 12 consecutive months within the 15
calendar months immediately preceding the month within which such issuance is
authorized by the Board of Directors, and (y) the stock equity junior to the
Preferred Stock at a specified date prior to such issuance was not less than the
voluntary liquidation value of the Preferred Stock determined at the same date.
No outstanding series of Preferred Stock may be classified or reclassified so as
to affect adversely the holders of any series of Preferred Stock without the
consent of the holders of two-thirds of the total number of shares of each such
series then outstanding so affected.
Consent of the holders of a majority of the votes of the then
outstanding Preferred Stock is required prior to the taking of certain other
corporate action by the Company, including (1) issuing or assuming, or
permitting any wholly-owned subsidiary (as defined) to issue or assume,
unsecured indebtedness (for purposes other than the refunding of outstanding
securities or the redemption or other retirement of outstanding Preferred Stock
of the Company or preferred stock of such wholly-owned subsidiary) if the total
principal amount of all unsecured indebtedness of the Company and its wholly-
owned subsidiaries on a pro forma basis would then exceed 10% of the aggregate
of total consolidated surplus and secured indebtedness of the Company and its
wholly-owned subsidiaries and the capital of the Company (in which connection
reference is made to an existing consent which increased such amount by $50
million as discussed under the heading "Consent of Preferred Stockholders"
below); (2) permitting any majority-owned subsidiary (as defined) to issue or
assume unsecured indebtedness for purposes other than the refunding of
outstanding securities or the redemption or other retirement of outstanding
shares of preferred stock of such subsidiary if the total principal amount of
its unsecured indebtedness on a pro forma basis would then exceed 10% of the
aggregate of its surplus, capital and secured indebtedness; and (3)
consolidating under the laws of the State of New York with or into any other
corporation unless such consolidation or the issuance of the securities to be
issued in connection therewith has been ordered, approved or permitted by the
Commission under the provisions of the Public Utility Holding Company Act of
1935.
CONSENT OF PREFERRED STOCKHOLDERS
In accordance with the provisions of the Charter, the holders of a
majority of the votes of the Preferred Stock then outstanding adopted a
resolution at a meeting held December 5, 1956 consenting to the issuance by the
Company of unsecured indebtedness at any one time outstanding in a total
principal amount not exceeding 10% of the aggregate of total consolidated
surplus and secured indebtedness of the Company and its wholly-owned
subsidiaries and the capital of the Company plus $50,000,000.
OTHER RIGHTS
The holders of record of the New Preferred Stock are eligible to
participate in the Company's Dividend Reinvestment and Common Stock Purchase
Plan. The holders of the Preferred Stock have no preemptive rights.
COMMON STOCK DIVIDENDS AND PRICE RANGE
In the years 1991, 1992 and 1993, the Company paid annual cash
dividends per share of Common Stock of $0.32, $0.76 and $0.95, respectively. On
March 25, 1993, the Board of Directors of the Company voted to increase the
quarterly common stock dividend from $0.20 per share to $0.25 per share on its
Common Stock and has paid quarterly cash dividends since that date at such rate.
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During recent years 100% of the dividends paid on the Common Stock
were subject to federal income tax as ordinary income to the recipient. It is
estimated that all of the 1993 dividends will be similarly subject to federal
income tax.
While the Company intends to continue the practice of paying cash
dividends quarterly, declarations of future dividends are necessarily dependent
upon further earnings, financial and accounting requirements and other factors,
including restrictions under law and in governing instruments.
Recent quarterly high and low prices of the Common Stock, as reported
by The Wall Street Journal as NYSE Composite Transactions, have been as follows:
<TABLE>
<CAPTION>
YEAR HIGH LOW
- ----------------- ------- -------
1991
<S> <C> <C>
First Quarter................................. $ 15 $12-3/4
Second Quarter................................ 15-7/8 14-1/4
Third Quarter................................. 17 15-1/4
Fourth Quarter................................ 18 16-3/4
1992
First Quarter................................. $ 19 $17-5/8
Second Quarter................................ 19-1/4 17-1/2
Third Quarter................................. 20-1/2 18-7/8
Fourth Quarter................................ 19-7/8 18-3/8
1993
First Quarter................................. $22-3/8 $18-7/8
Second Quarter................................ 24-1/4 21-5/8
Third Quarter................................. 25-1/4 23-3/4
Fourth Quarter................................ 23-7/8 19-1/4
1994
First Quarter................................. $20-5/8 $17-3/4
</TABLE>
The book value of the Company's Common Stock at December 31, 1993 was
$17.25 per share.
DESCRIPTION OF ADDITIONAL COMMON STOCK
The outstanding shares of Common Stock of the Company are, and the
Additional Common Stock will be, fully paid and nonassessable and listed on the
New York Stock Exchange. The Transfer Agent is Chemical Bank, 450 West 33rd
Street, New York, New York 10001. The Company acts as dividend disbursing agent
and maintains stockholder records.
The following brief summaries of certain provisions contained in the
Mortgage and the Charter (copies of which are filed as exhibits to the
Registration Statement or incorporated by reference) relating to the Additional
Common Stock do not purport to be complete, use certain capitalized terms (not
otherwise defined herein) defined in the Mortgage and in the Charter and are
qualified in their entirety by express reference to the Mortgage and the
Charter.
-25-
<PAGE>
DIVIDEND RIGHTS
After payment or setting aside for payment of cumulative dividends on
all outstanding issues of Preferred and Preference Stock, the holders of Common
Stock are entitled to dividends when and as declared by the Board of Directors
out of funds legally available therefor.
Consent of the holders of two-thirds of the votes of the then
outstanding Preferred Stock is required prior to the taking of certain corporate
action by the Company or its subsidiaries, including (1) payments or
distributions out of capital or capital surplus (other than dividends payable in
stock ranking junior to the Preferred Stock) to any holder of any stock ranking
junior to the Preferred Stock, and (2) payment of any Common Stock dividend
(which includes purchases or acquisitions of and distributions or dividends on
Common Stock, other than dividends payable on Common Stock), if (a) the Common
Stock dividends during a prescribed 12-month period would exceed 75% of the net
income applicable to the Common Stock (as defined in the Charter) for a related
12-month period and the pro forma stock equity junior to the Preferred Stock (as
--- -----
defined in the Charter) would be less than 25% of the Company's pro forma total
--- -----
capitalization (as defined in the Charter), each determined as of the end of
such related 12-month period, or if (b) such Common Stock dividends would exceed
50% of such income and such pro forma stock equity junior to the Preferred Stock
--- -----
would be less than 20% of the Company's total pro forma capitalization, each
--- -----
determined as of the end of such related 12-month period. No approval of the
holders of Preference Stock is required prior to the taking of comparable
corporate action.
The Mortgage provides that surplus of the Company shall be reserved
and held unavailable for the payment of dividends on Common Stock to the extent
that the aggregate amount of expenditures for maintenance and repairs, plus the
aggregate amount credited to depreciation, retirements and other like reserves,
for the period commencing January 1, 1977 is less than the sum of 2.25% of the
depreciable property of the Common on January 1 of each year during such period.
Such provisions have never to date restricted the Company's surplus.
LIQUIDATION RIGHTS
Upon any dissolution, liquidation or winding up of the Company, the
holders of the Common Stock are entitled to receive pro rata all of the
--- ----
Company's assets available for distribution to its stockholders after payment of
the full preferential amounts to which holders of stock (including Preferred and
Preference Stock) having priority over the Common Stock are entitled.
VOTING RIGHTS
The holders of the Common Stock are entitled to one vote per share.
Holders of the Company's Common Stock do not have cumulative voting rights with
respect to the election of Directors. Whenever dividends payable on Preferred
Stock are in default in an aggregate amount equivalent to four full quarterly
dividends on all shares of Preferred Stock then outstanding and thereafter until
all dividends thereon are paid or declared and set aside for payment, the
holders of the Preferred Stock are entitled to elect a majority of the Board of
Directors as then constituted. Whenever dividends payable on Preference Stock
are in default in an aggregate amount equivalent to six full quarterly dividends
on all shares of Preference Stock then outstanding and thereafter until all
dividends thereon are paid or declared and set aside for payment, the holders of
the Preference Stock are entitled to elect two members of the Board of Directors
as then constituted. No such dividends are now in default.
The Charter contains a "fair price" provision which (i) requires the
approval of the holders of at least 75% of the combined voting power of the then
outstanding shares of the Voting Stock (all outstanding shares of capital stock
of all classes and series of the Company entitled to vote generally in the
election of directors of the Company), voting as a single class (including at
least two-thirds of the combined voting power of the outstanding shares of
Voting Stock held by shareholders
-26-
<PAGE>
other than an Interested Shareholder, as defined in the Charter), for certain
business combinations involving the Company and any Interested Shareholder,
unless (x) the business combination is approved by a majority of Disinterested
Directors (as defined in the Charter) or (y) certain minimum price and
procedural criteria are met and (ii) requires the affirmative vote of at least
80% of the combined voting power of the Voting Stock, voting as a single class
(including at least two-thirds of the combined voting power of the outstanding
shares of Voting Stock held by shareholders other than an Interested
Shareholder), to alter, amend or repeal the "fair price" provision or to adopt
any provision inconsistent with the "fair price" provision.
The Charter also provides for the classification of Directors, with
three-year staggered terms, and a requirement of an affirmative vote of 80% of
the outstanding shares of Voting Stock, voting together as a single class, is
required to alter, amend or repeal the provisions relating to the size and
classification of the Board of Directors and the removal of members from, and
the filling of vacancies on, the Board of Directors.
The Charter further provides that an affirmative vote of 80% of the
outstanding shares of Voting Stock, voting together as a single class, is
required to alter, amend or repeal the provisions eliminating cumulative voting
with respect to the election of Directors by the holders of Common Stock.
OTHER RIGHTS
The holders of record of the Common Stock are eligible to participate
in the Company's Dividend Reinvestment and Common Stock Purchase Plan. The
holders of the Common Stock have no preemptive rights.
PLAN OF DISTRIBUTION
The Company may sell the Securities (i) through underwriters; (ii)
through dealers; (iii) directly to one or more institutional purchasers; or (iv)
through agents. The Prospectus Supplement sets forth the terms of the offering
of the Securities offered thereby, including the name or names of any
underwriters, dealers or agents, the purchase price of such Securities and the
proceeds to the Company from such sale, any underwriting discounts and other
items constituting underwriters' compensation, any initial public offering price
and any discounts or concessions allowed or reallowed or paid to dealers. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time. Only firms named
in the Prospectus Supplement are deemed to be underwriters, dealers or agents in
connection with the Securities offered thereby.
If underwriters are used in the sale, the Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
Securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more of
such firms. Unless otherwise set forth in the Prospectus Supplement, the
obligations of the underwriters to purchase the Securities offered thereby will
be subject to certain conditions precedent, and the underwriters will be
obligated to purchase all such Securities if any are purchased.
Securities may be sold directly by the Company or through any firm
designated by the Company from time to time, acting as principal or as agent.
The Prospectus Supplement sets forth the name of any dealer or agent involved in
the offer or sale of the Securities in respect of which the Prospectus
Supplement is delivered and the price payable to the Company by such dealer or
any commissions payable by the Company to such agent. Unless otherwise
indicated in the Prospectus Supplement, any such agent is acting on a best
efforts basis for the period of its appointment.
-27-
<PAGE>
Underwriters, dealers and agents may be entitled under agreements
entered into with the Company to indemnification by the Company against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribution with respect to payments which the underwriters,
dealers or agents may be required to make in respect thereof. Underwriters,
dealers and agents may engage in transactions with or perform services for the
Company in the ordinary course of business.
LEGAL OPINIONS AND EXPERTS
The legality of the Securities will be passed upon for the Company by
Winthrop, Stimson, Putnam & Roberts and for any underwriters, dealers or agents
by Simpson Thacher & Bartlett (a partnership which includes professional
corporations). Paul J. Kaleta, Esq., Vice President--Law and General Counsel,
and Winthrop, Stimson, Putnam & Roberts have reviewed the legal conclusions
under the caption "Description of New Bonds," "Description of New Preferred
Stock" and "Description of Additional Common Stock."
The financial statements incorporated in this Prospectus by reference
to the Company's Annual Report on Form 10-K for the year ended December 31, 1993
have been so incorporated in reliance on the report (which contains an
explanatory paragraph relating to the Company's involvement as a defendant in
lawsuits relating to actions with respect to certain purchased power contracts,
as described in Note 8 to the financial statements) of Price Waterhouse,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
With respect to the unaudited consolidated financial information of
the Company for the three-month periods ended March 31, 1994 and 1993
incorporated by reference in this Prospectus, the Company's independent
accountants, Price Waterhouse, reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report dated May 12, 1994 states that they
did not audit and they do not express an opinion on that unaudited consolidated
financial information. Price Waterhouse has not carried out any significant or
additional audit tests beyond those which would have been necessary if their
report had not been included. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. Price Waterhouse is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for
their report on the unaudited consolidated financial information because that
report is not a "report" or a "part" of the Registration Statement prepared or
certified by Price Waterhouse within the meaning of Sections 7 and 11 of the
Act.
-28-
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SE-
CURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
---------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Information......................................... S-2
Recent Developments........................................................ S-3
Construction and Financing Program......................................... S-7
Supplemental Description of New Preferred Stock............................ S-9
Underwriting............................................................... S-10
Legal Opinions and Experts................................................. S-11
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information....................................................... 2
Incorporation of Certain Documents by Reference............................. 2
The Company................................................................. 3
Ratio of Earnings to Fixed Charges.......................................... 3
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends... 3
Application of Proceeds..................................................... 4
Significant Factors and Recent Developments................................. 4
Description of New Bonds.................................................... 18
Description of New Preferred Stock.......................................... 22
Common Stock Dividends and Price Range...................................... 24
Description of Additional Common Stock...................................... 25
Plan of Distribution........................................................ 27
Legal Opinions and Experts.................................................. 28
</TABLE>
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6,000,000 SHARES
NIAGARA MOHAWK
POWER CORPORATION
PREFERRED STOCK
9 1/2% SERIES
($25 PAR VALUE)
---------------
[LOGO OF NIAGARA MOHAWK APPEARS HERE]
---------------
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
REPRESENTATIVES OF THE UNDERWRITERS
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